Edward Hadas

Banker-think in welcome retreat

Edward Hadas
Mar 27, 2013 09:45 UTC

For once, investors have got it right. In 2008, their panic turned a financial crisis into a long multinational recession, but they have mostly yawned right through the drama in Nicosia. They hardly twitched at a stream of warnings from investment banks and pundits: bank deposits are no longer sacrosanct; the European Union has been exposed as despotic and incompetent; the Russians are coming; the Russians are going; capital controls will destroy everything; “bail in” (taking losses on loans that cannot be repaid) is the end of the world as we once knew it.

Such talk was out of proportion. Cyprus is a small country – its GDP would put it at 116 on the Fortune 500 list of the largest quoted U.S. companies – with a financial sector that had expanded excessively for two decades, almost entirely by attracting flight capital from Russia. A national financial collapse was both insignificant and merited. Besides, the EU and the International Monetary Fund had a plan to deal with the collapse: a combination of financial help from other countries and managed pain for depositors in Cypriot banks.

Alarmists could not deny all this, but they invoked the great demons of financial crises: precedent and contagion. That was silly. Cyprus was obviously a special case, and the European Central Bank was clearly determined, and able, to keep its problems from spreading. Even if Cyprus had left the euro zone, there would have been no dangerous precedents or grim effects, just a demonstration of a bizarre desire for economic self-harm. For everyone else, Cyprus would still be like a flea-bite – scratch for a minute and forget about it.

Why then have so many distinguished economists made so many dire predictions? I believe the answer is that they overestimate the current power of finance.

Recent history is on their side. For more than three decades, financiers almost always prevailed over political authorities. In the 1980s, they bamboozled politicians with spurious arguments for financial deregulation. In the 1990s, banks trampled over their regulators. In the early 2000s, central bankers became votaries at the altar of finance. They treated rising asset prices as signs of divine favour.

Cyprus and the danger of promises

Edward Hadas
Mar 19, 2013 14:42 UTC

Don’t make promises you can’t keep. Wise parents tell small children that, and wary lovers use that command as a taunt. But in the world of finance, unrealistic promises are the norm, and they are too often broken. Depositors in the banks of Cyprus may be learning that lesson.

True, the government of the Mediterranean island may retreat from its first plan, and in any case the accounts are to be taxed, not written down, so the terms of the deposit insurance will be technically kept. And strictly speaking, deposit guarantees are not being breached in the United States and other countries with an inflation rate higher than the interest rate paid on savings accounts, even though that inflation-tax steadily erodes the accounts’ real value. But in fact, governments – both small and suspect like Cyprus, and large and respectable like the United States – have failed the lovers’ test. They have made promises to savers which they either cannot or will not keep.

These trust-breaking governments can resort to the errant lover’s usual excuse: we could not have known what the future would bring. Just as bitter experience somehow invalidates a promise of undying love, an impossible-to-predict avalanche of bad loans might erase the obligations of Cypriot banks and the equally unpredictable financial crisis could exculpate monetary authorities in the United States and elsewhere. Such events, they can say, are like the acts of God which invalidate insurance policies.

Obesity and the unhealthy economy

Edward Hadas
Mar 13, 2013 15:11 UTC

Obesity is a matter of free choice – no one forces people to get fat – but few people are happy with the result. In the last few decades, the freedom to eat has too often turned into slavery to the immoderate desire for more.

In the United States, the world leader in obesity, the trend toward higher body weights began more than a century ago. Researchers John Komlos and Marek Brabec show that the average body mass, weight adjusted for height, has moved upward fairly steadily – from too low for optimal health right through optimal to the current too high level. Most visibly, and alarmingly, the gap between the heaviest 30 percent and the rest has widened significantly in the last few decades. There is no end in sight.

The problem of obesity is an adverse side effect of one of the greatest economic liberations ever, the freedom from want of food. Until shortly before 1900, food shortages were nearly always and everywhere a lively possibility, and all too often a grim reality. Now, although inadequate nutrition still blights the lives of more than a billion people in the world, residents of developed economies enjoy food in excess.

Morality and monetary policy

Edward Hadas
Mar 6, 2013 13:22 UTC

Monetary policy these days is complicated, ineffective, and quite possibly immoral. The complexity is inevitable; there is no simple way to ensure that the supply of money and credit is appropriate in a large modern economy. The ineffectiveness is evident: central bankers let that supply grow too fast before the 2008 financial crisis, and have unable to return monetary conditions to normal since then.

The moral lapses may be subtle, but I believe the lack of attention to the common good in the management of interest rates and the monetary system causes three serious problems.

 1) Dangerous freedom

Imagine a world in which anyone can use anything as a currency. This perfect monetary freedom would be a disaster. With strangers, I would only be willing to deal in gold, or some other scarce substance that could be carefully measured, because I would have no way of evaluating verbal or written promises to deal fairly. I might be able to trust members of my social group in economic transactions, but only because our monetary freedom was balanced by strong social constraints; they would be punished if they tried to cheat me.