BREAKINGVIEWS-Sarkozy’s anti-market rhetoric misconceived

January 28, 2010

— The author is a Reuters Breakingviews columnist. The opinions expressed are his own —

By Hugo Dixon

DAVOS, Switzerland, Jan 28 (Reuters Breakingviews) – Nicolas Sarkozy’s anti-market rhetoric is misconceived. The French president used his address in Davos to blast the untrammelled free market. While the economic crisis has certainly exposed deficiencies in financial capitalism, this is largely because market forces were too weak rather than too strong.

Sarko had some easy targets. Top of the list were bankers. Their “heads-I-win, tails-you-lose” pay practices are an outrage. But these are not the result of the free market operating properly. They are the result of governments and central banks rushing in and bailing the industry out when it runs into trouble.

Sadly the authorities won’t be able to remove their safety nets totally. So part of the solution has to be tougher regulation. But, wherever possible, the discipline of the market should also be strengthened. This means making equity investors, creditors and the bankers themselves suffer before taxpayers are called in — and, indeed, constructing a financial system where banks can fail without causing the whole pack of cards to fold.

Another Sarko bugbear is mark-to-market accounting, the theory being that wild swings in asset prices exacerbated the crisis. But a bigger problem was the failure of banks to recognise losses in their loan books soon enough. If they’d had to account for expected losses during the boom times rather than keeping their loans at face value, they would not have gone so crazy in extending credit.

Of course, banks’ trading books are treated differently from loans for accounting purposes — being largely marked to market. But even here Sarko’s criticism is off target. The problem was not strictly that the value of toxic securities dropped like a stone but rather that such illiquid assets were funded with short-term money.

A third target of the French president’s ire was the undervaluation of certain countries’ currencies — read China’s. Sarko is right that the artificially-low yuan helped foster imbalances in the global economy — in particular, excess savings in China which were then used to finance America’s avid consumerism. Again, the problem here is not an excess of market forces, but Beijing’s manipulation of the market.

So, yes, Sarko, capitalism hasn’t worked perfectly. But the best solution is to make market forces work better.


— Nicolas Sarkozy launched a broad criticism on the untrammelled operation of the free market in an address to the World Economic Forum at Davos on Jan. 27. The French president argued that market forces needed to be offset by corrective measures.

— Sarkozy attacked mark-to-market accounting practices. He also made a thinly-veiled attack on China’s policy of keeping its currency low. He said the undervaluation of certain countries’ currencies constituted “monetary dumping” and called for a new Bretton Woods system. He promised to push forward the idea of reforming the global finance in 2011, when France will chair both the G8 and the G20.

(Editing by Rob Cox and David Evans)


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