– 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.