The same scolds now excoriating bankers for their imprudence badly mismanaged their own countries' finances in the boom years.
By Mojmír Hampl
(Wall Street Journal, 15 Dec. 2009)
Have you noticed who in the European Union has taken the stage at the time of financial crisis and started lecturing the financial market—self-confidently and with dramatic gestures—about how irresponsibly, myopically and recklessly it behaved before the crisis? The politicians. And they have immediately and intensively set about devising and proposing ways of taming these "bad market practices."
It is rather paradoxical. The political elite in most of the advanced democratic world hardly offers a textbook example of care for long-term goals stretching beyond terms of office and political cycles. On the contrary, the ability to see beyond the next elections is by definition suppressed in normal democratic politics. And there are almost always elections on the horizon, be they party, local, national or pan-European. Long-term thinking is the exception. It may reap rewards in history textbooks, but to get into those textbooks politicians have to win elections over a series of short periods. The long run is thus not necessarily anything other than the sum of unpleasant short runs. So far, all this is consistent with public choice theory, or "the economics of politics." It is why changes that are painful in the short term but beneficial in the long term are ultimately so difficult to implement, whether they relate to pensions, health care, labor-market flexibility or, at the EU level, the notorious Lisbon strategy, the EU's unsuccessful effort to "catch up and overtake" the U.S.
The financial sector is also often berated for not setting aside enough reserves in good times to have something to live off in bad times. But even here, politicians provide more of an example to be avoided than a model of virtue. There have been few times so good for public budget management as the "great moderation" years of solid growth and low inflation that preceded the present crisis.
Yet in 2000-2007 the vast majority of EU countries ran substantial budget deficits. The EU used to make a great show of its commitment not to let government deficits in individual member states rise above 3% of GDP in bad times. In the good times now behind us, budgets were supposed to be balanced or even create reserves on average. Thanks to the creative thinking of EU finance ministers, however, this criterion was converted into an admissible threshold not just for bad, but even for good times. And even this more-lax criterion has repeatedly been infringed in many countries in both the east and west of the EU (see the nearby chart).
So I have to smile when I now read the conclusions of Ecofin (the Council of EU Finance Ministers), which virtually every month proposes with a straight face a new accounting, regulatory or supervisory instrument forcing the financial sector to think about bad times from now on. These are often the same ministers responsible for those figures in the chart.
With one hand many politicians are hauling bankers over the coals for their herd mentality, which causes instability throughout the market. Yet with the other hand they are writing new directives that will narrow the room for banks and other financial institutions to make their own decisions and will thus lead to an even stronger herd mentality. Regulation is nothing more than prescribed herd behavior. Sometimes it is a good thing and sometimes it is not. In any event, the same straitjacket will also bind those financial institutions that did not follow the herd and emerged victorious from the crisis.
Moreover, it is ironic that in the current EU, the new regulatory measures are being written and promoted primarily by the large Western countries whose financial systems proved to be the most vulnerable in the crisis. Just imagine how it would look if new financial regulations in Central and Eastern Europe were written mostly by Latvians.
Just to be clear, I am certainly not among those who automatically regard politics with contempt and scorn. And politicians are not, for me, a strange species standing apart from all others on the planet. I take the pragmatic view that a particular type of rules leads universally to similar behavior and outcomes on average. Public administration is no exception. That is why it surprises me that this cheap lecturing of the markets in many countries around the world is accepted so quickly and uncritically when it is easy to see that the advocates of such lessons lack credibility in the subjects on which they preach.
Mr. Hampl is vice-governor of the Czech National Bank and a member of the EU's economic and financial committee.