I believe in America

America is the country that taught us the spirit of freedom, social commitment and entrepreneurship. A great country with a great destiny, America’s great fortune was its blessing with great leaders. From Thomas Jefferson to the regretted JF Kennedy, America's leaders had the vision and the power to commit to and fulfill the legacy bestowed upon them by their Founding Fathers. Yesterday was a historical day. Once again, the leaders of the great nation rose to the expectation. By rejecting the bill to help crippled banks with 700 billion $, the Congress showed that the Americans are no nation of whiners, as one top political figure commented not so long ago. In fact, all the whiners are to be found on the Wall Street, jittering behind their desks, watching how the Dow is melting, along with their not-so-long-ago pried skills of talented investors and financial innovators. Not being fooled by the pathetic lamentations of Mr. Paulson, seconded by Mr. Bernanke, I believe that the American congressmen took the right decision, a decision that will restore America’s might and integrity, a decision that will wipe out the ineffective institutions and rotten business practices, clearing the path for a solid and healthy growth and for a reassessment of the role of financial institutions in the overall economy. If I could, I would convey to Mr. Paulson the advice that Mr. Corleone gave to Johnny Fontane when the singer was complaining about the misfortunes in his life, in the legendary Mario Puzo’s opera: –What to do, What to do?..Be a man, that’s what you should do! And to the American people, who, no doubt, will once again be confronted with hard times ahead, I could remind the message (adaptation) that another legendary leader delivered to its fellow compatriots, when faced with difficulties far greater that today’s misfortunes: “…Let us therefore brace ourselves to our duties, and so bear ourselves that, if this country was to last for two hundred thirty years, men will still say, 'This was their finest hour.' ”

The Irish (lame) duck and the baby Euro

In my country there is a funny story: An upscale guy went on the local market where he wanted to buy a duck from a peasant. He then asked the peasant: - How much might you ask for that duck you are holding for sale? The peasant said: 20! The guy generously wanted to help the poor-minded peasant and he said: I want to help you so I will pay you 25 for your duck! The peasant replied: No, I won’t sale it for 25! The stunned guy said: Well, you wanted to sell it for 20 but you won’t sell it for 25, which is actually more money? This is non-sense!! The peasant was not touched a bit. Finally, the guy said: Ok, I will pay the 20 you have asked in the first place. The peasant calmly replied: No, the duck is not for sale anymore. This story is, seems to me, very similar to what happed when Ireland rejected the new EU treaty. Although Ireland is rightfully considered to be one of the absolute winners from the EU membership, with the consistent financial support received as one of the main contributors to its impressive economic development, when faced with the proposal of a Treaty that would undoubtedly have contributed to an even better function of the EU, it bluntly rejected it.The event was later dismissed as irrelevant by EU officials but it had, nonetheless, delivered a stunning blow to the EU consolidation efforts. And today more urgent issues clutter the EU agenda: the Georgian crisis, the financial crisis, and etcetera. What some might fail to recognize is that the evolution of European Union, especially since the launch of EURO, back in 2002, was extremely fortunate. This was a relatively calm period that should have been used by EU bodies to work hard on consolidation and stabilization issues. As the financial crisis spreads and the economic crisis seems to feel pretty much at home, the challenges that the EU will face will increase tenfold. In many ways, EU is a successful project and it is here to stay. However, the resilience of the euro and the euro economic area has not yet been tested much in the same way the US economy has been, on numerous occasions in the recent or more distant past. If the monstrous financial crisis that is unfolding will not lead to the collapse the fragile euro area (and odds are pretty high that it might do just that) then this will be the Christianization with fire for the baby Euro. Regardless of how things will evolve, a YES vote in Ireland and a new treaty in place would have been a great help, anyhow.

American Investment Banks and Russian Roulette

I was pondering for a while whether to write about the turmoil in the financial markets. My intention is to write on this blog about general issues with long-term implications. However, I do have something to say and I believe that it is related to long-term developments, rather than the short-lived turmoil present these days on the stock markets.
The US government decided to step in and take actions to tackle what many dubbed the “greatest financial crisis after the Great Depression”. I would not subscribe to this dramatic nomination, if only for the simple fact that I have not yet seen any Wall-Street financier jumping out on the window, like they used to, back in the thirties.
But what troubles me most is the disappearance of what used to be called investment banks. These institutions were at the heart of the financial crisis and probably one of its main catalysts. But the decision of US government to step in and impose deep changes to the business of investment banking, I believe it is not wise. It is clear that the government’s decision to intervene before the financial crisis is propagated in the real economy is a good one, and this move obviously requires tighter regulation. But to completely change the nature of the investment banking, by imposing regulation similar to commercial banks, it is not good. Investment banks used to play a vital role on the Wall-Street and they were at the forefront of financial innovation. They were experts at taking risks and identifying opportunities in real-time without the constraints of a supervising authority. That they can be wrong at estimating risk and they can go over-the-top with the scale of their operations, it is absolutely clear to me and it should have been clear to all market participants and especially to the rating agencies.
I think a fair way out of this crisis would have been to let the investment banks go bust, even if that would have induced losses to third-parties. An even wiser approach would have been to save some investment banks and let some other to go bankrupt. The criteria for choosing which to save and which to let fall should have been completely random. In this way, continuity and a fragile stability would have been created in the system, at the same time with avoiding the infamous moral hazard. Above all, investment bankers play a game of chance, much like a roulette player. It is the nature of their business, and they should be able to estimate and engage those risks that they can actually manage. And they should be allowed to learn the game the hard way, much like the players of Russian-roulette do. Belive it or not, but for some people this is a catchy game.