March 25, 2013
One of the first things a course on Monetary Economics teaches us is that the quantity of money in circulation is part of banks’ balance sheets. Apart from technicalities, it just indicates that banks make the backbone of the monetary system of a country. It is not a case that there is shortage of cash at the moment in Cyprus. A big industrial corporation and a big bank are not the same: they both have thousands of employees but bank bankruptcy is more likely to trigger the breakdown of the monetary and financial system. Europeans should keep it in mind.
Big banks have behaved quite badly so far and they have been caught doing all kinds of dirty games (better say, crimes). We refreshed our memory after the financial crisis 2007-2008 – it was no news – about the danger of having poor financial regulation, with bad incentives and “high ranked” moral hazard. So, banks are unpleasant (I never had the dream to work in a bank…). However, the reason why we did not end up as in the 1930s is that people like the chairman of the Federal Reserve, (Prof.) Ben Bernanke, have understood that banks make a vital part of the economic system.
The argument “banks should pay, not the people” does not really convince me. I mean, former management of collapsing banks should maybe pay for their mistakes but not “banks”. In a complex monetary union such as the Eurozone, banks have a crucial role for the functioning of the system. On the one hand, they are the first suffering from countries’ unbalances and on the other hand, a local banking crisis is able to shatter the Euro union.
Maybe if the average level of financial literacy in Europe – especially in Southern countries – was not so poor, the political debate would be different. Still, people would furiously react to bad agreements like the one decided last weekend – with a 6.75% levy on mid-low wealth households – but they would use different arguments. I heard too many times people blaming the “Troika” and governments to be puppets of the financial establishment and to say “a Europe for the people, not for the banks!“. We should really increase financial literacy in Europe or people will never get that the Euro system is not just black-and-white. Within Euro-zone economic and monetary unbalances will always be perceived as the German or Troika tyranny and “No Euro” political parties will make their success out of it.Claudio Baccianti