December 13, 2011

Greed is its more obvious fuel, yet the economic engine cannot work without some solidarity mixed in. "Creditors are joined at the hip to the debtors" (*). Even the most heartless capitalist must accept Martin Wolf's basic solidarity as a fact of life. The latter explains that "the world cannot trade with Mars". Behind the humor lies a scientific lesson. Unless one clearly defines the system under study, all conclusions are suspect.

Our planet is the system. Down on earth, the sum of all debts must equal the sum of all loans and reckless lenders mirror bad debtors. To run an export economy and to expect all one's partners to do the same, as Germany seems to insist in doing, is either foolish or hypocritical.

Knowing such epithets are commonly hurled at capitalism, John Kay speaks of "the failure of its public relations" (**). He also faults "Europe's political left" for its intellectual bankruptcy. Capitalists too are to be blamed for their blindness as much as for their greed. But perhaps the focus should shift from capitalism to solidarity. It is solidarity which has the worst press today and, as long as this endures, no progress can be made.

Social solidarity was all the rage during the Middle Ages. Under the Church's guidance, the rich knew their salvation depended in part on the poor, whose role it was to receive alms. This attitude bred noblesse oblige and is behind the philanthropy of John D. Rockefeller Jr or Bill and Melinda Gates. But this type of solidarity assumes rich and poor alike are secure in their positions, an hypothesis which runs counter to modern sensibilities.

Rather it is moral hazard, its opposite, which is dominant today. The poor are the ones responsible for their fate and the more the rich try to help them, the more helplessly dependent they become. Were he back among us, Charles Dickens would feel quite at home. What are US houses burdened with mortgages in excess of market value and European countries run by appointed technocrats but debtors' prisons in disguise?

Still, by blood or ballots, two centuries of revolutions have created a web of state-financed solidarity. The problem of the political left is that these services have been mostly funded through future liabilities, whose unchecked growth is as pernicious a bubble as any asset bubble. For creditors see no difference in financing Mme Bovary's adulterous escapades and French workers' pension pledges. Default for them is the one and only sin.

One solution is to look beyond the labels. As many rent-seekers pass their unlimited greed as a spirit of enterprise as there are free-loaders who hide behind solidarity. Eliminate both types of sinners and the economic engine will run smoothly again, restoring the reputation of capitalism .

It has been done before. Cromwell's England and Mao Zedong's China severely discouraged both gorging oneself and slacking off. The issue of course is that sin and freedom are the two sides of the same coin. Thus made sinless, capitalism misses freedom and is like a fish without water.

To combat sin without killing the sinner, the best way is to remove temptation. This is the cogent lesson to draw from the MF Global debacle.

The facts are clear in an ironic sort of way. "I simply do not know where the money is". A stunning admission when one is talking of "an estimated $1.2bn of missing customer funds" at one's own broker-dealership. As reported by Tom Braithwaite and James Politi (***), Jon Corzine takes his cue from Henry II, so popular with top executives. "Someone could misinterpret, 'We've got to fix this', which I said [two days before bankruptcy]".

Meanwhile the FTC has extracted from Facebook the promise its employees will follow the rules. When our data is not even ours the way our money is supposed to be, when even a CEO is so readily kept in the dark, the FTC is like a sheep wanting to watch over a pack of wolves.

Eprivacy should be enforced by a mechanism which lets personal data be targeted while stopping companies from accessing it, let alone aggregating it. I have shared this insight with the FTC (1)(2). If the latter wanted some third-party confirmation, it should read Darrell Duffie on MF Global (****). "It is time to consider requiring an operational firewall, and not merely a legal barrier, between a future brokers and its customers' funds".

"Sometimes, it makes sense to adopt rules that also make it harder - much harder - to transgress in the first instance". Professor of finance at Stanford business school, Darrell Duffie is well aware many will complain this would deal a blow to our individual liberties, the death of innovation. The same people I suppose will insist all fences be removed from our bridges, all crash barriers from our highways, all ignition keys from our cars.

Past societies had a ready solution for dealing with such malcontents. Send them out of the system. Asia and Africa offered their vast domains to quarrelsome VIIth century's Arabia as the Americas did to restless XVIth century's Europe. In the XIXth century's United States, the West was where to go for elbowroom. This of course turns out to scale up the system in the process, a dynamic remedy unsustainable in a closed environment.

Today's society is therefore in a serious quandary. Now in the XXIst century, its economic system has scaled up to the whole earth while its mechanisms remain at best regional and the political consensus which, alone, can legitimate them quite local.

Hence the ease with which location arbitrage can defeat many mechanisms. Hence the paradox of Europe, torn between the task of becoming a bigger Germany until the world can no longer afford its exports and the trial of finding a better balanced model which the planet could copy.

It will be a long while before people adjust to the conditions of a system with a consistent, global scale. But this is only half of the quandary. Recall that dynamism is both a requirement and a result of past successes and meditate the truth hidden in Martin Wolf's humor.

Even the best of mechanisms cannot redeem human nature. Society needs to find new planets soon to provide room outside itself. Mars anyone?

Philippe Coueignoux

• (*) ....... Creditors can huff and puff but they depend on debtors, by Martin Wolf (Financial Times) - Nov 2, 2011
• (**) ..... Capitalism does not have to be about greed and gambling, by John Kay (Financial Times) - Nov 2, 2011
• (***) ... 'I simply do not know where the money is', Corzine tells Congress, by Tom Braithwaite and James Politi (Financial Times) - Dec 9, 2011
• (****) . The MF Global mess and how to safeguard customers' cash, by Darrell Duffie (Financial Times) - Dec 6, 2011
• (1) see my past campaigns
• (2) a self-interested statement, as I claim to have invented such a software architecture