In 2001 the head of the Inter-American Development Bank spent much of his time fighting speculation that one of Latin America's giants, Argentina, had enough national reserves to maintain a 1:1 ratio between the Peso and the US Dollar and maintain confidence for investors that they would have their investments returned with acceptable risk. Five Presidents later and six years later, Argentina is fighting to stave off another economic crisis with some added funds in the bank, promises to pay back much of its international debt, and many of its creditors suffering from an economic collapse which might ironically place Argentina in the position to gain added investments if its reputation can handle the latest wave of financial crisis to hit the globe. It is doubtful this will happen of course, but with poor economic and political leadership in the US, the world and its source of international funds have taken a process that was expected to take 40 years and reduce the US into a shared global power into a change in the world economy which is today's reality.
Questions which always have arisen are whether regulations or political leadership had the ability to avert crisis that come from decisions made in private industry and in private boardrooms. One argument regarding Argentina is that loans given to The Argentine and other countries by international creditors place complete onus on the borrower to assume ALL risk in the transaction. As with small business loans in many financial markets, the tradition of incorporation and all of its legal rights for an investor to be separate from the company with separate legal identities is signed away, leaving all risk in the transaction on the head of the borrower. The problem with this on a micro level reflects that of the macro level, leaving all risk on the borrower, but not placing any onus on the lender to make a business decision on their clients in order to avert losses to the company. Like with international lending, risk is always taken by the borrower, so when there is a problem in the relationship, bad business decisions by the lenders result in a situation where gains are taken as profit, but if there are losses the borrowers must go well beyond reasonable measures to pay back a loan that might have been given without consideration to risk, as lending in the modern era has been able to avoid the Invisible Hand of the market as poor economic decisions have little effect on irresponsible lenders who see no ill effects from giving bad loans to people and countries who have no rights to shield themselves from the market.
While Argentina has announced this month that it will make moves to pay back its international creditors (Risk insurance for Argentina is very high or not offered), what is the effect if a whole industry makes poor business decisions and the borrowers simply return their capital and leave the lenders with large numbers of very nice houses? The root of the mortgage crisis is the obvious result, but it must be challenged on three levels. We must return to the ideas of Adam Smith and the root of modern capitalism. Fundamentals such as the Invisible Hand of the market is the basis of the US economy, but in an industry where risk can be passed off to the consumer, sold into the larger market or as we see in the Bail Out, allow for private companies to claim profits but make US taxpayers and government cover their losses, private gains are created and losses are made public. The free market cannot sustain itself as lenders do not take any substantial risk and thus make business decisions which would lead any other company in any other industry into swift bankruptcy, but in the financial industry allows mortgage lenders to make irresponsible business decisions without the consequences of market forces to bear on those decisions.
Regulation and government intervention must be considered, as with such a unique industry which relies heavily on non-risk and government regulation and bail outs, the market forces on the financial industry must invite regulation in order to maintain its non-risk positions and insure losses by way of the national reserves despite poor decision making by those in the industry themselves. The root of financial industry theory is that the market will determine the right course of action for people, but that regulation is needed to insure that losses will not create a catastrophe in the process. In Argentina, the failure of the economy forced banks to literally lock people out of their private savings so that a run on the currency would not create a collapse. Luckily the US does have reserves to cover the losses, but did the crisis comes from regulation impeding the free market, or does the free market simply not work? I would argue that since risk and consequence is the result of any business transaction, an industry which prohibits other industries from growing without giving sensible risk to the lender cannot vent its problems on regulation and a government that is insuring any and all mistakes made as a result of poor decisions collapsing their industry as a whole. Regulation is a key issue as it allowed mortgage lenders to sell their risk into wider financial markets and is the reason why the current catastrophe has echoed worldwide, but the same regulation also is there to keep the US out of the chaos of Argentina, namely, to maintain confidence in the US economy that risk of losses is low and that the market is strong. So is regulation a barrier to the free market and caused the current problems, to some degree it did allow for problems to arise, but mostly due to an industry making decisions without consequence and giving the risk to the public in many forms with no constructive losses to financial companies or threats of real losses to their own private companies.
Leadership, while likely the most media friendly issue and less complicated than the equations needed to understand the Bail Out, has done little to address the true need for proper regulations, the true market effects of the financial industry and creating laws which protect consumers. They have done little to protect the national reserve and provide that economic decision making should bear consequence on those decision makers in private industry and remove the corporate veil for larger financial companies as is the case with many business borrowers and consumers of the financial industry which need those companies to help grow their local economies and communities. As debated by Mr. Obama in last night's debate, the financial crisis we have to date is the final legacy of the Bush Administration, but while a Bail Out may make this issue last week's news, the massive amount of borrowing from lenders in cash rich China, Dubai and other wealthy emerging economies in the last eight years and the economic alienation of US allies in the process in places like Europe, Canada and Latin America may take a process of normalization of investment trends from the US to the world into a situation where those new lender countries will be on par with the US immediately. It was thought by writers like Zakaria and Khanna that over a course of 15-35 years, the US will become one of many economic superpowers in the globe, but due to poor leadership and a financial industry which has chosen to give the death kneel to the American Empire of the 20th Century, measured predictions by those authors will likely come true before the paperbacks of their recently published books become available. The next President, whoever he is, will likely be a better choice than anyone in the last 20 years, and will spend the better half of the next four years cleaning up America as he bears the responsibility for cleaning up everyone else's mess. Like the formidable Cristina Kirchner of Argentina, charm can only go so far when you are the caretaker of a crisis from the past. Suffering politically from chaos which she cannot end and did not create, Obama or McCain will inherit one of the worst jobs you can have in the financial industry, the country's official risk bearer.
