Why banks fail

Europe is in the middle of huge economic trouble. The European states promise more to their voters than they can afford. Banks and financial institutions get much of the blame, but the real reason is simply public and private overspending in practically all of the countries, except those who are selling lots of raw materials (usually oil and natural gas).

However, there are some real problems in banks as well, and they have contributed to the situation. Politicians like to blame banks, investors (or "speculators"), rating agencies, etc. This allows them to shift the blame that simply belongs to politicians and voters. EU leadership wants to control rating agencies. This is a bit like when you are flying an airplane and you get very many warning lights in your cockpit that tell you about to hit the ground,  you react by reaching for a hammer and start smashing your instruments for incorrect operation. Yes, there may be faults in those indicators, but the time to do service is on the ground, not in flight. And not by the pilot who doesn't like what the lights say. Not when the rest of us are aboard this flight.

But what is really wrong with the banks? It is not that they make profits (if and when they do). It is not that they pay dividends. It is not that they pay huge sums of money in salaries and bonuses to their managers (although the latter is a symptom of the upside the banks had here: in the build-up of this governmental and inter-generation Ponzi scheme, they made fortunes.).

The problem is that the traditional separation between investment banking (which issues securities) and commercial banks (which accept deposits) was removed. This has created banks that have taken huge investment risks - such as investing in Greek government bonds. The same banks are also important for commercial operation of  the daily economy - basically they have bank accounts, yours and mine, and mortgages for homes, your and mine.  These banks are "too big to fail", but now they may actually collapse.

That is what makes the current economic crisis so much more difficult to handle: you can't easily just let the Greeks default and leave those evil, greedy vulture capitalists without their money. We have the deposits and pension savings of everyone at play, and our homes are mortgaged with funny money.

It looks like the U.S. effective repeal of Glass-Steagall Act - sponsored by Republicans, approved by a vast majority of Republicans and Democrats in the last years of Clinton administration with a Republican House majority - is the most serious blunder of the U.S. Republican party. It's not the Iraq war, it's not whatever spending or whatever tax cuts that Bush did. It's what they did in 1999 when Clinton was president. They messed up the financial markets.

In Europe, some similar development was done through the adoption of a single market in financial services, started 1987 and completed 1996. Now we see what it leads to in a dozen years.

Nevertheless, we shouldn't forget that the trouble of banks and other financial institutions is just a symptom. The fundamental problem in Europe is that politicians promise too much to their voters, and the result is that everyone is in debt. Public sector is in debt, and much of private spending is based on this debt as well. Europeans work much less than e.g. the Chinese, and it is difficult to understand how European leaders can expect poor, hard-working Chinese people to continue "lending" (i.e. donating) money to European central bank in order to keep up the frivolous spending practices of European welfare states where people can feed themselves without working. This is something where even North Korean news is more crebible than the eurocrats.

Will rich Greeks be repatriated?

It's been obvious for a long time that Greece will default; with Georgios Papandreu's silly referendum idea this week the way we arrive at this inevitable outcome is becoming more apparent. Greece will exit euro.

What will be done is something along the lines of Argentina's default some 10 years ago. It's not a disaster - sure, there is an economical shake-up, but it won't be that hard. It's not exactly a World War.

Not many people will be killed (although some riots and political activism along the lines of to Brigate Rosso may actually cause some deaths). Masses of Greeks won't be starving. They'll eat just fine, and people will continue to live in rather nice homes, they will continue to have a level of heath care that is marvelous when compared to historical levels, and they will continue to have TVs, mobile phones, entertainment and all the benefits of modern technology.

The austerity is long due and will do good to the people everywhere in Europe, not just Greece. But one question puzzles me. Greeks will have to start collecting taxes (let alone complete construction of all those houses that were left unfinished because an unfinished house is not eligible to pay property tax) .

The country has had a few super rich. And they have left, and their fortunes with them. The money will now be stored in bank accounts in Switzerland and Liechtenstein and UK and USA and even Germany, and other assets like shares and stocks will continue to be listed in the name of Greek nationals.

So, the question: Greece will probably make laws that say that its richest people will have to pay up much more in their taxes. The new government, when one is formed, will want to repatriate some of the earnings of the super-rich, who'll be living in other EU countries and North America. This will involve court cases about tax evasion and wealth transfers, and the outcome will be that Greek courts will ask other countries to send back people and their money. Will other EU countries and the USA really do this?

Some really rich people in Greece will have taken their winnings with them and they will try to stay out of the reach of Greek taxes, and keep their money. Will the other countries hand over these people and their money? Will rich Greeks and Greek riches be repatriated? Or will each and every one hosting these people try to attract as many of these expats as they can, because the money and wealth will be a benefit to the local economy?

My bet is that the super rich expat Greeks will keep their money. It's sad, but that's the most likely outcome: the hoarders will keep what they hoarded.

Shooting the messengers

Jose Manuel Barroso wants the EU commission to put a clamp on credit rating agencies.

Heiner Flassbeck, director of the UN Office for World Trade and Development, wants the agencies "dissolved" or at least banned from rating countries.

What utter idiots. I've got a piece of advice: before you do this, try something less harmful. Like fire all of the Meteorological Office staff  when there is bad weather.

I it is really quite scary to see that the commissioners are so removed from reality. The project for federal government for Europe is going to the heads of our political leaders and, increasingly, the civil servants who hold way too much power. When they hear messages they don't like, they start silencing the messengers, when in reality, they should listen, and try to understand, and act according to wisdom.

Market economy invented in Kumpula!

HS runs a story about Kumpulan vaihtopiiri (edit: there is also another one, Helsingin vaihtopiiri, I confused these two but they seem to have the same idea). These are grassroot organizations that enable barter economy of small services in exchange for credits (alternative money). In this system, the credits are called kumpenni, a local penny, 10 kumpennis are worth one hour of work. (In the other one, it is merkkari which originally stands for "pirate coin", in fact a popular licorice candy).

That's all very fine and admirable; this is how communities have worked all along throughout history, and selling and paying for services in local trade through bi- or multilateral barter or more loosely defined gift economy is what keeps communities up and running. These movements pop up and there have been little stories like this in papers every now and then.

What baffles me is that the participants say - according to HS - that "they want to distribute welfare and have alternatives to capitalistic market economy".

Hey guys, wake up. What you have invented is capitalistic market economy: freedom of selling and buying services, freedom of pricing, freedom of who you trade with and who not. It isn't an alternative to capitalism, it is capitalism. There's even a "bank" that keeps track of value of services given, instead of the more traditional way of each person keeping track of who owns him or her what, and who he or she is indebted to.

What the participants seem to forget is that what they do is eroding the welfare state, and that what they do is illegal. I'll elaborate a bit.

1) The eroding of welfare state

Why is buying services with money so expensive? Because you have to pay tax, and because you have to pay for the related bureaucracy (which may be a higher cost than the tax itself). You pay not only the 22 % value added tax, but there are lots of other taxes, particularly the income taxes and social insurance contributions of people who work for each other, and the administrative cost of making these payments. If you hire someone to work for you legally, and pay all the taxes and statutory contributions, often less than half of the money actually goes to the person doing the work. The rest goes to the state to fund the welfare state. And if you have ever employed a person in Finland, you'll know that the process of meeting legal obligations is complex and takes a lot of work to find out.

If you evade those payments, what is that if not undermining the foundations of welfare state? Also, the welfare state has developed mechanisms to restrict worker exploitation, for instance the minimum wage (in Finland, through collective agreements). In local barter trade, all these rules are dodged.

2) The illegality

Yes, I know, it's absurd. It sounds really stupid that if I mow your lawn and then you mend my socks, we should both pay income tax and pay social contributions, and if we do more of it, we should also pay value added tax. But that's the current law; that's the very basic idea of the welfare state. A very large part of the money that the government makes and then uses for various more or less good causes comes from taxing the use of labor, and much of worker protection is achieved through the bureaucracy and the barrier of entry that it creates.

Current law is very explicit about this, and the taxman's guidance in the Web makes it absolutely clear. There are situations where people can work for free - bees (in Finnish, talkoot) for instance. But bartering services is tax evasion.

Even in the case where you and your neighbor work at the same place and only you have a car, giving a ride to your neighbor and accepting half of the gas cost from him is illegal. This is the welfare state.

The outcome

The development in Kumpula is by no means new. This kind of barter economy movements have spawned throughout the Western world for decades. For instance, in the U.S., the tax code was amended to cover them in 1982.

The ideas are the same ("let's fight evil capitalism and support local communities"), the means are the same ("let's use local money to enforce locality, avoid the taxes and bureaucracy"), and the outcomes are the same (unrestricted small-scale capitalism works for a while, it's generally a nice experience, but people grow up, the key people move away, and eventually the system fades away). If any of these trials were to become substantial, they would face investigations and criminal proceedings.

So, to summarize: the activists speaking here have become completely confused with the concepts of market economy and welfare state. They think they're doing "something else", when they are actually doing "more of the same". They think they've invented an alternative to capitalism, and what they're doing is going back to the 19th century style capitalism, just in small scale. If it stays that way, it's OK.