4state

We are still in time to adjust everything

19 marzo 2020 -

In the last 20 years we have witnessed political and economic processes becoming more and more interconnected and interdependent. Still, it is taking us some time to acquire awareness of the mechanisms behind  such processes. The bottom line of our first 20 years of this century is one: the gradual disappearance of the middle class, the rise to power of populist parties and an increasing inequality even between the richest. In these processes a major role is played by the banks, and the policies adopted to save them.

Banks, the players to save

 

Analyzing the answers that the world gave to the most important crises in the last twenty years, it can be seen that the largest efforts targeted to save the economy have been always for the benefit of banks, holding them accountable for the general wellbeing of our economic environment. The question that arises from those choices are the following: is this true? Are still banks the only -or even the main- responsible for the wellbeing of the economy? Are banks the players that should be saved “whatever it takes”? The most iconic answer has been given during the great recession started in 2008.

 

New rules, same habits

 

After the crash of Lehman Brothers, the world by mutual Agreement chose to adopt strict rules for banks and insurance companies. Still, after Basel Committee has adopted stricter rules, the problems of the banks don’t seem to be solved. One paper of the IMF shows us that the banking crises have not diminished significantly after 2009, and where they have diminished is only for advanced economies. Several countries have experienced after 2000 a bank crisis, and some of them even twice or more. In Italy, for example, more than three banks failed only in the last 4 years.

Systemic Banking Crises Revisited  by Luc Laeven and Fabian Valencia  IMF 2018
Systemic Banking Crises Revisited
by Luc Laeven and Fabian Valencia IMF 2018

The importance of waves

Whatever the origin of a crisis, it tends to occur in waves. For this reason it is not wrong to associate a correlation between the different types of crises. Still, we could agree on this: the mix of fiscal and monetary policies plays a major role in approaching, or moving away from such banking crisis.

 

Who is responsible?

 

However, another important characteristic to look at, is bank’s saving procedure. When a bank obtains support to carry on with its business, most of the time are the households savings that get absorbed to balance bank’s accounts. Still, a question remain, who is responsible for the crash? Looking at data from the FT on the Italian market, we can see that the amount of bad debt collected by companies is not only much bigger than the one held by households, but also increases steadily from 2009 on, denoting a lack of social responsibility and fiscal sustainability in companies’ strategy, two factors that could result key in triggering a financial crisis.

 

Financial Times, july 2016
Financial Times, july 2016

 

The big lies behind Covid-19 and the class-struggle

 

Nowadays we are facing another crisis with different socioeconomic conditions, but until now the answers have been the same, more money for the banks and SME, without accounting for the differences across sectors and across societies. These differences should be taken into consideration, though. First, some companies are keeping their production active, while others not. Within those active, there are some that do so in smart-working mode, that as showed from the Dondena Research Center of Bocconi University1 increases productivity, and others not. Second, some are saving much money in salaries and meal voucher, while others volunteer to help states in this difficult period. Third, all of them will have the same lower interest rates for borrowing money and will be allowed to payback with larger deadlines.

 

For these reasons, it couldn’t be wrong thinking to apply flexible measures that should account for the relevant differences across companies. However a part of the citizens, and a consistent part of the labor force remains outside from the advantages  of these measures, and actually could suffer them, finding themselves in a worst position than before the crisis. The middle and lower class lost their income in these months, and will not regain it, at least until May. Still  they have to pay taxes that have been postponed only slightly less than one month. On top of that, they’re afraid more and more to lose their jobs.

 

Fiscal stimuli as the only way to maintain democracy

 

In this landscape, the power that can be acquired from populist parties is enormous. In fact, when people are deprived of their labour rights, of their possibility to understand that the state will take care of them, allowing them to build their future, becoming extreme right or left voters is really easy. On this matter is interesting to read the book of J. Stiglitz “Globalization and its Discontents”,  the author theorizes that unemployment moves together with violence in the streets and poverty.

 

Given that the pact over the role of the ESM has to be ratified yet, we hope in a logical and altruistic response from the competent authorities, a real signal from the global governance structure that is in favour of the middle class, giving back to european citizens a trust in Europe that never like now is being put in discussion, and now more than ever need to be confirmed.

1: ftp://ftp.dondena.unibocconi.it/WorkingPapers/Dondena_WP137.pdf