fatvegan

I read somewhere the other day that several big banks had lent three times their total capital to just Latin American countries. Which means that if Latin America defaulted they would almost certainly go out of business, because their liabilities to their investors would be far higher their their assets. Since this silliness objectively makes their businesses rather rickety looking, their share prices should be pretty low. In theory, if Latin America was their only loan client (which actually isn't the case), then you could argue that their share price should be close to zero, or even zero if their liabilities are much greater than their assets. Even if the likelihood of default was not that big, the overwhelming size of liabilities might mean the expected value of the future profits was kind of tiny. I think you can make a good case that an efficient market should punish people invested in those banks by taking all their money from them outright. Since the banks were silly to invest in Latin America the way they did, and the people were silly to invest in those banks. It's not an ethical argument one way or the other, simply an argument about market efficiency and the risks associated with high reward. And the rewards were very high for quite a while. You could even go further and say that if the markets didn't punish them by taking their money, then there's not much disincentive to do it again.

Of course, this all assumes that the banks were silly to lend what they lent. And not everyone believes this. But assuming that you do believe it, I think this is a reasonable sort of conclusion to draw. So if Latin America has a few hundred billion dollars of outstanding debt it can't pay, but the companies that own that debt aren't really worth that much, then what is stopping Latin America from buying those banks outright. No one else in their right mind would want them. The only people the debt assets are valuable to are Latin America, for political reasons as much as economic ones. So Latin America could buy the banks, and write off all the bad debt. The only reason the banks have survived so long without having to write off the debt is because they've formed these crazy cartels, and keep lending more and more money. But if you didn't particularly care what the share price of your bank was (because you own it), and if you said it wasn't ethical to operate in a cartel, then there'd be no reason to stop you from writing off the debt. Even if the banks operated under US or UK jurisdiction and regulation, which restricted the actions of owners, they could easily argue that the responsible course of action was to write off the debt. Investors could hardly sue the owners for minimising investor exposure to future bad debt. Lots of commentators and government regulators have been telling banks to write off this debt for decades, but they've kept the system afloat by doing a whole lot of wacky things.

I believe that Latin American governments could practically do something like this. I think it's hardly the fault of the poor in Latin America that banks in the rich world leveraged themselves so blithely. It would hurt those invested in the banks, but if you want to start appealing to a sense of fairness then you'd be crazy to compare the plight of even the poorest Western families with the plight of poor Latin American families. It wouldn't trouble me that much to see the US and UK governments directly paying adversely affected families with some of the wealth they've siphoned out of Latin America in the past few centuries. The US and UK governments (particularly) could have got involved in (re)regulating the banking business far earlier.

I think there are two morals to my little rant. Firstly, if you want to construct a worldwide economic system that rewards amorality, then you shouldn't lose your knickers when the oppressed take you up on the offer. Secondly, you're an idiot to leverage your bank to the hilt making loans to military dictators more interested in filling their pantries with fancy cheese than with paying back loans. Finally, an extra moral I just thought up then, if you're lending money to a country hoping to get paid back from the economic surplus that is generated you should think long and hard about whether or not the guy across the hall working for that other investment bank has already spoken for that surplus. Colonialists and imperialists and neofeudalists had completely perfected the art of taking all surplus long before the banks showed up. It was far more than a matter of simply generating additional surplus - the banks actually had to figure out ways of prying it from the claws of the existing folk. And I don't think they ever did. So the third and final moral is, think about stuff before you do it.

In summary it's not the fault of the Latin American poor that American and European investors have been investing in the cheese pantries of dictators for the past 20 years, and they should stop making the poor pay for their stupidity. When corrupt country leaders tell you to give them money for extra cheese, and by eating this extra cheese they'll be able to give you 14% return, don't believe them.