Thursday, 5 May 2011

While the Government Berates the best Technocrat we ever had, Europe rewards

Dr. Orphanides of the central bank of Cyprus by placing him at the head of of the steering committee of the European Systemic Risk Board (ESRB). In a period that we celebrate even the tiniest victory for our beleaguered economy this acclaim has gone unnoticed by the local media. The committee will have a great role to play in shaping the future rules and regulations of the financial industry and no doubt it will seek to enforce and shape new Basel rules of banking as well as additional banking directives.

Thus the comment by Dr. Orphanides that ""A crucial weakness is that insufficient progress has been made, and one that needs to be addressed urgently, on how to allow major institutions to fail," must have made the big banks sweat with anxiety and made them call their army of lobbyists to the fray.

Of course Dr. Orphanides is right: the feeling that banks got away with paying for the damage when the crisis they fueled hit, even though they profited in the (personally and as corporations)in the bubble is not just a moral argument but an economic one. Removing the chance of bankruptcy removed the proper calculation of risks as moral hazard meant that there was money to be made if suspenseful and the looses would be borne by others. Great to see Dr. Orphanides trying to refocus the world on what got us in such a big financial crisis in the first place.


Protesilaos Stavrou said...

This is good news indeed. Not only because a Cypriot was appointed in such a crucial position, but mostly because Dr. Orphanides wants to revise the economic mode of thinking of the EU.

The ideas that allowed the banks to engage in unbridled activities need to be pushed aside. All need to be responsible for their actions.

Without the fear of the consequences none has the incentive to think away from pure personal interest.

Banks need to realize that the taxpayers' money, will not be there to cover their risky ventures. They need to understand that bankruptcy will be one of the options in case they do not behave reasonably.

Let's hope that Dr. Orphanides will materialize his ideas, for the betterment of our economy and our society of course.

Alexander Apostolides said...

So true - see the article i posted by Sachs - the fact that moral hazard was realized but not fixed or the actors reprimanded is a huge risk for the future.