The New Capitalism

These days financial European headlines are greener than ever : Capital Markets, the ultimate measure of all are once again traded in a relative high, following several weeks of rising prices.

The headlines of the last rally are accompanied with news concerning the lamentable situation of Greek finance, including the downgrade of its national debt to the worst investment category ( From bbb + to bbb - … something like that ) . Naturally a bad new which should remind us the gravity of the situation, so how it comes that a bad new brings the markets to new highs ? Have the markets gone crazy?

The explanation for the apparent inconsistency is our ( still ) deep public pockets as the Greek new “junk” status practically oblige the European Union and other international entities to “rescue” that country. The word rescue is somewhat misleading as we are not talking about an humanitarian cause but the handling of money so Greece can pay its obligations to foreign investors. Therefore the rise of financial markets is a confirmation for the new injection of fresh public money into the financial arena. Politicians are applauded by markets ….

Still, the celebration can be interpreted from a different perspective .Since the result of the rescue would be that the owners of the Greek debt ( which probably made a lot of money from these obligations) are not really punished for their errors , this sort of rescues undermine the foundations of the market economy ( Economists call it “Moral Hazard”) . This is the essence of what I call the New Capitalism , an economic system in which the detachment between risk and reward is bridged with public money. That system involves the allocation of wealth and welfare from the average citizen to the average investor ( and banker) , generally not the same average person. Anyhow it should be noted that Europe is not unique in the application of that distorted system. The inconsistency of those actions is even deeper if we consider that the New Capitalism is applied in a very selective way : The average citizen runs his life according to the the laws of the “Good and Old “ Capitalism of free markets and competition .The identification of the rescue of financial markets , (better put the holders of certain financial obligations) with “saving the economy” is pure demagogy .

The problematic rescue obliged politicians and markets to go through a preliminary “tough” game but by the end of the day the unconditional support or financial markets is clear and beyond any real question. Thus more rescues and public interventions are just a matter of time. Maybe the imminent rescue is a good news for the very short term, but from a wider perspective it allows to preserve the actual and distorted financial and economic practices that are the real cause behind the economic crisis. In a more financial jargon, the political establishment bought time with public funds until the next default/crisis, but the problems of the New Capitalism cannot be ignored forever.