The Crisis

Last evening I attended a meeting of the Oxbridge Society of Poland at which the guest speaker was Andrzej Klesyk the chief executive officer of PZU the leading insurance company, and one of the largest financial institutions, in Poland. In a thought provoking address, Mr. Klesyk shared with us his thoughts on the financial crisis which has gripped the advanced economies since 2008 and what this might mean for Poland.

The first point to understand, of course, is that the financial crisis was not really a financial crisis at but rather a banking crisis since the insurance sector did not fail and did not require the large bailouts that the banks did. Indeed, it is a further example of the bankers’ ability to escape responsibility for their own actions that this canard has had such a good run for somebody else’s money. And it is this want of responsibility which lies at the heart of the banking crisis and which raises some interesting questions about capitalism itself.

What cannot be doubted is that the real cause of the bank crisis was the progressive de-coupling of risk and reward and ownership that has been a feature of banking in recent years. When financial institutions were largely partnerships a natural caution prevailed since a bad transaction would ruin not only the partner concerned who would be personally liable to the extent of his assets for any losses but, potentially, all the other partners in the firm too. Profits were shared – indeed a partner is only rewarded from profits and the personal nature of the firm limited its ability to over leverage with debt. Ownership, risk and reward were thus coupled together. As these institutions became limited liability companies, not only was liability limited but it became possible to borrow ever larger amounts on money and those trading on the company’s account did so safe in the knowledge that if a transaction went wrong, they would not face any personal loss. As shareholder bases became wider no single shareholder was in a position to supervise the company effectively or even to marshal the shareholder base as a whole. With ownership, risk and reward having been separated in this way no wonder the “heads I win, tails you lose” mentality became so prevalent amongst the bankers.

Echoing some of the thoughts raised here last week in Trust, the problem is how effectively to control individuals who are de facto, if not de jure, beyond control. There is no easy answer since it is not feasible to return to the partnerships of yesteryear. There is also no real substitute for capitalism and private ownership as the bases for a functioning economic system. Perhaps it is a moral issue, after all.

Be that as it may, the crisis has not (so far) affected Poland as it might have done. For once in its history Poland has been lucky: the constitution prevents Poland from running a large budget deficit; Poland does not have the Euro; the EU funds arrived at just the right moment; and Polish institutions were not particularly exposed to the more exotic derivatives. But in the longer term Poland does face challenges arising from the fact that its economy is ultimately dependent on others, especially that of Germany, so if the Germany economy grows, Poland’s will grow at an even greater rate. There is a certain irony in Poland wishing for, or even being dependent on, German success but the Germany itself is also trying to accept the painful reality that if the Euro is to succeed it will have to foot much of the bill. The disruption that would be caused by Greece leaving the Euro is today too great to contemplate since it would probably not stop at Greece. It would have been better had Greece left the Euro two years ago before the Euro crisis developed but, alas, for those who are Euro enthusiasts, that opportunity was lost. And, in a neat twist, it worth remembering (not a point Mr Klesyk made) that the only reason Greece was able to join the Euro at all was because that well known investment bank from New York cooked the books, contributing to not just one but two crises – quite an achievement.

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