The Golden Straightjacket and the Choke Effect in Practice

This past week the Council on Hemispheric Affairs published an article on the Obama Administration’s actions to depressurize the relationship between Argentina and the “vulture funds” that made profit off Argentina’s default from their 2001 economic collapse. With so many formerly healthy economies in Europe now facing the same end game as Argentina did nearly a decade ago, moves by President Obama to keep an open relationship with its southern neighbour took precedence in policy and in law to the benefit of Argentina. This move by the current administration is an attempt to draw a very fine line where the Golden Straight Jacket does not automatically come with a choke.

Eric Stadius of the COHA does a great job in detailing how the relationship between debt, vulture funds and recovery efforts work in the international financial system. With protests by the 99% and anger against financial institutions since 2008 coming to a boiling point in 2012, it is surprising that there are not more political actions being taken in law and in policy against the lack of equity that exists in current debt restructuring processes. Part of the problem is that the technical nature and legal quandary of the issue cannot be easily communicated and Stadius’ attempt to clarify the issue should be given praise. Whatever side one may be on concerning national debt and vulture funds, protests often ignore these types of technical issues, and there are few legal professionals who can claim to be an expert in finance and international debt as there is little time outside of law school for young lawyers to re-professionalize themselves towards this additional skill. The 99% movement may have pushed governments towards addressing these types of issues in a very general way, but policymakers and foreign policy officials dealing with this specific issue have done a great job in defusing the power some American financial institutions have over countries like Argentina and Greece. That may not defuse protests by the 99%, but it does add risk into the financial industry that has operated outside of their own Straightjacket. For years, the finance industry has pushed to work with zero risk, operating with zero consequences when poor business decisions have been made in the past.

Risk for countries like Argentina and Greece should not be eliminated, as a Golden Straightjacket does have some positive attributes in maintaining stable economies. With risk in international borrowing, there is also risk that needs to be attributed to international lending as shackling national governments in persistent debt will only keep those societies in debt eternally. On an international and local level, financial institutions seemed to have legislated themselves out of their own Straightjacket so that bad decisions have no consequences on paper. The result is that by eliminating risk to bad business decisions, that industry’s entrepreneurial core no longer exists. Pushing an industry to the point of surviving off the eternal debt obligations of the poorest in poor societies only rewards a legal obligation to pay a debt, but it does not put money in the company’s pocket as it allows technocrats to avoid the reality of true entrepreneurship. Banks never were the engine of any healthy economy as they make money off entrepreneurs more than anything else, but with a complete lack of risk and entrepreneurship in the financial sector, wise policymaker will force financial institutions into a riskier posture in the future.

So much for the risk free 1%.