Due to some strange evolutionary trait, we all aspire to acquire more of the crisp green rectangular pieces of papers issued by the Central Banks. What is more, we measure everything else, our valuable time; our enormous talent; our dwellings; our savings; in terms of the paper issued by the Central Banks. We feel elated when value of our possessions rise in paper terms, and we feel dejected when the same possessions lose value in paper terms. Everything else seems to be jumping around, while the paper issued by “strong” Central Banks seems to be of stable value. And it is these Central Bankers who seem to hold magic wand by which they can make the markets, far and wide, cringe or rejoice as per the wishes of the monetary policy committees.
Now, let’s take a pause and think what happened last week in the European Bond Markets. One may say that if something feels like a default, smells like a default, then it sure is a default. However, the voluntary rollovers of Greek Debt are not termed a default, never mind that Greeks do not have a single Euro to pay to its creditors. In theory, Central Banks, as purveyors of the stability of the banking system, should strongly object to the “Vienna Convention”. However, in reality, ECB seems to be interested in making sure that the books of accounts of banks do not show any red ink, never mind rivers of red flowing underneath.
Lets look at the problem from another angle. What is the best solution for the Greek nationals from this crisis? Clearly, the lenders to that nation made a mistake in judging the credit quality. Hence, all the losses should go to the creditors, and the Greek debt should be brought down to a manageable 40% of GDP. The Greek nationals, now free of the debt servicing burden, can think of how to put the house in order, so that their nation emerges as a strong, vibrant economy in a decade or so.
Clearly, ECB has eschewed this or similar alternatives where creditors take any significant pain for their errors of judgment. ECB thinks it is morally right to incinerate the Greek Nationals to the exclusion of the creditors.
Can one draw a parallel in this situation and in Hannah Arendt’s Banality of Evil?
In fact, one may think of many such situations where Central Bankers preferred one set of outcomes over others, without any public discussions. Recent examples can include Alan Greenspan’s decisions to allow all bubbles to grow till they bust and then to provide a backstop to the losers who were long the bubbling asset of that time.
Also, the moment one draws this parallel, it becomes clear that Central Bankers should not be allowed to function in secrecy, and there should be greater transparency and accountability in their decision making. We would take this as an important lesson of the current crisis.