Can punitive fiscal policy work?

8 March 2010


The Greek Central Bank has been directed to shut out Hedge Funds from their bond sale.

On the front page of last Saturday’s Financial Times there was an article reporting that the Greek government, holding a bond sale in order to raise money to address its present financial crisis, has ordered its bankers not to sell any of the bonds to hedge funds “or bodies that might be a proxy for them.” How are we to understand this interesting development?

The article in the Financial Times claimed that the Europeans largely blamed speculators in sovereign debt as the cause of the problem, and Angela Merkel was quoted in the article as saying, “speculative instruments need to be contained, especially where it is speculation against states.” This is both a curious and interesting assertion. Why is, or why should, the nation-state have special protections in the financial markets? I can imagine answers both pro and con to this — it is not difficult to speculate regarding the content of such arguments — but the real question, as I see it, is whether such arguments if they were made (which they have not been) represent the actual reasons for the actions taken, or whether they are ex post facto rationalizations for decisions taken on an entirely different basis.

I suspect the latter is the case. Though the Europeans came late to the nation-state party, previously preferring hereditary aristocracies, they seem to have bought into the ideology of the nation-state lock, stock, and barrel. The nation-state, it seems, is sacrosanct, and to bet against the irresponsible financial dealings of a state is unacceptable, whereas betting against the irresponsible financial dealings of some other kind of financial or political entity, while possibly an action that will invite disapproval, is not to enjoy the same level of official condemnation.

It could be argued that nation-states have no business being in the market, that the the use of state power and state funds (i.e., state revenues derived from individuals and businesses under the power of a given state) as represented by sovereign wealth funds is a misuse both of power and of money. But the advocates of the role of the nation-state, while they might at least recognize the question of whether or not nation-states should enjoy special protections within the marketplace, probably could not even imagine to ask the question (nor to argue for a answer) whether states as states should be involved in financial markets. To ask the question is to imply the dispensability of the nation-state, and since the nation-state is defended on the basis of the raison d’état (a reflexivity that apparently does not bother advocates of the nation-state), the dispensability of the nation-state is strictly incomprehensible in this context.

But to return to the Greek bond sales, excluding hedge funds and their proxies, what are we to make of this? In the present financial climate the convenient scapegoat is the banker, the finance manager, and especially the hedge fund manager. Back in November 2008 in Economics or Secular Eschatology? I wrote:

The Hedge Fund Manager, so recently a character of contemporary mythology, has now become a tragic figure, visited by the furies for his hubris.

And in Responses to Recession, Left and Right I wrote:

…figures such as the Hedge Fund Manager were, until recently, nearly legendary characters in the case of contemporary life

We can only understand the present reaction of the Europeans if we understand the recent legendary status of the Hedge Fund manager. Among financial professionals, the Hedge Fund manager had complete freedom to trade as he liked because he had the full faith and confidence of his firm. If he wanted to buy art, or play the currency markets, or undertake any daring quest in the service of higher profits, he had a free hand to do so. Such positions carried great financial rewards and also, until recently, almost as significant social status.

Greek punishment of Hedge Funds and their managers (and their proxies) is vindictive, as well as being ineffective. It also narrows the market of potential buyers at a time when Greece really needs buyers, and they need the bonds to perform as well as possible. Will sending out the message of a punitive policy toward hedge funds will the Greek government improve its financial position, or is it cutting of its nose to spite its face?

It would be no great matter to get around the exclusion. A good Hedge Fund manager could create or enter into a relationship with a proxy that would go undetected at the time of the bond sale. Precisely because this action would be so easy to circumvent, we see that its intent is almost entirely symbolic. And precisely since this move is entirely symbolic, it is obvious that the Europeans, and especially the Greeks, are not pursuing economics but secular eschatology.

. . . . .


. . . . .

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: