Corporate Governance vs Political Governance

The corporate governance debate forced for decades has created a rigorous system of transparency, control routines and reporting requirements. Understanding the corporate accounts and the risks in the company is no hassle and the information you need is easy available. Corporate crime including tax fraud leads to long term sentences and humiliation. Never, ever in modern time has corporate defaults led to a severe financial crisis. Despite that fact the Basel framework still regards corporate risk as something that shall be crowded out from the banks’ balance sheets into the second engine.

The Basel framework regards real estate collateral as a semi high risk. Since the mid 1980-ties and the first version of Basel we have had several real estate bubbles bursting creating huge financial meltdowns. In 1991-92 the Swedish real estate bubble almost made Sweden go bankrupt. It was avoided thanks to the country’s small size and international limited importance and clever politicians making fast and bold decisions. Generally speaking Sweden’s high tax rate still depend on the tax payers to mortgage their homes for larger investments (such as a new car or a kitchen). Saving money after tax is for most Swedes impossible. In fact the whole Swedish economic system is built on creating real estate bubbles, which is a clear systemic risk facilitated by Basel.

Globally we are now in the largest and most devastating financial crisis since the 1930-ties again created by a real estate bubble, which the Basel framework regards as a limited probability of happening! The first crisis 2007-09 disclosed inappropriate sovereign risks effectively leading to countries defaulting with Iceland being the first and who knows what PIIGS countries will follow? All of us will lose money in this crisis and on the countries defaulting in particular.  The “private investors” shall cut 50% of the holdings it’s told. We, the people, are the private investors through our retirement funds and savings.  No one is open about who the private investors actually are. The word private investors lead us to believe they are the rich and glorious bankers we all are taught to hate. But eventually we – the people – will have to pay the costs – again.

Political governance does not at all reach the same standards as corporate governance. Far from. Effectively any political administration can bankrupt any country and live happily ever after. There is no transparency where the tax payers’ money is spent. There is no percussion for financial crime in the political world. Genocide is the only thing an administration should avoid. That may lead to a conviction in The Hague. But impoverish a whole nation and putting the global financial system at risk is ok. The Basel framework encourages speculation in sovereign risk! We should acknowledge the largest financial crashes are caused by political failure. From where is the notion that politics is low risk?

We need to balance capital requirements in a way so they are as high for corporates as for real estate collateral as for sovereign debt. A director of the Swedish Central Bank recently said:  “The problem is that Greece has been able to borrow to the same low cost as Germany.  No one made a country analysis [my translation from Swedish]”. Of course this happened since it is what EMU is all about! Blame directly the systemic risk caused by the Basel framework making everyone regarding sovereign risk as low risk. Unfortunately the analysts put too much faith in the political system to enforce financial discipline in the EMU. There are lots of criticism against the financial institutions for the crisis and that’s ok. But I believe this financial crisis is created by the political system. The lack of governance has given us incompetent, shortsighted and populist politicians. We urgently need systems for strict political governance or they’ll draw another disaster on us immediately after we’ve endured and paid for this one.