Europe pays for lost character

Should the European Union extend credit to its risk-of-defaulting members? Can Greece and Italy be looked at like some misbehaving heirs who got easy money from their indulgent, dotting parents? Can "tough love" be a remedy?

Parents, after all, occasionally advance far too much capital on far too easy terms to their undeserving offspring - with disastrous consequences, as noted in last week's column (see The vital few, Asia Times Online, October 15, 2011). I am not even talking here about Shakespeare's King Lear, giving away his kingdom to his two ruthless daughters, but the quite common occurrence of the saying "three generations from shirtsleeves to shirtsleeves". The first generation is the entrepreneur builder, the second expands - and the third often destroys.

This happens as the third generation perceives the business as serving them, the self-indulgent generation - rather than them continuing to serve the business, and find ways to accountably match capital with talent and character. But parents' misallocation, being blinded by misguided "love", does not bring about national crisis, big as the business empire might be - unless they happen to be either dictators, be it in the Middle East, Africa, and not long ago Latin America.

But what has been blinding Washington's politicians/ Wall Street's banks/ the rating agencies to lead them to advance so much credit to households who had no glimmer of hope of returning the loans? And what is it that blinded European banks and governments to advance directly or indirectly so much credit to profligate countries?

J Pierpont Morgan once said there was only one basis upon which he would extend a loan. It was "character" - not money or anything else, "because a man I do not trust could not get money from me on all the bonds in Christendom."

Trust? Character? When was the last time you heard these terms applied to anything, whether in Washington, Wall Street or Europe's political class? And what would "character" mean when credit is extended to countries?

Reuven Brenner holds the Repap Chair at McGill University's Desautels Faculty of Management. The article draws on his Force of Finance (2002).

Read full article: Asia Times, October 22, 2011

Read edited version of this article: Forbes