How Finance Works

February 12, 2010

Ordinarily, if you go to a financial adviser and ask them to sort out your debt problems, they will respond with a fairly similar prescription: get your act together, cut out unnecessary luxuries and concentrate on what you really need to get by while you set aside part of your income stream to paying debts.

If you are a country, and your financial adviser is the IMF, this is not the case.

Imagine you are head of a large family. A few kids (well, 90 percent of them) haven’t done so well, living on porridge made from dust, barely being able to read and needing special educational attention, while some have serious illnesses for which you have to pay.

But some of your kids are doing fine. Their grades are good and they exercise all the time. They make hundreds of pounds every week selling the lunches and clothes of their brothers and sisters and making them work for pennies in an improvised sweatshop behind the games cupboard.

All the while, you are paying more and more money to feed, clothe and cure your sickly children. It’s almost crushed you.

It’s a strange scenario. But run with it. A debt adviser would probably be bemused but would (informally at least) get to the heart of the matter. What you have here is a problem with parasites. Those few healthy children need to be disciplined and made to pay their siblings for the torture that they have been inflicting on them,

It’s not too hard to see. Common sense (and any tabloid newspaper hack) would advise the same. Stern discipline within the family would sort out your own little corner of “broken Britain.”

But wait. Imagine you seek the advice of the IMF to reduce your spiralling debts. And the IMF tells you that the problem is purely the size of your debts. You have borrowed beyond your means and must cutback on all expenditures. Some of your kids may die and see their education retarded. Your unruly rich brats will continue to exploit their siblings. The IMF official notes this approvingly, telling you that it may be for the good. After all, some of the wealth generated by their sweatshops and stolen dinners may trickle down to you in time.

Can you see the disconnect here between actions which are a) morally satisfactory and b) actually effective and the way in which countries are assessed by the world’s financial elite?

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