Lorenzo Bini Smaghi towers over the little people

- Euro states should give up debt powers

16 Jul 2011

On this blog I regularly talk about the failings of the Western elite, but Lorenzo Bini Smaghi, currently an official at the ECB, is definitely one of the exceptions. In fact, it seems to me that the winds of change are sweeping the European Union Ivory Tower, and a handful of Italian Central Bankers, dressed in the finest armour and from the noblest Italian families, are now assuming command. The old guard are slowly sneaking away like "Hunchbacks of The Opera". They know they have failed miserably, and they are intensely aware of the fact that a rowdy mob has surrounded the castle, and it won't be long before guillotines start appearing.

Indeed in both in the United States and Europe there is a real sense of incumbent elite failure and paralysis, and we are waiting on tenterhooks to see whether the new leadership will come from the rough and tumble masses, or the professional pragmatic finance and business elite. In other words our failure is routed in the muddle headed philosophy of liberal artists and social scientists, so the world is clamouring for more hard nosed self confident masculine leadership. Now Europe's future revolves around the struggle between the True Dutch, True Fins, True Austrians etc; and the Master of The Universe types, such as Lorenzo Bini Smaghi. Both the populists and the professionals despise the woolly headed liberal relativism of the petty outgoing elite. This unfolding battle between the mob and the übermensch reminds us of the fall of liberalism in 1930s Europe.

For a while it looked as if Germany was going to lead Europe intellectually, but the European debt crisis has completely and utterly defeated the German elite. Within a year Germany's top man, Wolfgang Schäuble, has spectacularly crashed from hero to zero. Europe is built on German economic success, but in the aftermath of WW2 Germany swapped philosophical leadership for engineering, it turned in on itself psychologically and is still terrified of self knowledge. Now Germany's hybrid technocratic liberalism is suffering from the Wen Jiabao disease. Chinese intellectuals are suddenly calling for grander philosophical vision, they want "scientific development" to mean more than good roads and railways, they are fed up with Wen Jiabao's muddle headed talk about democracy and human rights, and the new Chinese leaders are expected to be much more radical paternalists. Germany don't have China's problems yet, but declining educational standards and cowardly energy policies threaten to derail German's long term future as badly as China's run away property boom and environmental self-destruction.

As a result of Germany's fear of philosophy, France has traditionally run Europe post WW2. Nevertheless, I don't think you need to be a starry eyed philosopher to know France has completely failed and is on a frighteningly descendent not ascendant path. After Germany and France, one naturally thinks of Italy. Perhaps you think Italy's too much of a mess for hegemony, but don't forget that intellectual hegemony is built both on the shoulders of a few great men and the rate of change of economic growth, and both these things can turn in an instant. In other words, if Germany carries on as it is, and Italy reforms radically, Italian stocks are going to outperform German stocks. Look it's all about vision, loose that vision as Japan did and you are sunk, find it as Turkey did and you are superhero. Turkey is not rich, but when you are on roll you end up getting the world's attention. It's often easier for people whose lives are a mess to find vision, because the motivation is more powerful. So it seems to me that Europe's intellectual future might be increasingly Italian. Well this is the mechanical possible "how", but what's the philosophical "why"?

Interestingly, "comedy" is a world one often hears associated with modern Italian politics, and Plato certainly associated the comedian with the intellectual Air principle (eg Aritophanes). Likewise, in Chinese Astrology, the comic Monkey has the sharpest mind. The Moneky's aim is paradoxical understanding, but his personal failure to grasp the complexities drives him to hate his subject, so he ridicules understanding in comedy [eg Republic 486c]. Of course, not every intellectual is comic, some are famously gentle and reserved, others are famously excitable plain speaking and unmeasured. In search of another explanation of Italy's developing ascendancy, it seems to me that the Italians still have a sort of idealism that many other European states have lost. How could anyone brought up in Rome fail to love the beautiful? Of course not every Italian is brought up in Rome, some other Italian cities are notoriously shallow, but if good and beauty go together many of Europe's most worthy men must surely have been born in Italy! Remember too that Italy is Roman Catholic, the Catholic religion, unlike the Puritan religion, is antithetical to democracy and populism.

However, I think the real key to understanding Italian Central Bankers as the übermensch of today's Western World, is to think about the evolving political paradigm. The failure of untrammelled populist democracy has long been obvious to Italian intellectuals, so the naive post modern ideological populism that fuels the Western elite has long revolted the best Italian minds. I think that's why the gap between Italian and German Central bankers is so vast, it's not just concrete tower blocks crushing German idealism. For example, take a look at the clash between Berlusconi and Giulio Tremonti. The essence of the clash is populism, and although it damaged the Italian Bond market, I think it vocalised a wonderful point. Plato describes a "short bald tinker" who inherits some money, gets dressed up, and tries to marry a beautiful wife. It seems to me that the Berlusconi v Giulio Tremonti clash is the story of the short bald tinker who couldn't get the wife he wanted because the father saw through his disguise. Now Berlusconi, the tinker, is hammering away with furious claims that Giulio Tremonti thinks "everybody else is stupid".

In the sea of endless Eurozone crisis opinions, Italian Central Bankers such as Lorenzo Bini Smaghi really stand out. One thing that really stands out about people like Smaghi is their consistency, the other thing is their self confident rudeness.

On the matter of consistency, since this crisis started a few years ago, I have watched the debate moving back and forth like a herd of sheep running around a sheep pen. Take a look at the Financial Times, a few days before the Greek vote on austerity Wolfgang Münchau wrote an article saying Maybe Greek MPs would be right to say No. Then, on the eve of the austerity vote, the FT published an article saying Greek vote against austerity would be suicide. The suicide article quoted the Governor Of The Bank Of Greece who pointed out that with no plan B, a vote against austerity would immediately bankrupt all Greek banks and eject Greece from the Euro. With no cash machines and a penniless government, Greece would collapse into the sort of chaos Europeans haven't experienced since the second world war. The Greek governor said if you vote against austerity we need to get tanks on the street asap to prevent looting etc. So the FT published two completely and utterly contradictory stories within a few days, whereas some commentators such as Smaghi have towed a consistent line throughout this crisis.

Right from the beginning, Smaghi has made it very clear that Greece both can pay and should pay its debts. For example, a few days ago he said UPDATE: ECB's Bini Smaghi: The Claim That Greece Can't Repay Debt is Absurd. Until recently the idea that Greece could pay it's debt if it wanted to, the problem is political willingness used to crop up in the newspapers regularly, but today the herd is largely concentrating on the inevitability of default. Even the journalists who used to think Greece could pay rarely talked about Smaghi's idea that Greece should be forced to pay. Smaghi's focus is stability, but his toughness almost echoes the tabloid crowd who come at the crisis from a completely instinctive moral perspective. So do you see that self-confident consistency is one of the fundamental differences that really stand out between people like Smaghi and journalists and politicians? This gap between the chaotic churning sea of public opinion and the unwavering voices of scientifically trained professionals is not untypical of the modern world. Take climate change and oil supply, whereas public fears of climate change and oil dependency change with the weather and the state of the Middle East, the scientific community developed a consensus in the 1970s which still holds today forty years later.

In addition to consistency, the other thing that stands out is the self confident rudeness of the real professionals. People like Smaghi call everyone else completely stupid. Think about people at a pub watching football. Different people support different teams, but whatever team they support, they tend to support passionately. In a sense Smaghi is passionate about what he believes, he tends to use words like "absurd", "stupid", "madness" etc. But Smaghi doesn't use these words in the same way footballs supporting fans usually do. When a Manchester fan tells you Arsenal has "absolutely no chance" of winning the cup and says you are talking "absolute rubbish", he knows that his support for his team is not really based on reason, if Manchester lost their best player due to injury in the first quarter, he wouldn't switch sides and start supporting Arsenal. He identifies with his team and enjoys being their friend, and if he calls you an "idiot", it's more a token of his loyal feelings that a serious personal condemnation of your intellect.

When, however, Smaghi or Tremonti call people idiots they really mean it. When Wolfgang Münchau wrote his article saying "maybe the Greeks should say no", he was encouraging 11 million people to commit suicide, but he is supposed to be a finance professional working for the Western World's most important newspaper. So I am not speaking like a football fan when I say Wolfgang Münchau is an idiot and his ideas are completely absurd, I really mean it in the most deadly serious way. Likewise when Smaghi talks about absurd journalists going on and on about the necessity of default, or Tremonti talks about stupid little self obsessed men who haven't got a clue, it's not because they are politically incorrect populists, they really mean it in a cold hard reasoned way.

What I am saying here is very hard for people to understand, because most people were brought up studying a subject such as history and think there is no such as thing as objective truth in life. They think "it's all a matter of interpretation", and when you say "for heavens sake this is serious, stop being completely and utterly stupid" they take it personally, as if you are speaking like a politically incorrect football fan and going too far. Therefore, it's absolutely vital that people such as Smaghi and Tremonti make sure that the liberal arts and social science crowd understand that they are deadly serious, they they really have profound contempt for liberal arts and social sciences, they they really think the ideologuues know absolutely nothing, and the ideologues are silenced the world is headed to disaster. The liberal crowd should be shaking Smaghi's hand, because if it ends up in the hands of the masses the liberal bourgeoisie will end up being guillotined instead of sacked. Much as I respect Smaghi I think he needs to project a bit more anger, because I can hardly hear his voice of reason amognst the screeching tormented sea of led by the liberal poets of inspired madness.

After that long introduction, I want to mention Smaghi's vision for ending this crisis, which of course hasn't appeared any any major newspaper, you have to dig it out of Bloomberg or Reuters. First of all Smaghi & the ECB Italians are adamant that there must be no plan B for Greece, which means that it can not escape in an orderly default, if it fails to repay it's debts it pays with it's life in terrible disorderly default. Second Smaghi talks about states such as Greece giving up their debt power. What that means is that instead of Greece doing whatever it likes, it would have, in a sense, its bank accounts managed for it by the EU, so it couldn't borrow more than it could afford. It's a great idea, not that you can read about it any newspaper, because it's not exciting enough to capture public attention. But it has one major flaw, it doesn't force states to embrace structural reforms, like an old German Central banker it focuses on debts rather than life giving growth.

So I have a message for Mr Smaghi, if by God he ever reads my blog. Go with the "state of emergency" instead. Use disorderly default as stick to force the Greeks into a five year suspension of democracy. If you can, get the grumpy Germans to reduce the cost of funding in return, but it's not critical, don't let that issue blind you. As soon as you start sorting Greece out their funding costs will drop and they can stop borrowing from the Germans. But you must get a state of emergency declared in Italy as well, because in five years you can transform Italy by demonstrating the value of professional decision making, transforming European politics and enabling federalism etc. So although your "giving up debt power" idea is a solution, forget the complicated half hearted steps to technocracy that the idiot people and the idiot journalists and idiot traders are never going to understand, give the world the real thing! I reckon the Chinese will help you out too, it will the biggest and best thing that happened to Italy since Saint Francis of Assisi.