Source: Tomorrow (Economy), 23/09/2008

The US government's bailout of large investment banks, insurance companies and brokers who, in order to boost their profitability, took risks they could not bear, sparks a debate around the world about the ethical aspect of the measures. In the view of economist André Franco Montoro Filho, the issue must be divided into two aspects. From an economic point of view, he says, the United States' Treasury and Central Bank measures are justified by avoiding a financial collapse with dire consequences for thousands of people. From an ethical perspective, however, it is necessary to punish those responsible for the crisis. "But this is not an easy task", said the president of Etco - Brazilian Institute of Ethics in Competition. The following is the full interview that André Franco Montoro Filho gave to TOMORROW, moments before speaking at an event on “Debureaucratization and Management Efficiency” promoted by the British Chamber of Industry and Commerce in Brazil (Britcham / RS). 

In the light of competitive ethics, has the US government done well in using public money to help banks, brokers and insurers threatened with bankruptcy?

The trend there was a systemic risk. If the government did not intervene, it would be worse for the whole world - for the economy and for American taxpayers themselves. The obligation of all monetary and financial authorities is to prevent exactly this breakdown of the system. Now, this cannot be done, in my view, without those responsible being punished. This is not easy to separate, but I see that the American Congress is trying not to benefit those who were the cause.

Could it not have been the banks that are being bailed out?

Depositors are the ones the government is looking to help. Because if the bank breaks down, of course the banker loses something, but the ones who will lose the most are the depositors, those thousands or millions of people who made their investments, their savings and created their reserves even for retirement. Everything turns to dust. That is what we need to understand within the functioning of the financial system. Bankers are people who invest not only their resources, but the money of others. In a general fall in the system, the entire population is lost. It is in this sense that the intervention of the State is morally justified: the defense of the popular economy, preventing people who have fixed income funds, variable income funds, pension funds from other retirement systems to be harmed.

How do you think commercial banks, which are not involved in this problem, see this unusual attitude by the United States Central Bank to bail out investment banks?

I believe that there is widespread support for the situation not to be allowed to reach a financial catastrophe, which would hit the world there. It is not a segmented thing. Commercial banks would also end up being hit if the investment bank crisis could not be controlled.

Is this not a benefit to the cause of great speculation?

Yes, it was a great speculation. But Lehman Brothers did not speculate as money from their owners, but with the money of thousands of people. This is the point that differentiates the financial system. And now who would lose the most would not be the owner of the bank, although he loses something, but the population. And if this is not stopped, it will be a crisis. Let's see the following: years ago there was the issue of Banco Meridional in Rio Grande do Sul. And the campaign that was carried out in Rio Grande do Sul was not to defend the bank's owners. It was to defend those people who had applied, the thousands of depositors who were threatened with losing their resources. So what is needed is to find mechanisms to guarantee the resources of thousands of people in good faith who made the applications. And punish those who were irresponsible in handling the money of others. This is the big challenge.

Doesn't this crisis have broader moral effects?

It will always leave sequels, in terms of you, in a certain way, being stimulating speculative behavior in the future. But when weighing that possibility with the potential loss of millions of people around the world, I believe that the balance is tipping to the recognition that the measures were necessary, and that it is necessary to punish those responsible - which is not an easy task .

Would this situation, if not remedied, match the Great Depression?

It is the risk you have. In a different way, but it is something similar to what happened with bank runs. It is a bank run in a different way, but it is the same phenomenon, in which you have a situation of panic and lack of resources that ends up paralyzing the entire system. And the financial system only works if there is this confidence in renewing credits. I think there is, clearly, that perspective. If nothing is done, there would clearly be a crisis of such proportions.

What should change after this crisis?

I think it is necessary that, along with the measures that are being taken, new criteria for prudential regulation are established, in order to avoid similar facts in the future. Just as the crisis of the 30s was responsible for the creation of even the Federal Reserve and a series of mechanisms that created deposit insurance and prevented bank crises and runs at that time. At the moment, there is a differentiated bank run. What is expected is that regulation is created, so that there are mechanisms to avoid the repetition of similar phenomena.