Is there such a thing as a free lunch?

Francisco López Lubián. Professor. IE Business School

5 July 2013

The basic rules of capitalism dictate that there is no such thing as a free lunch, but this is not exactly true for those who are responsible for the current crisis.

The problems that the EU is having in reaching an agreement on the content of the Bank Recovery and Resolution Directive (i.e. who is supposed to pay the cost of an eventual bank bailout), got me thinking about one of the basic principles on which the capitalist economy model is supposedly based, namely that there is no such thing as a free lunch.

We all know how important it is to manage any kind of crisis well, and that it is even more important to adopt measures to prevent it from happening again. I fear that on this occasion the reactions of international regulators both prior to and after the financial crisis have sent a very clear message – for some people free lunches really do exist.

There are problems and the solution does not lie in denying that they exist. Bailouts, both direct and indirect, of the financial systems of western countries were probably absolutely necessary to avoid short-term disaster, but medium or long-term solutions to the problem are distinctly lacking. 

So, would it have been better to do nothing? Is it better to leave financial markets unregulated? Regulation is indeed necessary, but it should be proactive not merely reactive. Regulation should be used as a means to impose transparency, demand profitability that does not only exist on paper, and demand the fulfillment of minimum capital requirements without resorting to tricks to distort the numerator (capital) and/or the denominator (total investment). Regulation or supervision should be used to separate the interests of the bank itself, given that it serves the same client as both an investment bank and as a commercial bank.

We all know that this crisis will not be over until investors recover their confidence in banks, until they believe that banking assets have been sufficiently rationalized, and until they can trust the management team.

As long as there are economic sectors in which decisionmakers are seen as providers of free lunches, it should come as no surprise that parasites continue to exist.

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