Italian Local Administrators and Derivatives: Victims or Perpetrators?

Lawsuits over derivatives contracts stipulated by Italian local administrations in the last decade are trying to determine whom has responsibility for transactions gone awry. Does it fall upon the shoulders of gullible administrators or is it also the byproduct of a cultural environment that gave an aura of incontrovertibility to such financial instruments? Right now, as the London High Court of Justice has determined, it seems that it is public administrators that are to blame.

But this means letting investment banks and financial analysts off the hook, the very people that over the last decade acquired a sort of shamanic status, whose magic powers of healing could not be questioned. So let's try to really assess the perimeter of responsibility. A culturally and morally inept political class acting in its own interest and oriented to maximize short-term popularity, rather than striving for the common good, has put itself in the position of being led on by banks and financial operators. The buck starts there but doesn't stop there, because it is true that a red carpet was rolled in front of politicians, saying that the level of risk was acceptably low. The Stability Pact, as it was interpreted until 2007, with its constraints paradoxically favored the purchase of derivatives by local administrations, so that the provisions of the Pact could be flaunted. The prevailing context also gave the perception of an acceptable cost-benefit ratio. Starting with the 1990 Nobel Prize given to Markowitz, finance started to be surrounded by a halo of absolute truth. Thus economics stopped being political economy (the economic welfare of thepolis) and became a self-referential discipline superimposed over the polity.

Economics and finance were suddenly treated as exact sciences, whereas economic science was born as and should remain a social and moral science. Economic studies were given the luster of scientific authenticity and information asymmetry put exceptional power in the hands of financial operators, thereby instilling a sense of cultural inferiority in the rest of society.

Information asymmetry can have nefarious consequences, as the pharma industry discovered when it marketed Thalidomide, a painkiller for pregnant women, in the 1950s. The drug had been tested on non-pregnant guinea pigs, contrary to its purported final use, and the consequences were horrifying: unsuspecting women who had taken the drug gave birth to infants with phocomelia (limblessness). Who was to blame? Uninformed mothers or rather the pharmaceutical company that had marketed the product?

If the parallelism holds, the blame for huge losses over derivatives cannot thus be placed entirely on public administrators, but the finger must also be pointed at that toxic system of relations the linked politics, finance and academic economists until the financial crisis. The disaster we are facing was entirely man-made; it wasn't due to unpredictable natural events. How responsible are financial players and their teachers? We'd better start thinking about the answer, because to err is human, but to persist in error is diabolical.