Contagious tangles in the economic web

The continuining turmoil in the Eurozone has led many to question why it has taken so long for politicians to recognise and act upon the debt crisis. Even as the crisis spreads inexorably to the very heart of the Eurozone politicians are being ousted as they have pandered to the short-term whims of the electorate rather than the long-term needs of the countries they were given the honour of serving.

At the heart of this problem lies a lack of real leadership with politicians more interested in maintaining their fragile and fleeting hold on power, than having those courageous conversations that would have taken entire countries into the zone of uncomfortable debate.

Those conversations would certainly have damaged their standings in the popularity polls as we all like to believe that if we ignore a problem it may go away. However, those conversations would certainly have led to changes in fiscal policy.

But the problem of the markets would have remained – the fear such debate would have generated would have caused share prices to slump and threatened a fragile economic recovery that seems to be based more on Keynes’ “animal spirits” than any founding in reality.

And here perhaps we come to a deeper truth – that the agents we hire to run our countries, our banks, our pension funds and our companies are now too far removed from the people they are paid to represent. Furthermore, aren’t the majority of shareholders tax payers that also pay into some sort of pension fund.

This in my mind is where the true problem lies right now – we are all principals of a great deal of invested money – UK taxpayers own the majority of Lloyds and RBS and Northern Rock. And in turn, each UK taxpayer indirectly owes at least £30,000 to financial institutions and other countries due to the government defecit. We are also agents of the same institutions, or at lest those that serve them. Many of us are also customers.

The web has become so confused and convoluted that one of the cornerstones of microeconomics – Principal – Agent theory – has become so confused that that no agent can fully know what is in the best interest of their principals- merely that they have to do their best to make sure their peice of the economic puzzle performs well – even if that is to the detriment of the economy at large.

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