The euro zone financial crisis has seen its share of historical events but none more telling than the recent ascension of Mario Monti to the Italian Prime Minister’s chair. With the removal of Berlusconi and the rise of a government of technocrats determined to right Italy’s financial ship of state, yet another European nation’s leadership fell into the hands of a person with ties to one of the most powerful and influential investment banks in the world: Goldman Sachs. The Italian Prime Minister, leadership at the European Central Bank and as recently as last Wednesday even the International Monetary Fund’s European division was led by a Goldman Sachs alum. Of course, the prevalence of Goldman Sachs employees and ex-employees at the tops of embattled European sovereign nations, and indeed very much in control of the fate of the euro itself, has raised suspicions with regard to the financial firm that has been a part of the narrative of the financial crisis since 2008. People tend to be conspiratorial whether one exists or not, but the predilection of Goldman Sachs personnel to create and destroy wealth on a national scale is perhaps worthy of inquiry. Writing for The Independent, Steven Foley calls this close networking between Goldman Sachs and governments around the world the ‘Goldman Sachs Project’:
“This is The Goldman Sachs Project. Put simply, it is to hug governments close. Every business wants to advance its interests with the regulators that can stymie them and the politicians who can give them a tax break, but this is no mere lobbying effort. Goldman is there to provide advice for governments and to provide financing, to send its people into public service and to dangle lucrative jobs in front of people coming out of government. The Project is to create such a deep exchange of people and ideas and money that it is impossible to tell the difference between the public interest and the Goldman Sachs interest.”
Foley describes a methodical, decades long program on the part of Goldman Sachs to recruit academics and government technocrats for its ranks and vice versa to put its former employees into the halls of power. One way in which Goldman Sachs’ intelligentsia became indisposable to some euro zone states is in the complex accounting methods used to pare down the sovereign debts of Italy and Greece so that they met euro zone criteria for entry into the euro zone. This was engineered by Goldman Sachs. The necessary austerity measures and the bailout packages prepared for euro zone countries differs from the 2008 financial crisis in that this time the crisis is at the sovereign level. MF Global’s bankruptcy was precipitated by revelations that it had placed such heavy bets on Italian sovereign debt. Once this heavy risk was exposed, the firm led by former New Jersey Senator Jon Corzine collapsed immediately in one of the largest U.S. bankruptcies ever. The central problem that has been identified in the interlinkages between bankers and bureaucrats, or banking and government, is that the intertwined interests make disengagement impossible. To kill one is to kill the other while to save the one is to perhaps encourage risky behavior on the part of the other. Moral hazard becomes lost when risks are not understood in market terms – i.e. ‘too big to fail.’ Why not make risky investments in firms or sovereigns that are ‘too big to fail’ because, if the bills will be repaid anyway, really the risk is imaginary. It is the thought of total loss that helps induce rational market decisions. Providing market distortions through constant bailouts only entrenches bad behavior but without the bailouts innocents get lost in the crossfire.