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Sunday 6 April 2014

Ponzi schemes, white-collar crimes and the Eurozone failure..

A few days ago, an old professor of mine posted the following message on her facebook page :

" Those who don't study history are doomed to repeat it.
Yet, those who do study history are doomed to stand by helplessly while everyone else repeats it. "

It is quite easy to enter the second group by reading Paul Kennedy's masterpiece " The rise and fall of the great powers ". Although, you have to be prepared that you pass to a group of a distinctive minority, the people who know but can't fight the majority in any way..

One year ago, Cyprus got bankrupted. People lost huge amounts of money, younger generations lost the majority of their pension funding and the island's economy might recover sometime but only after many decades. For the majority of the people this was something strange and unexpected. Those people never investigated what was really happening in the last fifteen years or what the norm in small and isolated societies like Cyprus is. I believe that it was not a surprise for everybody. It is totally different to say that it was a surprise and totally different to pretend that it was a surprise..

Last year, we were officially bankrupted. But in the last fifteen years we had two other, "unofficial" bankruptcies. It is quite impossible that last year's incident was a surprise since an important number of people in Cyprus have Bachelors, MBA and/or PHD degrees. Although, it is quite possible that people in charge pretend that everything was ok since those people were receiving huge salaries based on their degrees and expertise. But it is also totally different to have the expertise and totally different to pretend that you have the expertise. You can separate the two by reading Paul Krugman's classical article "A country is not a company". Krugman remarkably separates a person capable to do the job from a person that pretends to be capable to do the job. Last year's bankruptcy reveals that we had more actors and less skilled people in our government.

People of my age (39 years old, more or less) were raised in prosperous times. For many years, we had enough money, really good money.. It was just after the Turkish invasion (1974) that the new Cyprus miracle started to happen. At least that was what we thought we had.. An important number of British tourists were bringing part of their profits and prosperity to Cyprus for many years, enhancing our as well. During my Bachelor degree studies, in Athens, and the collapse of the Cyprus Stock Exchange bubble i learned how to discover the healthy environments and separate the Ponzi schemes and the white-collar crimes. I was lucky because i used this knowledge to protect my friends and family from time to time. They still believe that i am extremely smart. The truth is that even some people can separate healthy economics from fraud nobody dares to notice it in public.. During my MBA studies and my Erasmus period experience in Paris i was lucky to separate the healthy environment of studies in a european country from the fake and over-priced knowledge of an isolated island. It is totally different to truly study a field and be capable to notice and fix a problem from buying a degree in class where the professor is not able to be listened if she forgets her whistle at home (this is how things are in Cyprus..)

How can you separate a healthy environment from a Ponzi scheme or a white-collar crime ? In a company, you just count the earn per share, whether it is a repeated pattern or a one-off profitability. Additionally, you observe whether the company has enough reserved profits for an unexpected situation. In a country, it is not that simple. You have to compare the salaries, the taxes, the pensions, the quality of life. A simple measure is the "homeless factor". In Cyprus, we had no homeless people. At least, in the recent decades.. This is a proof that the country can manage their people, rich and poor. First time i saw homeless people was in Athens, in 1995, then in UK, Germany and France. Seeing homeless people is for me a proof that a country is not able to handle a simple problem ; create prosperity for their people. Because (in a political scientist's mind) if you can't find a solution for a few people, the problem becomes bigger until the whole system collapses.

In the existence of the "homeless effect" you have to decide whether you fix the problem or you hide it. By fixing it, you create stability and you put these people back to the circle of economy. They produce and they spend. By hiding the problem, many people (mostly in government and big corporations) are allowed to get huge salaries and bonuses. The problems is not so obvious or important for them. You get the extra money by hiding the problem, you exclude the homeless, you dot't count them so one day they become a mass. Some years ago i was shocked watching on TV people putting fires in every corner of Athens. But i knew what was going on there and that that the consequences revealed.. Some months ago i was shocked watching on TV people putting fires in every corner of Paris. After my last trip there, it was obvious that they copied the steps and results of Athens.

In the recent years, the public sector and the big corporations of Cyprus used to receive raises and bonuses that the system couldn't handle any longer. Especially in the annual reports of the public companies, it was more than obvious.. In the recent years we faced the fact that many higher government directors received around 100.000 per year, some of them 160.000 and more (bonuses excluded). How reasonable is for a small country like Cyprus paying monthly salaries of 10.000 euros or even 5.000 the same time an important number in the private sector were losing their jobs or part of their salary? What if we were in the middle of a crisis no-one could really imagine or care for. It is more possible than you can realize, but only if you know how to observe and analyze the numbers. Even worse, the merge of Bank of Cyprus and Laiki Popular Bank last year, as a solution to the problem ! Since those two institutions were both dangerous for the stability of the financial system, how was possible for anyone to decide that their merge was a healthy step and a vital solution ?

Why the above data remembers me the PONZI schemes? Because the PONZI schemes use other people's money to get their salary and a raise as long as they can.. But.. PONZI schemes always collapse as Cyprus did..

Why it remembers me the white-collar crimes? Because the white-collar crimes use other people's money (in this case, the taxpayers social insurance funding) to pay their debts and legalize their illegal actions in a country that the financial crime is legal. 

Our banks used to give huge salaries and bonuses their annual reports couldn't justify, our governments used to give raises our National Audit report office couldn't explain and one year before the Cyprus taxpayer had to pay the bill for them.. Even worse, the european funding, designed to improve local competitiveness and expertise can't always go to the beneficiaries. They remain in the government bank accounts and the banks as interest-free cash! Hyman Minsky described perfectly the development of a PONZI economy in the '80s. He was unlucky to describe it in a period of prosperity so nobody paid attention. It took us three decades to accept the existence of the Minsky moment and that "IT" happens all the time and everywhere, all over the world!

Another extreme PONZI method in Cyprus was the COLA (Cost Of Living Allowance) bubble effect. COLA was designed to give extra financial support to low income people and not to people already receiving thousands of euros as monthly salary. COLA in the beginning was supposed to protect people that needed food, milk and bread for their daily needs. At the end of the PONZI, COLA was a financial benefit for high income people who wanted to buy a new beach property.

What is the biggest problem in modern societies? Corrupted people, or even worse, corrupted governments or / and parliaments. Political parties dealing with unions in order to buy their vote and become government, banks financially supporting political parties in order to protect and legalize their individual interests, political parties dealing with black money, parliaments refusing to vote against it. The last fifteen years, the Cyprus house of parliament tried to create openness to the parliament parties funding (revealing who - how much - how often was giving financial support). These last fifteen years, our political parties couldn't (or wouldn't..) vote for the openness for their income! Even though we can't say that specific members of our parliament are corrupted it is quite obvious that the House of Parliament in the majority tends to cover and protect corruption ! Even worse, our Government. In the Cyprus constitution, both the government and the parliament are entitled to pass a legislation. Both denied !

Cyprus was a prosperous country as long as the inequality was managed. The time the governors decided to allow few people to become the robber barons of the 21st century (see "Plutocrats" by Chrystia Freeland), the time they decided to give extra raise to people that had no need by stealing from the people that needed support the new Ponzi scheme design and collapse was unavoidable. Cyprus became Greece as France is nowadays becoming Cyprus.

The current Cyprus administration has to deal with a very serious dilemma, fix the problem or hide it. Based on my experience, every new administration covers the problem. The majority of the government and parliament can't (or won't..) understand it so the problem is always there until the next official of unofficial bankruptcy.One year after the new administration took over, they problem is still there. One year after, nothing was fixed. So we know what will happen again, sooner or later..

This distinctive white-collar crime is a reason why the Eurozone can't be vital for long. Since some countries tend to support and protect corruption more than others and the Eupopean Union as a body pays no attention to the issue, it will enhance the inequality withing the members until it will lead to the Eurozone's "perfect storm" day.

In the next post, we will examine how the problem is created and why nobody wants to fix it..

Nicos Rafidhias (official page) is a political scientist and a corporate consultant at TANTAK Ltd (based in Cyprus). The above data are part of his upcoming PHD research for the possible collapse of the Eurozone.