Following rules … into disaster

While most economists seek to undertand the inherent or natural laws of economics, some policy makers seek to impose man-made laws and on the economies under their influence, often with disastrous results. 

What is the diference between the “laws of economics” and mere man-made rules?  Here are some exemples from the ongoing debt crisis.   

A “law of economics” may state that a creditor who  makes imprudent subprime loans, will suffer high loan losses (as in “you can’t get money from a stone)

An “economic rule” may ignore actual reimbursement capacity and simply declare that that a sovereign borrower is zero risk (under BASEL), just because it is an OECD country.  Or that it is "illegal" for a borrower not to repay a loan even if he does not have the means, or that a borrower may not declare bankruptcy to gain relief from its excessive debt. Repayment capacity is a matter of economics, not of law, regardless of what the lawyers say.

But different governance cultures seem to view the practice of “rules &  regulations” in different ways.

A.      Rules above all, compliance is an end in itself

Powerful policy makers, frequently lawyers by training, design “the rules”, which are then enshrined as quasi-commandments, not to be questioned.  Compliance with “the rules” is seen as an end in itsel.  Enforcement of the rules may be biased or  short-sided.  Enforcement may be biased,  focusing  on the “letter of the law”, and opportunities for regulatory arbitrage are to be exploited, not to mention outright regulatory fraud, gaming the rules to meet the letter while abusing the spirit of the regulation.
In this approach, enforcement may be narrowly focused and catching and correcting unintended consequences is not allowed, as “the rules” have to be obeyed even into disaster.

According to the Economist, there is a branch of economics known as “ordoliberalism”, where a strong government creates a framework of rules which provide the order (ordo in Latin) for markets  to function better.

B.      Rules as a means to and end

Rules are discussed and determined  democratically, as a means to achieve specific agreed social-objectives.  Compliance and enforcement focuses on outcomes, and rules are evaluated in light of the actual results, and  corrected and amended in case of unintended consequences in order to avert impending crisis. Enforcement focuses also on the “spirit of the law”.  

C.      Rules as mere intentions

Rules may be improvised or  defined by policy-makers  disconnected from the society, The rules are poorly implemented and may remain on paper. Little attention is given to    compliance, enforcment or  to actual outcomes..  Due to the lack of results, more rules are created, and bureaucratic red tape grows unchecked. 

Mariana Abrantes de Sousa

PPP Lusofonia 

See the Economist - http://www.economist.com/news/europe/21650565-german-ordoliberalism-has-had-big-influence-policy-during-euro-crisis-rules-and-order
Gaming the rules:
- Goldman Sachs and the Greek debt swap  http://www.bloomberg.com/news/articles/2012-03-06/goldman-secret-greece-loan-shows-two-sinners-as-client-unravels
Volkswagan and emissions  http://www.spiegel.de/international/business/vw-scandal-shows-german-companies-are-no-longer-big-league-a-1055098.html 

Euro rules violate best principles  http://ppplusofonia.blogspot.pt/2015/07/euro-rules-violate-best-pinciples.html