Florence Bridge & Moral Hazard – Framing austerity before the economic crisis

Ponte Vecchio is the bridge that spans the Arno River at its narrow point in Florence, Italy. It was constructed in the Romans times as part of the Via Cassia – one of the main arteries of the Empire.

Despite many floods and attacks, including a Nazi Bombenanschläge in 1944, it remained unbroken until today. It is well known of tourists, not only by it stone closed-spandrel segmental arch and cozy windows, because the lovelocks that were removed some years ago, or the picturesque stores of jewelers, art dealers, and souvenirs over it, but also because this bridge contains an immense symbolism. It is intertwined with the origins of the word bankruptcy.

This search leads us to the 14th century butchers, tanners, and farmers of the Ponte Vecchio to whom “la fortuna è stata madrastra”. During these times the bridge was the stage where bankers’ benches, were smashed if merchants defaulted on payment of their credits, i.e., “la banca è rotta”, meaning that their bank should be broken in order to keep them out of the trade and therefore the order in the system. The message from the creditors was clear – only the trustworthy merchants should remain in the bridge or, in other words, in the market.

But the point here is not only about the origins of the word bankruptcy, but the meaning or the fate of the Romans’ descendants to whom this year became terribly harsh with a pandemic leading to a unprecedent crisis.

The message is, indeed, related the functioning of the markets. It is embodied in the confidence and the role of governments, or both, when they are giving, during these days of pandemic, incentives to families and firms to increase their exposure to risk. In other words, policy makers are promoting the moral hazard in times of crisis – what an explosive cocktail!

Moral hazard has a big role in the crisis of 2008 and conceptually refers to the fact that an individual may take undue risks if others will bear with the consequences. What is ongoing in the policy scene, is a naïve and desperate behavior of several governments for doing anything. Indeed, they are behaving, again, in acts of faith, promoting precisely what was done wrongly by privates during the subprime crisis of 2008, which results were well known.

As previously, it is clear now that for many individuals and groups the only available method of adaptation will be the bankruptcy and starting the process of developing a fresh start within a more innovative and modern manner. Instead of giving wrong messages, and even lying by suggesting that everything is in the seventh heaven.

Governments quickly need to behave honestly and exemplarily highlighting the right values, telling the true of the facts, avoiding dilatory maneuvers and practicing the austerity. Yes, austerity, not fiddling while Rome burns, and instead, just saying that hard times will come sooner than later, and the behaviors need to be adjusted immediately to take time and recover faster.

This is not a crisis of liquidity; this is a crisis of markets disruption and special problems of different industries can be explained as adaptations to the existence of uncertainty in the incidence of the problems and in the efficacy of the solution ¹. Companies need to find their adaption path that necessarily goes through more productive methods, and for the sake of justice some companies should be compensated (not subsidized) for having been forced to stop their operations. As John Rawls clearly stated “Each person (or individual) possesses an inviolability founded on justice that even the welfare society as a whole cannot override. Therefore, in a just society the right secured by justice are not subject to political bargaining or to the calculus of social interest ².”

It is necessary to remind governments that, in terms of jobs, incentivization will likely generate more negative than positive effects as countries decide to indebted at the future expense of small and medium enterprises with no debt, the ones that in matter of fact create more jobs; and, that borrowing for nonproductive purposes spells setback in the growth of wealth.

Unproductive indebtedness should be avoided, and otherwise innovation and environmental protection has to be promoted in order to construct a solid and valuable economic system, where people can travel again to visit Ponte Vecchio and many other tourist attraction nella bellissima Italia and all around the world. What a coincidence the country where COVID-19 propagated faster and more lethally – very likely the major trigger of bankruptcy ever – is the same where the concept of bankruptcy was born.

¹ _{Arrow, K. J. (1963). Uncertainty and the Welfare Economics of Medical Care. The American Economic Review, 53(5), pp. 941-973.}

^{2 Rawls, J. (1999). A Theory of Justice. Revised Edition. The Belknap Press of Harvard University Press. Cambridge, Massachusetts.}