Bokros says lex Quaestor morally, politically and financially unacceptable

April 17, 2015

“You cannot privatize all gains while socializing all losses. This was the way the soviet system worked and it duly collapsed. . . . You cannot have democracy on the basis of a command economy.”

– Lajos Bokros, former Hungarian minister of finance

Movement for a Modern Hungary chairman and former Hungarian minister of finance Lajos Bokros talked to the Budapest Beacon last Friday about the bill (subsequently passed into law) to compensate the victims of Budapest-based financial services company Quaestor’s bond issuing and securities trading business units.

The danger of nationalizing losses

He believes the “nationalization of all losses” is “the worst lesson which we could learn from this exercise” because “it means that people don’t have to take individual responsibility for their own voluntary action.”  Bokros warned that requiring Hungarian taxpayers to compensate some 32,000 investors up to HUF 30 million each is something which will “destroy the social fabric”.

“When there is a loss as a consequence of the result of a legitimate enterprise going bankrupt, then the question arises how you share the losses among of the stakeholders.  For that to occur in a civilized manner, society invented the tool of bankruptcy procedure.  And if that does not work, liquidation.”

Bokros points out that even if it was not a market failure but rather a government failure in the sense that the government failed to keep an “arms-length” relationship with certain businessmen, “the fact remains that the state is not responsible for all the losses.”

“The persons involved, be they politicians or managers of profit maximizing enterprises . . . can and should be held responsible.  That’s why even in Hungary we have legislation that enables the confiscation of the personal assets of people if those assets have been acquired on the basis of wrongdoing.  But it does not give rise to a 100 percent claim of compensation from the state because that would mean that innocent taxpayers, who did not invest in Quaestor, Buda-Cash or Hungaria Securities, should share the loss, and that would be absolutely inappropriate in a market-oriented society or a liberal democracy.”

Bokros believes the government will compensate the victims if only for political purposes to “try to hide government-initiated wrongdoing”.  He says that compensating investors means the government needn’t answer “nasty and impertinent” questions about its role in the failure.  However, he points out that in the end “the taxpayers will lose”.

Moral hazard 

Bokros says the decision taken on Tuesday to compensate all 32,000 of Quaestor’s bond holders is “a textbook case of moral hazard.”

“When some of the business managers who are sitting very close to the politicians feel there will be no consequence of whatever they do because the state will step in and compensate everyone, this is a call for wrongdoing.  Those managers feel they can do whatever they want.  They will not be held responsible for their actions.”

Bokros believes that no system can be based on privatizing all gains while socializing all losses, and this is something which will “destroy the social fabric”.  He says forcing all of society to pay for the mistakes of certain individuals “cannot be a moral or political message on the basis of which one tries to build a healthy society”, adding that “it is absolutely unacceptable from a moral, political and even financial point of view”.

Rule of law

Bokros says hundreds of small changes are necessary to restore the rule of law in Hungary.

“The general public in Hungary has to realize ultimately that the rule of law, which is one of the most important pillars of democracy, has been completely destroyed in this country.  No matter what kind of legal changes you make, everything depends on the political will whether that would be implemented or not.  In a country where the political class can change the constitution within four hours of a “negative” constitutional court decision which does not favor the government, and where specific pieces of legislation can be put together to serve the interests of one single person, then the whole legislative process is completely subordinated to the political will and political whim of the political elite.  And that is a hotbed of corruption.”

Economic democracy

He says a new culture is required in order to have institutions that will work as checks and balances not only in the political sphere but also in economic life, and for this reason economic democracy is as important as political democracy.

“Without a well functioning market economy you cannot have political competition and a well functioning democracy.”

Bokros says this is “one of the most important pillars of a well functioning societal system.”

“Most people in Hungary would agree that we need democracy but many would also argue that we don’t need the market for that.  And this is next to impossible.  A market economy is an indispensable pillar for a well functioning democracy.  You cannot have democracy on the basis of a command economy.”