There are few sights in modern statecraft quite as painfully predictable as the sudden, bewildered downfall of a politician who honestly believed the government could run a bank. On Friday, Paraguayan President Santiago Peña found himself stripped of his sash, evicted from the Palacio de los López, and placed under house arrest after the Senate executed a remarkably brisk impeachment. His fatal crime was not an exotic conspiracy or a military mutiny, but that most banal of bureaucratic catastrophes: a state-affiliated financial institution collapsed, the money vanished into the ether of sovereign incompetence, and somebody had to be tossed into the volcano to appease the angry gods of the bond market.
Watching the state attempt to direct capital is much like watching an elderly uncle attempt to operate an iPhone at Thanksgiving: you know disaster is imminent, you know everyone nearby will suffer, yet you are powerless to stop the screen from going entirely black. In Paraguay, as everywhere else from Brasília to Washington, politicians cannot resist the urge to turn the allocation of credit into a sovereign plaything. A state-affiliated lender is essentially an institution built on the profound delusion that market discipline is an optional accessory, like heated seats in a company car. When the inevitable dry rot settles into the loan portfolio, the shock among the governing class is always performed with the wide-eyed innocence of a child holding an empty cookie jar and covered in chocolate.
Friedrich Hayek warned us about this long ago in The Fatal Conceit, pointing out the absurd presumption that any centralized authority can successfully mimic the dispersed, spontaneous knowledge generated by a free market. The moment a financial entity is stamped with the imprimatur of the state, the concept of risk assessment is replaced by political expediency. Loans are disbursed not to borrowers who can actually generate productive wealth, but to whichever cronies, pet projects, or regional power brokers happen to hold leverage over the executive branch. It is not high finance; it is a glorified patronage machine disguised by double-entry bookkeeping.
Naturally, the Paraguayan Senate moved with dizzying speed to distance itself from the rubble. The legislative branch, which invariably spends years cheering on state subsidies and pocketing the indirect benefits of loose credit, suddenly discovered its deep, abiding passion for fiscal integrity. By impeaching Peña and placing him under house arrest before prosecutors, the political class enacted the oldest self-preservation ritual known to man: sacrifice the executive to save the regulatory apparatus. The message to the public was clear: the system itself is pristine, you see, but this particular custodian proved unworthy of its majesty.
It is the ordinary savers and taxpayers who will absorb the real blast radius, as they always do. While Peña sits comfortably in his residence waiting for the lawyers to hash out his formal indictment, the Paraguayan people are left to grapple with the crater left by their government’s monetary misadventures. When a private bank fails, its shareholders take the hit and its assets are liquidated at market clearing prices. When a state-linked bank fails, the bill is quietly converted into public debt, the currency takes a beating, and the productive economy is subjected to a fresh round of austerity to plug the hole. The state takes the gamble, but the taxpayer pays the debt.
The most tragic element of this South American melodrama is what inevitably follows. Rather than recognizing that the government has no business guaranteeing balance sheets, underwriting commercial risk, or steering capital in the first place, the commentary will soon demand a sturdier regulatory corset. Bureaucrats will solemnly argue that the collapse occurred only because the state did not have *enough* oversight, *enough* agencies, or *enough* forms printed in triplicate. It is the perpetual motion machine of governance: solve the catastrophe created by political intervention by proposing a double dose of the exact same poison.
If Santiago Peña wishes to pass the time under house arrest productively, he might pick up a copy of Hayek's The Denationalisation of Money. He will find within its pages an airtight explanation of why politicians and banking mix about as well as kerosene and birthday candles. Regrettably, the lesson comes a bit late for his presidency. For the rest of the world’s self-styled economic planners, the collapse in Asunción will serve as no warning at all. After all, the defining trait of the Leviathan is not just its appetite, but its stubborn refusal to learn from its own indigestion.