Monday, November 19, 2007

A Bucharest Glimpse into the Ethics of Hedge Funds

Romania now is part of the European Union, but traces of its past are more than evident in Bucharest. The massive, hubristic presidential edifice commissioned by the late despot Nicholas Caucescue hulks over the city on a site cleared of old houses and churches which had withstood centuries of pre-Communist turmoil.

And the Romanian economy, while growing and birthing a middle class, is more of a transitional economy than a developed one.

Bucharest needs infrastructure – better roads, underpasses, overpasses, ring roads, new streets, stop lights that work, parking ramps.

The new middle class is putting is disposable income into cars. There are too many for the streets of Bucharest, too much time wasted in traffic jams and no place to park them. The city needs parking facilities.

A business man has a plan. At least a small one. He owns a parcel of land in the central city and has estimated the cost and earnings of building and maintaining a modest parking ramp – 600 cars – on the site. It will pay off with interest in 5 years. But he can get no investors to finance the project.

Romanians are in a speculative mode; quick turnaround of capital at a good return – get your money back in 6 months at 30% interest.

Asset speculation – whether on financial exchanges, in wartime economies, or in real estate – always leads to trouble. It is built on the twin pillars of unrealistic valuations and “irrational exuberance” – the human propensity to gamble when facing the prospects of making easy money. It is a dysfunction that undermines the rationality of capitalism and pre-dated the emergence of capitalist production and systemic accumulation of invested wealth.

While in Bucharest to speak on corporate social responsibility recently, I met by chance a young investment broker from the UK seeking to earn commissions by channeling money into Romanian real estate projects. He is offering London hedge funds 400% returns on money they invest in Romania. They love the prospects he told me. Money is coming into Romania.

But not for parking ramps, needed infrastructure and other long-term payoff projects.

The effect of the hedge funds is to further distort Romanian economic priorities towards short term speculation.

Is this really very helpful?


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