Finance is the most beautiful craft in the world because it is the discipline that most ruthlessly imposes accountability on its practitioners. Financial markets are where meritocracy is at its cleanest, most transparent and most efficient.
Public finance is more distorted by institutional manipulation, but its effects are just as powerful. Getting public finance wrong affects people’s lives directly, and the consequences of your mistakes are there in public for everyone to see.
Last month, we predicted that Finance Minister Clyde Caruana was at the peak of his political career. Pumped up with the confidence of a bull after rolling out his public-finance programme of social benefits and welfare bonanzas underpinned by economic growth, the young socialist stalwart was on fire.
However, he also exuded excessive confidence and a degree of arrogance as he mocked the Opposition for its financial illiteracy. The young and humble socialist had turned into a pretentious bull, deriding the Opposition with cheap slurs about having a broken calculator.
The bullish confidence exuded by the Finance Minister is very familiar to finance and market participants: it is the excessive confidence of someone who has got it right once and now believes he will keep getting it even more right on the basis of past performance.
Clyde Caruana’s problem is that he is relatively new to applied finance. Those with a bit more experience would never have dared to be so cocky. Anyone with decent experience in finance knows that overconfidence is a killer, and arrogance is even more lethal. It didn’t take much long for cracks to sprout out of his invincible financial plan. Reality may very well hand him his ass back.
The problem with finance is that competence is not exclusively dependent on knowledge and mathematical grit. In the world of finance, the biggest intellectual challenge is how to handle risk vis-à-vis potential contingencies. You can create the most beautiful mathematical models in the world that still and ultimately can be ruined as easily with a €400 drone that destroys an oil refinery or a power-station in a far-off corner in the world that you have never heard of.
Minister Clyde Caruana has many potential contingencies and he is not fully in control – he can never be. Minister Caruana has to content with an Energy Minister who is gambling with policy and public funds like a drunken sailor, a Prime Minister who is corrupt and reckless, and a whole dirigence of government officials who can’t be slightly bothered by his principles of financial prolificacy. Sitting alone in his office, Minister Caruana’s autism is indulged with perfect mathematical models and beautiful structures that actually make sense, but from his door out, his financial plans are contingent to a multitude of risks that he has no control of. It takes great intellectual depth to handle and improvise your financial estimates in a volatile environment.
He does have this intellectual depth, but those of us with a bit of experience in applied finance know very well that prudence is often discarded with initial success that turns humility into stupid arrogance.
Eventually, everyone gets humbled, and Minister Caruana’s humbling moment is yet to come. Perfection in finance does not exist.
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Historian and Publisher
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