Limits of Austerity in European Banking and Football Clubs

At the Guardian today Stefan Szymanski has a neat post which compares European banking an football. He writes:

Contrary to appearance, there is little difference between a football manager and a bank manager. Both are gamblers who use other people's money to bet on the next big thing. Both work hard to present an aura of invulnerability and inevitability, when in reality both are exposed to the fickle laws of chance.

The principle of banking is to borrow short and lend long, giving rise to two sorts of risk – liquidity risk (depositors want their money back) and solvency risk (the long-term investment you lent to went belly up). Usually it is insolvency that leads to a liquidity crisis and general failure.

The principle of football is to buy players today in the expectation of future success and income, which also gives rise to liquidity risk (the future revenues are slow to arrive) and insolvency risk (the future revenues never arrive).

Given that we cannot live without banking or football, both sorts of manager are prone to moral hazard – taking excessive risk today in the knowledge that if things don't work out tomorrow then the organisation is too big to fail. Banks and football clubs almost never disappear, but they often have to be propped up when they fail.

Austerity won't work in banking (see Martin Wolf) and it won't work in football either:

Many people argue that Europe's austerity policy is not tenable in the long run if it impoverishes the poorer nations, and much the same can be said of the financial fair play regulations. Sound finance is a worthy goal, but not if it guarantees German and English dominance (in the latter case funded by international broadcast income) at the expense of the game's traditional southern powers.

Smart stuff. Do read the whole thing.