Globalaffairs

Issue 13/ February-March 2009
By Glen Ruffle

Governments should allow banks to fail and endure short-term pain in order for them to be long-term gain

As predicted, the governments of the developed world are falling over themselves trying to stop what is inevitable. In acts of gross stupidity, they are borrowing more and more money, nationalising more and more banks, and making the state ever bigger at a time when the exact opposite is needed. In Britain, every new-born baby instantly inherits a share in the national debt of ₤17,000; an outrageous sum that will only grow bigger as the government continues to pursue the economically flawed policies it has used for the past decade.

Had Milton Friedman still been alive, he would probably have looked sadly at the policies being put forward and notice the amazing similarities between today and the 1930s crisis. In both cases, a dramatic cut in the supply of money has helped cause a meltdown of the system. Desperate to restore the flow of money, governments have thrown billions at the markets in order to try and restart the cycle of investment and production that is essential for capitalism’s survival.

Yet they have missed a key point: the good times at the beginning of the 21st century necessitated the collapse now. Bankers came to believe their own doctrines of endless growth; they actually thought that house prices could endlessly increase.

The Spanish example is a case in point. Vast swathes of Spanish land was bought up and built on, and sold to those with money from northern Europe. The idea of a place in the sun caught on, and more and more people wanted a piece of Spain. Prices rose as companies realised they could make a large profit.

Yet who could not foresee that the world is running low on oil and petrol? Since the nineteen eighties and before, textbooks in schools have taught children that natural resources are running out. And as the resources get lower, so the price of them increases. Thus the ability to fly cheaply from one place to another is only ever going to be a temporary illusion.

But this ability to fly from one place to another was key to the property boom. Prices could only continue to go up if the demand increasingly went up. And the only way to increase demand is either to have an increase in population, or to enable people to go back and forth easily between their new homes and their place of work.

Thus as immigration increased, so prices continued upwards further. More people chasing not-enough homes. And cheap flights were the icing on this cake, enabling people living in Norway, the UK and Germany to compete with those permanently resident in Spain.

A similar process happened in the UK. By allowing ever more immigrants into the country, the UK was able to boost its population, keep wages low, keep demand for housing high, and create a property bubble that has finally popped. The only way it could have been sustained was either to keep filling up the country with immigrants, which only would increase racial tensions and eventually meet the constraints of physical, geographical space, or to knock old homes down and not replace them, thus decreasing the supply.

And of cause, there was what was happening in the United States. Bankers here invested in the sub-prime market of families who were borrowing more money than they could ever pay back, and finally the house of cards fell down.

The answer to this crisis that Obama’s America, Brown’s Britain and Barroso’s Europe have chosen is to throw billions of taxpayers’ money at the failing system. Essentially, they are using our money to stop businesses from going bust. Yet what exactly is this achieving? In a market, if a business makes stupid decisions, it will fail. It will go bust, and those who authorised and oversaw those decisions should lose their jobs, and face the consequences of their folly. Instead of this, today governments are protecting them and using everyone’s money to save the bankers.

Of course, the situation is so big, that many people’s money is in fact threatened, which justifies a little more the actions taken by the governments, but equally, it should be a wake up call to society as well. Instead of blithely going about life, people should be encouraged to wake up and understand the world they live in. They should be encouraged to know and take an active interest in economics and know the risks that they take. By letting banks fail, and by allowing many everyday people to lose out, the governments would actually be encouraging a more responsible society to emerge. If people face the consequences of their choices, it forces them to act differently, and that in turn will force the banks to act differently. How many people would trust banks if they saw life-savings lost due to the banks stupidity? Surely most people would choose to keep their money in building societies, credit unions or cooperative banks rather than risk it in huge private banks that only a year ago were handing out millions of dollars in bonuses to staff. Spreading the pain is not the solution. Those people who ignorantly thought that a 100 percent mortgage was acceptable and logical need to feel the consequences of their actions, as well as the bankers who encouraged them. If we don’t pay for our mistakes, we don’t learn.

At the moment, people don’t know how the system works – they don’t understand what the differences are, what the choices available to them are. And because of this, believing that their money was in safe hands, the populations of the West idly allowed the bankers free reign and are now facing the results of that. But is it fair that those who did understand and those who made wiser choices should now be burdened with the debts of the banks? Why aren’t the investors, traders, managers and directors who made the bad investments required to give and pay back some of the millions they have accumulated? Instead, when times were good, they reaped the benefits; and when the inevitable consequences came, then everyone pays. Hardly a recipe for peaceful societies, is it?

And that is partly what is driving the anger across Europe, as thousands take to the streets to show the elites that politics and business should not be in bed together. The State is not the servant of capital, but rather the saviour of capital. Yet until the state fully accepts its role as the provider of smart and rigid regulation in which capital can operate, these problems will continue to happen. The solution to today’s stupidity has been to pass on the costs to future generations. By the time they have cleared the debts, it is likely another crisis will be brewing, because of lapse regulation and because politics and capital are too closely linked.

It should be noted that the present governments have taken a step backwards to the 1950s and 60s. The economic system in place was Keynesianism. Governments were the motor of economic growth, spending money and continually printing money to expand the system. Today’s crisis will be blamed on the monetarists, but that is wrong. The US neo-conservatives took some of the monetarist agenda, and lumped it with the nationalism of the Bush administration. This produced a government that lived way beyond its means, pursuing economically illiterate policies. Only China’s investment in dollars kept the US afloat, effectively funding the US wars and expeditions in the rest of the world. For Britain, New Labour has pursued many Keynesian ideas by increasing taxes and expanding the public sector, creating a system that many now think is out of control and ultimately failing to deliver any real results.

And the Bank of England’s fiddling with interest rates has sent consistently the wrong signals to the market. Because they changed, investors started to second-guess the bank, and instead of having a consistent, knowable base on which to make long-term decisions, short-term gains took precedence.

This was all predictable, if people had listened to Hayek and Friedman. And it is likely, when this crisis is history, and when the inflation problems start to affect the economies that have nationalised so many industries, that another government will have to repeat the actions of the 1980s Thatcher government in Britain, and restore more order to the economy. Only in that time, great care must be taken to provide a strong and clear framework for the market to work in; as well as creating a strong and transparent government separated from business, and an educated population less enthralled to the marketing men and the propaganda of international capitalism.

One thing however remains clear. As Professor John Gray has argued many times, the idea of progress in the modern world has been laid out and exposed as being a complete myth. We’re back in the 1930s, and the 1950s. Soon we will be back in the 1980s. And then there will be the next crisis. If only we would learn.

Glen Ruffle
Masters from the University of Southampton and currently teaches in Moscow.

References

Adrian Michaels (2009) Europe’s winter of discontent, 29/01/2009, Daily Telegraph, at: http://www.telegraph.co.uk/comment/personal-view/4363750/Europes-winter-of-discontent.html

Anna J. Schwartz, Money Supply, at: http://www.econlib.org/library/Enc/MoneySupply.html

Ellen Meiksins Wood (2003) Globalisation and the State: Where is the power of capital?, Chapter 9 of Alfredo Saad-Filho (2003) Anti-Capitalism: A Marxist Introduction’, Pluto Press, London.

Friedrich Von Hayek (1994) The Road to Serfdom, University of Chicago Press.

Iain Martin (2009) Fire Digby Jones, 16th January 2009 at: http://blogs.telegraph.co.uk/iain_martin/go/tag/view/blog_post/DigbyJones

John N Gray (2004) Heresies: Against Progress and Other Illusions, Granta books.

Metro (2007) City bonuses at record ₤14bn, 28/08/2007 at: http://www.metro.co.uk/money/article.html?in_article_id=63626&in_page_id=36

Myra Butterworth (2008) Scottish Widows drops 100 per cent mortgage, 01/04/08, at: http://www.telegraph.co.uk/finance/personalfinance/borrowing/mortgages/2787288/Scottish-Widows-drops-100-per-cent-mortgage.html

Nick Robinson (2009) Ministerial post ‘dehumanising’ for Digby Jones, 15th January 2009 at: http://www.bbc.co.uk/blogs/nickrobinson/2009/01/ministerial_pos.html

Paul Henley (2009) French government fears rise of left, BBC News, 1/02/09 at: http://news.bbc.co.uk/2/hi/europe/7861774.stm

The Guardian (2009) New babies born with ₤17,000 debt, claims David Cameron, 12/01/2009 at: http://www.guardian.co.uk/politics/2009/jan/13/tories-debt

The world can halt Bush’s crimes by dumping the dollar, (2008) at:
http://bbs.chinadaily.com.cn/viewthread.php?tid=595987

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