By Alasdair Macleod
Governments have refused to accept the necessity of a period of economic readjustment following the credit-bubble. The bubble burst about five years ago and economic progress has been effectively suspended ever since. The consequences are to make this adjustment unnecessarily drawn out and needlessly painful. Reduced to its bare bones, the choice has been either to accept that unviable businesses and over-extended banks must go bust, or to ignore the problem and hope it goes away.
Governments are refusing to let markets clear: prices have not been permitted to fall to a clearing level. They don’t want to face the bankruptcies of the over-indebted, the businesses that rely on the state for their survival, and the banks that have foolishly lent them too much money.
Reality is now catching up with western governments. Their underlying financial position is rapidly deteriorating, with welfare costs spiraling out of control and governments already heavily in debt. They cannot realistically underwrite the global banking system, which is insolvent and considerably larger than the governments themselves. The economic recovery which is the governments’ get-out-of-jail card will not occur without that economic readjustment.
We are long past the point of no return: that was probably when the Federal Reserve Board under Greenspan decided to rescue the stock market by cutting interest rates to 1% in 2003/04. It has been crisis management by the state ever since. We have progressed to the point where governments have chosen to protect themselves, in preference to looking after the true interests of their electorates.