Friday, April 03, 2009

A Financial Crisis: Fighting Fire with Fire

The year of 2007 revealed a phenomenon that was already being developed for a long time: the financial crisis. It is not clear when it started exactly, but it was surely not yesterday. By definition, a financial crisis is a period of time in which some financial institutions or assets suddenly lose a large part of their value. This prominent event occurred because the financial bubble in the US housing market exploded, leading to a massive loss of money by the banks, to a general financial distrust, and, more recently, to a global recession. As a result, during recent times, the causes for this explosion have been seriously discussed: the most common entity to be blamed is what some people call “neo-liberalism”, which is a pompous name for pure economic freedom. Similarly, as sub-products of that concept, we get the sub-prime lending, speculation and the deregulation of the market as the engines of this hideous trouncing machine. In a moment of massive unemployment, as well as of economic difficulties, these are the mainstream scapegoats; still, are these targets being fairly accused?

What is not commonly said is that the risky loans given by the banks were a direct result of the action of the Federal Reserve: with the intention of putting more money in the market, the Clinton administration pressured the banks in order for them to expand mortgage loans among low and moderate income people. To attain that goal, deregulation was not the only measure that was taken; in the same way, interest rates were reduced to extremely low levels and state protection was offered in case of failure. This lead to risky loans that banks would not normally give, but because the state was assuming the risk, they were allowed to do it. Also and again, it is safe to say that this financial collapse was not the result of liberalism; ultimately, it was the result of the state intervention in the economy that subverted the natural rules of free market.

In some way, this crisis was a blessing for many politicians in power: with the media spreading the news that “savage liberalism” and greed were to blame for what happened, the governments from all over the western world took the opportunity to increase their power by enlarging the functions of state, by promising to regulate every human interaction to its core or by taking control of the economy; to put it in other words, by returning to classic Keynesianism. It is no surprise, according to politicians, free market is now the demon that should be hunt; as a consequence, personal freedom will become seriously damaged. Frightened by the catastrophic propaganda, people claim for more regulation, for more state control, forgetting that the state control will inevitably knock at their door one day, by intervening directly in their personal and professional lives.

State intervention brought us to this, but because of simplistic propaganda, people now want more state intervention to solve the problem that the previous intervention has created. Ironic? Lets just say that life is a Samuel Beckett play.


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