Tuesday, 6 December 2011

The Financial/Economic Crisis

The stock markets rose when the central banks of major capitalist countries pledged to provide the troubled banks of Europe with more liquidity, printing money guaranteed by their taxpayers. The Eurozone crisis is not really about bad fiscal practices by a number of the smaller states. It is about the bad lending practices of the big banks. F. A. Hayek would have insisted that the banks have to suck it up and take the losses, which were due to their own irresponsible practices. The neoconservatives have been ignoring him lately.

The central bank of the European Union does not have the funds to bail out the governments of Italy or Spain. Therefore, the only option seen by the political-economic elite is for a bank directed government imposing harsh austerity measures on the common people. Riots and general strikes are natural reactions.

This week Angela Merkel and Nicolas Sarkozy are meeting to come up with a plan for a new European union which would include the power to control the elected governments of the member states. These governments would be brought into line by a central authority operating on behalf of the international financial community. Needless to say, this is a diversion that would never be accepted by the member states.

Few want to mention that the real reason for the crisis is the dodgy level of solvency of the large banks. They made bad investments, like purchasing U.S. mortgage backed securities. They made loans to governments without checking to see if they could be paid back. The sovereign debt held by the banks was judged to be as good as cash and used to make inter-bank payments. There is no mark to market rule used by accountants today as it would reveal that banks hold a great deal of debt at a face value that is far above the real market value. That is why they are not rushing to foreclose on bad loans. It is a question of solvency.

Iceland

Then there is Iceland. The first country that went bankrupt. Fortunately for the Icelanders, it was not a member of the European Union. The common people, through two referendums, refused to be held responsible for the horrendous practices of the private banks egged on by their mainstream economist advisers.

The OECD now reports that the GDP for Iceland will be +2.9% for 2011. Unemployment has fallen to 6.1%. Exports are recovering. Inflation is firm at 4%. The government is steadily moving to reduce the budget deficit. This turnaround was achieved by the Social Democratic-Green Left Movement government by devaluating the currency and introducing capital controls. This government rejected the calls for an austerity program and has chosen to follow the Argentine example of promoting growth from the bottom up.

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