The Incredible Lie Concerning the Crisis: The Vision of an Entrepreneur

Reflections on the bubble, the debt and the end of the welfare state.

“To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.” Paul Krugman, 2002.

The general public believes the states, political parties and the media that serve them are not responsible for the crisis — yet these entities have an incredible amount of force.

The prevailing theory is that the crisis is due to a “lack of supervision of financial markets.” This is easy to claim, especially since the public has understood the need to bail out banks in disaster at the edge of bankruptcy. But was the problem with the banks the cause, or rather the consequence of the crisis?

Vladimir Vodarevski explains this hoax very well in his blog; in particular he demonstrates how the famous deregulation of financial markets is largely a myth. I will complete my explanation in some respects and tell you how I understand the crisis. I could be wrong, my point of view is certainly perspective; however, I’ve thought about it carefully, and I wanted to share my thoughts with you.

‘Providence’ Credit

For several decades, the debt crisis has been an obvious reflection of the exhaustion of a growth model driven by the credit of “welfare states.” States in the West have come to deserve the title of the welfare state and have even earned the grand prize. The rulers of these states are so proud to do good around them, just like fathers who celebrate Christmas all year. These welfare states reward voters with gifts in the form of aid, grants, subsidies, support, loans, hiring employees, etc.

Such lavishness is intended primarily to ensure the re-election of the powers that have been funded by regular increases in taxes and social security contributions, so that in the most collectivist countries, government spending now accounts for more than half of the overall economy.

It is easier to increase spending than to increase taxes, so despite rising levies, some countries developed a permanent budget deficit. The debt went up a little more each year, slowly increasing until the problem arrived later — and then bin Laden came.

Sept. 11, 2001: Beginning of the Credit Bubble

When planes hijacked by bin Laden hit the towers in New York in 2001, Wall Street collapsed. To avoid the collapse of the entire American system, the American federal bank, the Federal Reserve, a state agency, immediately encouraged Americans to borrow and consume, radically lowering its interest rate to a low of one percent in 2003. One percent actually corresponds to a negative rate once inflation is taken into account.

The reaction of the Fed to Sept. 11, 2001 was the starting point of a gigantic credit bubble, especially in the real estate market. Everyone wants to buy a home when credit is free. Getting into debt seemed to be a particularly good deal; with the continued rise in housing prices, Americans could easily obtain extensions of credit to pay for equipment for the house, accessories for the car, etc.

In 2004, the Fed started to raise rates to fight against inflation, but by then it was already too late. The damage was already done; the housing bubble had reached such proportions that no one wanted to deflate it. The U.S. government then pushed the parasitic financing mortgage companies — Freddie Mac and Fannie Mae — to lend at any cost, regardless of the creditworthiness of the borrowers.

Many U.S. households found themselves deeply mired in debt, which was not a problem as long as property values were up. But with the rise in interest rates in 2004, buying a home became more expensive and the household debt burden of repayments became unbearable.

In 2007 and 2008, the U.S. housing market quickly began to crack. On Sept. 15, 2008, Lehman Brothers declared bankruptcy.

A Bubble of Exceptional Size

The difference from previous cycles was the size of the bubble. Billions of dollars of subprime home loans made for easy resale between financial institutions, which found themselves suddenly worthless as it became clear that overindebted households could not repay.

Subprime lending blew up the banking system. To avoid further contagion and collapse of the monetary system, states decided to rescue the banks and then do everything to revive the economy. In response, central banks have lowered their rates to almost zero, while the federal government has launched a costly stimulus.

Since 2008, governments have actually substituted for consumers to borrow and spend like crazy at all costs. And sovereign debt, which was already impressive before the crisis, has exceeded reasonable limits.

The End of the Welfare State

We have seen that the crisis is the result of many Western societies drifting under the influences of excessive and reckless stagnation. It is no longer possible to pretend and ignore the gravity of the situation: Obese states should follow a long weight-loss program, in the context of prolonged economic stagnation.

Unfortunately, we must note that even the countries of southern Europe have taken measures to save; as a result the public debt continues to rise, along with the burden of debt.

This is the pattern of growth in credit collapses; it will result in decades of higher interest on the debt. For the most indebted and less exporting countries, the economic stagnation — such as in Japan — is inevitable. Only a few countries, including Germany and Switzerland, have put a brake on debt since 2002 and as a result have a slightly more favorable outlook. The United States will one day be overtaken by the enormity of the debt, despite its repeatedly demonstrated economic dynamism.

This crisis can only be overcome by radically revising the missions of the state, which should focus on areas that are irreplaceable (security, justice, diplomacy … ), and for the rest let the citizens, as companies, run their lives freely.

Policies, by nature, will always struggle to take unpopular measures in terms of the economy. If they are unable to help, the situation will worsen until the system explodes for its own good.

Citizens of Western countries will have to learn to live as adults, without the crutches of generalized assistance. Given the rapid growth of Asia, we have to roll up our sleeves.

Be optimistic: A new state-owned company, under more liberalism, will eventually emerge from the rubble of the welfare state. But the delivery will be difficult; convulsions are just beginning.