I hope and wish, you remember all that drama created by corporate media and sold out politicians in 2008. How the sky was falling? How the whole world’s economy would have been messed up forever, if we did not do those bailouts? How those bailouts would have solved every problem and all potential problem on the planet, very much like a magic wand? How the economy was supposed to recover rapidly? How everyone was going to be working within no time? How the financial system with the help of bailouts was supposed to transform all of us into a new world of growth and prosperity? My friends, six years have passed.
Under the spell done by big media and politicians, you may have not believed us at the time. But, I believe, now, we have a great opportunity to put everything going on till now into retrospective. It will help us to have a better understanding of what happened, what is happening and what might have happened, even for the future purposes, just in case. Since, all of us have been experiencing, what is going on since that time, I would start with the alternative scenario. After that we will compare it with the situation going on since 2008. Bear with me, please.
On business side, the alternative scenario would be the way it works in truly free markets. When a sector of economy crashes, like it happened to financial and automotive sector in 2007-2008, the prices of assets in that sector go down, drastically, in the midst of oversupply of devalued assets, uncertainty and reduced demand due to uncertainty. The businesses in that sector get devalued. Many businesses have to file bankruptcy, for going out of business or for restructuring. This reduces the competition in that sector. Reduced competition along with reduced values and asset prices makes it very easy to start new businesses and expand the existing businesses.
Soon, large investments start to flow into start-ups and expansions to capitalize on currently devalued assets and reduced cost of doing business in that sector. The people who lost jobs in crash, start finding jobs in these new opportunities created by crash. The potential and incentive to make huge profits with seriously devalued assets and reduced values, is huge at that stage, and people who lost jobs due to failure of similar businesses in that sector could be a great asset for these start-ups and expanding businesses.
On consumer side, people benefit a lot with devalued assets. They can buy the assets a seriously lowered prices. Even the people who could have never been able to afford those kind of assets can now buy. Many of them would just buy for investment purposes and can profit later on when market comes back. This buying and even selling of toxic assets, although at much lower prices, is still a sell out and can provide much needed capital and liquidity for struggling businesses to survive and re-structure. Businesses that sell off any of these devalued assets would suffer losses, though, and some of those may not be able to survive the losses.
For surviving businesses with toxic assets, unless they are exceptionally sound from financial point of view, there is not much choice except to sell off the toxic assets at the best possible price they can get. This benefits consumers and smaller financially sound competitors, a lot. As both of them can buy these assets on highly discounted rates. The most important point here is that the only hope for failing businesses is to compensate for some of the lost liquidity by selling off the toxic assets, as you might have often seen in liquidation sales in businesses near you. If the crashing sector is huge like finance the demand and prices fall significantly in other sectors of economy too, and consumers and businesses enjoy a higher buying power, and standards of living.
Now, we look at, what is actually happening since 2008, as a result of rescue, recovery and stimulation packages, and quantitative easing. First of all, many banks did not want to take tax payers’ money. Regulators mandated them to take that. They did that in a very tricky way. Suppose bank A was offered ten billion dollars in rescue package. Regulators said that in their estimation bank is ten billion dollars short in liquidity from what they consider as safe for bank A. So, if bank A refuses to take that money, it has to raise ten billion dollars in investments within a very short period of time. This forced almost every bank to accept the rescue money. This also shows, how regulators treat the tax payers’ money.
Once banks started getting large amounts of tax payers’ money, it killed the most important measure needed to solve the crisis. Namely, the selloff of toxic assets at lower prices to gain liquidity and survive.
So, banks just used the tax payers’ money to gain liquidity, instead of badly needed lending and credit expansion, and most of the toxic assets stayed on shelves, to be sold in future, after expected recovery. This strangulation of free market Capitalism’s very basic adjustment mechanism, right at this early stage, killed the whole natural process. Because, most of the toxic assets were never sold out, the prices remain high. With crash just happened and unemployment rates very high, consumers could not afford those high priced assets. One of the biggest causes of crash were very high prices of assets, anyways. Incentives for start-ups and the expansion of sound smaller competitors were lost due to no sell off and higher prices due to that.
This is exactly what happened in Major Depression. Large amounts of tax payers’ money flowing into toxic and failing enterprise, as well as new laws, barred failing businesses from sell offs. The prices remained high, and consumers and small businesses could not benefit from it. Due to higher prices demand remained suppressed, and hence the economic activity and job creation, very much like current crisis. As much as the liberal economist don’t like deflation, it is the only proven and effective natural method for market correction and recovery. In alternative, free markets and no intervention scenario, no doubt that we would have lost lots of jobs and lots of businesses would have gone bankrupt which happened anyways. But, recovery would have been much faster and stronger, as it used to be in eighteenth and nineteenth century, before liberal governments started to mess up the free market economies with repeatedly failed fiscal and monetary policies.