Article published by José Alberto León Alonso on 09/22/13 in Diario de Avisos.
Five years after the collapse of Lehman Brothers sparked the biggest global financial crisis since the Great Depression, nothing seems to have been effectively resolved. Oversized banking sectors have wrecked the economies of Ireland, Iceland and Cyprus. Banks in Italy, Spain and elsewhere are not lending enough, while in other countries they are again lending too much. China's credit boom is a fiasco. The economic recovery has progressed much more slowly than anyone could have expected, and in some countries, such as Spain, it is barely in sight. Why have we made so little progress?
In short, the world has not yet solved the fundamental reason for the financial crisis: excess debt. The inability to understand that the high debt burden, which has increased incessantly for several decades – even more so in the private sector than in the public – is a significant threat to economic stability is striking. Debt can fuel cycles of overinvestment, as demonstrated by the Irish and Spanish property booms, as well as booms and busts in the price of existing assets. In good times, increased debt can lead to a feeling that underlying problems are disappearing. But in the post-crisis decline, accumulated debts have a powerful depressive effect, because excessively indebted companies and consumers limit investment and consumption to pay their debts. Japan's lost decades after 1990 were a direct and inevitable consequence of the excessive debt accumulated during the 1980s, and it remains the most indebted country in the world today. Public and private debt levels must be treated as crucial economic variables. Ignoring them before the crisis was a huge economic policy mistake, for which the citizens of many countries have suffered intensely. All the imbalances that led to the disaster are still there. World debt has grown by more than 30% since the start of the crisis (in just five years!) and bubbles in danger of bursting abruptly, such as those of emerging nations, are multiplying. The outbreak of a new financial crisis seems only a matter of time.
The truth is that, five years after the crisis, Western economies continue to depend overwhelmingly on central banks to avoid even worse economic results. The addiction to abundant and cheap money, which is reinforced by lower rates and greater monetary expansion with each mini-crisis, is growing. But it should be remembered that the extraordinary measures and the “open bar” of liquidity, now in operation, are temporary. A large number of American, European and Spanish financial entities seem to have forgotten it.
This gives rise to two questions. The first is how to get out of the current excess, both private and public debt. There are no easy alternatives. Paying private and public debt simultaneously depresses growth. Rapid budget adjustment can be counterproductive. But counteracting fiscal austerity with monetary policies of abundant and cheap money poses the risk of fueling a resurgence of private debt in advanced economies and has already produced the dangerous overflow into the debt of emerging economies, which is now trying to be corrected and we will see how it ends, because the chinese bubble has grown to colossal proportions. It is necessary to accept the facts. It is obvious that Greece cannot pay all its debt and will have to default and restructure. But it should also be obvious that Japan will never be able to generate a fiscal surplus large enough to pay off its gigantic government debt. Some type of combination of debt restructuring and reduction of its real value generating inflation It will be inevitable in some countries. Nothing has been advanced in this regard.
The second question is how to limit debt-financed growth in the future. A long-term policy is necessary that combines countercyclical capital reserves for large banks that force them to keep reserves in good times; greater liquidity requirements in the financial system at all times; control of the incentives that bank managers have towards easy and quick speculative profits; and restrictions on direct borrowers, such as limits on the term and amount of loans for housing and commercial real estate. The free market in finance can generate dangerous levels of debt and has already generated one of the greatest crises in our history. If we do not accept this fact, we will not have learned the most important lesson of the 2008 crisis. And we are missing a profound and socially responsible renewal of the main causes of the crisis. If we want safer and healthier banks, we cannot demand anything from them other than to reduce their dependence on their debt, with which they finance more than 90% of their investments. Why is a financial reform not undertaken that limits this debt capacity?
In reality, government leaders are gripped by a visceral panic: that their economies will slide back into recession or into the abyss. The big banks play on this fear, arguing that a financial reform that forces them to “have more capital” will make them unprofitable and prevent them from granting loans. But there is no sign of that. And even if this were the case, the cost of avoiding financial crises is much lower than the suffering they generate when they break out. After all, these cause significant falls in production, increases in unemployment and seriously damage social cohesion. There are those who believe that banks are by nature special, and so many demands cannot be applied to them. In fact, they have become special primarily because of their ability to place so many bets at the expense of others. If it goes well, they win. If it goes wrong, taxpayers pay and citizens suffer. There is no justification for allowing them to distort the economy and endanger the population as they do. Unfortunately, despite the enormous damage caused, little has changed their policy. And it doesn't seem like we've learned anything.
