
In the last post I wrote about the root causes of the financial crisis, now I'd like to write about what are the three things that are making things much worse.
1-MARK-TO-MARKET ACCOUNTING: a more proper name should be mark-to-liquidation. Banks had to artificially knok down the value of assets from their balance sheets, that lead to risks in the stability of the banking system that made banks to hoard cash and to not lend to each other even if they where cash flow positive. That was a major cause for the so-called credit crunch.
2-POLITICAL CHANGE TO BIG GOVERNMENT: after 25 years of Reganomics where free-market monetarism spread around the world, the winds started to turn and the era of big goverment keynesianism started it's way. It all started with the always-proved-useless rebates the last year of the Bush administration, it continued with the bank and auto industry bailouts, and then it worsened with the Obama budjet proposal. The stock market was off 10% from it's highs but started to freefall in september 2008 when Obama started to lead the polls. Expectations make a crucial role in the stock market and the economy. Today we expect in the future to have a bigger burden of taxes and regulations that stop investment, entrepreneurship and growth. Not only in the US, countries from all over the world are changing policy.
3-PROTECTIONISM AND NATIONALIZATION: The 'buy american' legislation enacted by the Democratic congress in my opinion is just the start of the well known game (the US tried it with the disastrous Smooth-Hawley Act) of retortions and counterretortions that will make international trade a nightmare. Nationalizations of banks around the world is not only swiping out current shareholders but is also very dangerous for the future.
Credit is the blood of the economy, and if the blood is controlled by government we are in deep trouble.
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