The next stage of the financial crisis......

The next stage of the financial crisis
What opportunities does the policy still to be Lord of the financial system? The solution to the debt crisis is a distribution issue: Who pays for what has long been spent?

By Jens Beckerth, Mateo Mathaus and Wolfgang Streeck

20th August 2011

The financial crisis is now in its third phase. In the first banks fell because of high depreciation of mortgage-backed bonds into difficulty and were rescued by Lehman Brothers, by pooling their losses. In the second phase of the European periphery countries were drawn into a downward spiral, because the level of their debt could no longer expect that they would be able to repay their loans. Stabilization was attempted by rescue packages, which are respective of the pensioners and other state-based groups and funded by the economically stronger countries in the north and were €. In the third phase have now cast doubt on the solvency of state also extended the core countries of the world economy, particularly the United States, but also Italy, France recently. So that these countries fall into the vortex.

The various stages of crisis management can recognize a system of trust in which the loss of confidence by stakeholders at a level higher trust level guarantees from other players or to be compensated. But instead of calming the situation, followed by the guarantees of the doubts about the trustworthiness of the helpers. Meanwhile, the Trust reserves are depleted.
Losses deepen the crisis of confidence in its third phase. Particularly dramatic is the doubt about the safety of American Treasury bonds
© dpa
Losses deepen the crisis of confidence in its third phase. Particularly dramatic is the doubt about the safety of American Treasury bonds

Particularly dramatic is the doubt about the safety of American Treasury bonds, not only because the size of U.S. government debt market makes this essential, but also because of the total uncertainty induced by them in the financial markets. This is evident immediately after the downgrade by rating agencies onset of speculation against the French. Germany will also be affected if it takes more guarantees that lead to additional debt and joint liability for the debts of the other European countries. The purchase of government bonds by the European Central Bank and the discussion about a German Euro Bonds ready to step in front already.
Four solutions for addressing the debt crisis

Four years after the onset of the crisis seems to be no instrument found to contain them. Rather, it spreads to more and more states, with depleted resources of the trust. The policy makes one feel overwhelmed. A new regulation of financial markets has largely failed, the banking system is still vulnerable to flagging economic development. This raises the question of the next stage of the financial crisis. We do not share the hope of an early end to the crisis. This would require a credible consolidation of public budgets in terms of enduring privileging the claims of creditors as well as a resurgence of growth in the European countries and the United States. This is not in sight. Instead, it must be envisaged that will arise from the unresolved financial crisis in a social and political crisis.
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For addressing the debt crisis, in principle, there are four solutions. (1) By reducing government spending and economic growth will reduce the debt and thus restore the confidence of investors in the credit rating of sovereigns in the long term. (2) By raising taxes is the income situation of the state budgets are improved and the debt reduced. (3) The public debt set to service the debt and negotiate with creditors on a payment decree. (4) states the goal to provide monetary stability and pursue an inflationary policy by which their debts are deducted. It can now show that all four strategies would have consequences that are not confined to the financial and economic system and very likely lead to the next stage of social and political destabilization.

One solution, spurring economic growth by reducing government spending, is currently the preferred strategy. Your success is unlikely. Through austerity measures, as it was countries such as Ireland, Greece and Portugal decreed that fall from important demand stimulus. The consequences can be read in Greece to the declining economic performance. Fail because of the shrinking economy tax revenue remains the reduction of public debt.
Deep cuts in the welfare state

We can only hope to improve medium-term economic competitiveness through structural reforms in the countries concerned. The success of such reforms seems more than doubtful - just study only the failure of the decades-long, extremely costly efforts of the Italian State to modernize the Mezzogiorno. Without a top layer that is willing to take entrepreneurial risks at home, rather than investing their money abroad, a country can not develop. Ireland has no structural reform of its banking system needed outside. Britain and the United States suffer from the consequences of their long-term policy goal of de-industrialization and its concentration on those services in which capitalism had almost collapsed in 2008. In both countries would require a restructuring of the industrial competitiveness comprehensive long-term public investments in education and infrastructure, for which there is no money available.

In all affected countries, it's about deep cuts in the welfare state, to cuts in education and health spending and public investment. This policy applies in the United States has long been stagnating real wages and a situation in which the standard of living had to go through private debt and a steady increase to be defended by the families of hours worked. In Greece, Spain and now in England can imagine the social conflicts that will arise from the austerity measures. In those countries, the bailout have claimed, there is also a very far-reaching restrictions on their sovereignty. Central democratic institutions of economic and fiscal policy will be neutralized in the long term. As a result can not exclude that more and more of the population to turn away from the constitutional ways of political and economic interest articulation.

The second solution would be to increase tax revenue. In fact, this might be the only remaining viable option - he would not be blocked politically. The debate about the U.S. debt limit has made it clear that the mantra "no new taxes" so solidified that tax increases have become politically impossible, even if the U.S. tax levels are still relatively low.
Avoidance strategies of those affected

It seems to be enough property owners as the brothers manage to cook, organize populist movements (Tea Party Movement), which prevents them especially the Republicans to engage in higher taxes or even the withdrawal of temporary tax cuts originally. In fact, tax increases would, if it should go relatively equitably, are paid substantially from the top income and wealth groups. This group has focused on the tax cuts of recent decades and benefits, not least from the interest income from investments in government debt securities and most of all income gains to themselves.

But an increase in excise taxes of declining living standards of the great mass of Americans appear half unimaginable. The general principle is that tax increases to pay off debts can never be popular because they are used to pay for goods and services already consumed. Not least, can offer theoretical Down On fears that harm according to which tax increases, especially at higher income growth. Even with avoidance strategies of those affected would be expected, especially in the taxation of wealth.

The third solution, setting the repayment and partial debt forgiveness, was recently followed by Argentina, where he led to a temporary relief. Greece has with the recent decisions of the EU actually receive a partial waiver. This is however a relatively small economy, where the debt in proportion to the economy, but not absolutely high. The average cost of debt can therefore be borne by other States and, to a lesser extent, the private creditors. This does not apply to the major European economies and the U.S.. An inability to pay these countries would not only ruin their banking system, but also that of other countries. A rescue operation as of 2008 would allow the depleted state budgets no longer good.
Adventurous social costs

However, even if a complete economic collapse as a result of a new banking crisis could be prevented would have an unprecedented social crisis can be expected. Large parts of the state debt that is held by pension funds or insurance companies, which make such capital from pension payments and life insurance pay out. The reorientation towards capital-based pension during the last decades has brought a growing number of pensioners in dependence on the capital market. Not least, even though the bankruptcy of a state to secure a result that the refinancing costs would rise for most States. Given the enormous amount of public debt must be present but any increase in spending for debt service to increase the budget deficits and further exacerbate the need to economise. This is the reason why the previously less-affected countries do everything possible to countries like Ireland and Greece to avoid state bankruptcy.

Fourth would be possible to reduce unwanted by inflation the real value of debt. For this purpose, the government can borrow from the central bank, thus increasing the money supply growth also. Also, this option is associated with adventurous social costs. A devaluation of assets reduces the pension groups today continue the population. In addition, reduced by inflation, real income of those who receive a fixed income as employees or as recipients of transfer income. This means that almost the entire population would be affected. Would be expected with social protests and demands for indexation of wages and benefits. This would result in a potentially "galloping" rise in inflation. In addition, any devaluation leads to higher refinancing costs of government debt in the markets.
A question of distribution

The current crisis management was trying to crises by shifting the problem to a higher level with greater confidence reservoir "cancel". The banks were rescued by the states, and the small states of the big ones. This strategy is now at an end. The loss of confidence has now reached everywhere. In the next stage of the crisis will spread to the social system. Signs are already found in rising unemployment, emigration and violence in high burden countries. Whether through austerity measures, cutting debt and inflation, the upcoming massive reduction of assets and income will cause conflicts. These have the potential to achieve the political system, at first instance by increasing the feed to populist movements like the National Front or the Tea Party.

It turns out that solving the debt crisis is essentially a question of distribution. Who pays for expenses that were made long ago, without ever having been settled, in a situation in which the creditors lose confidence and have to reclaim their money? What is missing there is the economic performance of an entire year in some countries even far more. After the growth of GNP during the last thirty years mainly benefited the upper strata of the population, was raised in the debt crisis of the question, try whether and by what means the wealthy will defend its position, even at the cost of massive social and political crisis. We can not exclude that the writing on the wall, they also do not wish to continue