Since the crash, taxpayers’ money has been used to bail out failing banks because they are perceived to be too big to fail. Are they too big to fail? Or should we be asking a different question: aren’t these banks too big to bail out? Firms in any other sector would be left to go to the wall, but, because governments have allowed the provision of credit to become a business, they now have to step in when the banking system is unable to meet the needs of the economy. What would be the consequences if they were left to their fate?
Generally, loans are made (and money is created) for one of three purposes:
- to fund direct investment in the creation of new tangible wealth;
- to fund investments in financial markets and ‘products’ which have no direct link to the creation of real wealth; or,
- to fund the consumption of goods and services.
Although the current crisis is possibly the most serious and complex in human history, it follows a pattern that has existed since ancient times. The rulers of early civilizations, like that in Mesopotamia, had wiser solutions than today’s politicians. When the landless and other dispossessed people in these ancient societies ran up unsustainable levels of debt which threatened widespread economic ruin, they bit the bullet and tackled the problem head on. The authorities periodically made clean-slate proclamations: all debts were written off. This had the effect of resetting the economy to its original condition. Money lenders would suffer a nominal loss of wealth, but because things had become so out of kilter they understood they weren’t going to get their money back anyway. It was accepted that such debt jubilees were the only way out of crisis.
Kim Hill from Radio New Zealand discusses Greece, austerity and Europe’s future with Ross Ashcroft on her Saturday Morning show.