As a new Great Depression threatens, Governments should be concentrating on mitigating the effects and being honest with their citizens.
Governments around the world have been trying very hard to pin blame on bankers, while claiming that now is not the time to be placing blame. The tactic is very simple, a favourite of propagandists, although it requires some verbal skill. The trick is to implant the idea that bankers are the only people to blame while the overt message is that it is a time for actions and not recriminations. The very real danger is that the ‘actions’ are being taken not to solve an identified problem, but to give greater credence to the propaganda.
The basic difficulty is that no one really knows exactly what is going to happen during the coming months. The only recent example to draw from is the Wall Street Crash of 1929 and the Great Depression that caused so much hardship in the early 1930s and contributed to the 1939-1945 War. That is only a partial example because so much is very different today. Instant global communication allows information, true and false to circulate in minutes. Most of the world population is exposed to many very different views from ‘experts’ at the same time. Panic and false hope are equally easy to instill.
The basis of the current problems goes back to the Clinton Presidency when it was realized that relaxing controls on banking would create a bubble to help win elections. Those lessons were taken onboard by Blair and Brown in Britain and later adopted by President Bush when he followed the Clintons into power. Politicians rapidly became addicted to economic growth and the electoral advantages. As a result, they failed to respond to a series of warnings during the last eight years.
When times are good, money flows into land and property in many economies, causing a bubble to develop. That has happened most dramatically in the US and the UK, although other countries have also been affected. Eventually, that market corrects itself. If it is allowed to develop and self-correct, as in the US and the UK, the correction is the bursting of the bubble. It is inevitably a very painful process that could have been avoided by light intervention early on. Then one or more minor corrections would have taken the heat out of the situation and the experience might have been uncomfortable for some, but not very painful.
Bankers have simply taken advantage of ineffective government controls, particularly in the UK, as the Blair Brown Regime introduced new and seriously defective industry regulation.
When domestic property prices are rising rapidly, and apparently for ever, home owners feel very much richer than they are and borrow heavily against the value of their home. Unfortunately, a home really has no value unless the home owner is intending to sell a current home and buy a smaller cheaper property. In that case, the value of the home is the money left over from the sale of the old home, after the cost of the new home, and the costs of relocating, have been deducted. When times are good, many homeowners fail to recognize the dangers of borrowing against the asset value of the home. When times are hard it is too late. Higher value properties often lose value faster than lower value properties, the housing market collapses and the only way to satisfy the lender is to hand over the home against the personal debt. The home owner still needs somewhere to live and very real hardship can be suffered. The situation is made even worse because the lender is really not that interested in obtaining best price for repossessed properties and is only interested in removing a bad debt from the books. That often means that the home owner loses his or her home, has to rent alternative property at much more than it is worth, and still owes the lender money.
In Britain the situation was made far worse because Gordon Brown has spent more than ten years loudly claiming that his brilliance has abolished Boom and Bust for Ever and that under his inspired economic leadership only continuing growth is possible. Unfortuantely he is now claiming that his experience is the only skill able to save the world from disaster while admitting that the Brown experience is one of a series of mistakes.
Property and stock bubbles periodically grow and burst. The South Sea Bubble was a stock bubble that impoverished many Britons in the Eighteenth Century. Earlier in the Seventeenth Century there was the Tulip Bubble when many Dutch citizens were impoverished from a manic investment in tulips. The Union of Parliaments in the early Eighteenth Century when Scotland and England were administratively joined was prompted by Scots who had been impoverished by rash investment in Central America, the Belize Bubble. Less well recorded bubbles have occurred through history.
So, as bubbles are not new, governments should recognize when one is developing and have a duty to at least warn their citizens of the growing danger. In Britain, the Blair Brown Regime has been characterized by its desire not to hear bad news and an even greater reluctance to pass on bad news to the electors until it is too late and the dangers are already public knowledge.
In Britain and the US, the blame should be shared by politicians, banks and borrowers. The current world financial crisis could not have happened without the participation of all three groups. The greatest mitigation goes to borrowers because many were directly mislead by bankers and politicians. Some mitigation goes to bankers because their primary objective is to make money and grow business. It has to be expected that they will seek to exploit every loophole in search of profit. As they deal primarily in numbers, it is perhaps unreasonable to expect a high ethical standard or any appreciation of the potential harm to others of their greed and incompetence. The group that has no mitigation is the politicians in government. They have all of the supportive expert mechanisms of Central Banks, Treasuries, Trade Ministries and other sources of economic skills. A failure of governance can mean that incompetence has resulted in economic warnings being ignored. Unfortunately and inexcusably, the British situation is that the Blair Brown Regime failed to accept the dangers for vested political interest.
The only bright light today is the knowledge that eventually the crisis will be spent and better times will come. The bad news is that a great many people will suffer personal pain in the meantime.
It is increasingly clear that countries, that have laughed of the Anglo-American crisis as an Anglo-Saxon problem, have been equally dishonest or incompetent. They have exploited the growth in the US and UK economies over the last 15 years to the advantage of their own citizens. As those economies collapse, the people who traded with them will also suffer and one of the major victims could be China which has enjoyed explosive growth from massive trade with the US and UK. The very low cost of Chinese products has also been a factor in concealing the true US and UK economic environments during the last five years.