It is impossible to understand the current turbulence in the
financial markets
and the problems many
banks
are facing without looking back to the
financial crisis of 2008
and the methods used to “fight” it. That is when the foundations of the latest turmoil were laid.
As legend would have it, the 2008 financial crisis was caused by radical deregulation. In reality, of the 28 different measures introduced either to regulate or deregulate the financial industry in the years 1980 to 2009, the very same years in which there was supposed to have been unrestrained deregulation of the American financial industry, only five actually cut regulation. The other 23 created additional regulations.
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Indeed, there was nothing like laissez-faire capitalism in the financial markets. Immediately before the financial crisis, 12,190 people were working full-time on regulating the financial market in Washington, D.C., alone — five times as many as in 1960. Moreover, U.S. annual spending on federal agencies charged with regulating the financial market had increased from $725 million to an inflation-adjusted $2.3 billion since the 1980s, which is when the laissez-faire phase is said to have begun.
Even British economists Paul Collier and John Kay, who have wrongly argued that “market fundamentalism” has come to dominate economic policy in Western societies over recent decades, are forced to concede: “Those who blame the financial crisis on deregulation fail to recognize that there is today, and was in 2008, far more financial regulation than ever before: the state was increasingly active, yet decreasingly effective.”
There is not enough space here to go into detail about the last financial crisis, but, as I have shown in my books The Power of Capitalism and
In Defense of Capitalism
, it was the other way around: The crisis was the result of too much state regulation and the insane policies of the central banks.
I predicted even then that the measures taken by politicians and central banks to combat the 2008 crisis would cause even greater crises in the future. In 2019 in my book The Power of Capitalism, I warned:
“Misdiagnosing the causes of the financial crisis means that the proposed therapies are also wrong. The financial crisis was caused by excessively low interest rates, heavy-handed market interventions and over-indebtedness. Are we seriously to believe that the right therapy involves even lower interest rates, stronger market interventions and more debt? These measures may well have a short-term impact, but markets are becoming increasingly dependent on low interest rates. Such low interest rates do nothing to solve the underlying problems — they only suppress the symptoms and push them into the future. The current combination of overly excessive regulation and interest rates of zero will cause considerable medium-term problems for many banks and is the breeding ground for new, even more severe crises.”
The financial sector is less based on market economics and more strongly regulated than any other industry, perhaps with the exception of healthcare. The fact that precisely the two most strictly regulated areas of the economy are the most unstable should give anti-capitalists food for thought.
Central banks’ policies have both caused and exacerbated the problems. Free money has meant, as I predicted, that companies, governments, investors, and private households are now around $300 trillion in debt, about twice as much as before the financial crisis of 2008!
The Federal Reserve and other central banks are in a trap of their own making: Their policies of cheap/free money and bond purchases have ultimately triggered inflation — first of asset prices (real estate, stocks, etc.) and then of consumer prices. To fight inflation, they are forced to raise interest rates. And the moment they do, they trigger the next banking crisis.
It is a vicious circle that the economist Ludwig von Mises described as the “intervention spiral.” The most perfidious aspect of all this is that problems stemming from a total violation of the principles of capitalism end up being blamed on capitalism. It is like the thief shouting: “Stop, thief.”
Predictably, it is likely that politicians, to divert attention from their own failures, will once again single out “greedy bankers” as the culprits, which is about as good an explanation as blaming gravity for a plane crash.
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Rainer Zitelmann is the author of the recently published book
In Defense of Capitalism
.
