Friday, June 12, 2015
Solutions to economic collapse
Back in 2008 Iceland did something different from the rest of the world. Instead of bailing out their banks they let them fail. Instead of rewarding the bankers with huge paychecks, they sent them to jail. Bad commercial credit was allowed to suffer market corrections. In the rest of the world commercial debt became government debt.
In spite of all the gnashing of teeth and predictions of doom Iceland came out of the crisis in fairly decent shape. They did a pretty good job of following capitalistic principles. The rest of the world did a weird kind of socialism, not for people but for big corporations.
Greece is in the news once again. It's in danger of default. In my humble opinion they should have defaulted on their loans and done away with the Euro years ago. It's impossible that their debt will ever be paid. Things that are impossible to happen don't happen. More Euro loans are only an attempt to kick the problem down the road a bit further.
There's some worry that Greece could be the spark that topples an already shaky financial system. The bond and derivative markets are well into the impossible zone, so eventually there will be a day of reckoning. Best I can figure is that day may not be all that far off.
What should happen is all those bad bets be allowed to fail. Yes, it'll be chaos, but only for a while. There are really two economies. There's the real economy where goods and services are traded. Then there's the fake economy where huge amounts of paper wealth is generated. That would be fine except the wealth from the fake economy is being used to buy real things in the real economy. It's like we are allowing people to buy luxury cars with Monopoly money. That can't but help mess up the real economy.
When the paper economy fails, theoretically, the real economy should still be there. The farms and factories have not disappeared. There is still a need for goods and services. As soon as a basic banking and financial system is set up to facilitate exchanges, people can get back to work. The mistake being made now is that financial system thinks it is the economy instead of a small service industry designed to facilitate the exchange of real things.
Iceland let the fake economy go away and punished the bad actors. The solution, while not easy, is simple. Those who's living is tied to the fake economy -everyone from bankers to politicians, have a vested interest to avoid the correction. It's going to be interesting to see how it all shakes out.