Bubble Economy

The last quarter century the economic model created more mistakes than miracles. It encouraged people to spend, borrow, and speculate. And each time Mr. Market made a correction, the authorities came along with more money and easier credit. Businesses that should have gone bust years ago kept themselves alive with more and larger loans. Homeowners added more debt than they could carry. Speculators kept taking ever-bigger risks in a row. Total debt as a measure of the size of the bubble in the credit markets rose from only about 150% of GDP in the 70s and 80s, to 370% during 2000 -2008.

The financial industry’s bubble blew-up in 2007, creating today’s financial crisis and misery. The illusions and stupidity of the bubble era as witnessed were awful. Obviously, the correction will be enormous too. Assets all over the world were cut in half. Property prices fell off the cliff everywhere. It is estimated that the total loss of nominal wealth equals about $50 trillion.
Could these losses have been prevented? Certainly many of the mistakes could have been avoided. If the feds hadn't created the Federal Reserve Bank, it couldn't have provided such a large amount of money for so many speculators and borrowers for such a long period of time. And if the Fed under Alan Greenspan had done what it was supposed to do, avoiding the bubble before it could get out of control, this financial bubble would have been much smaller.

By flooding the market with ever increasing amounts of money, people drew the wrong conclusions. They thought they could spend money that wasn’t theirs without bothering about repaying the loans.

But capitalism corrected the mistakes, and punished the imprudent consumers and investors with trillions in losses, penalizing mismanaged corporations in the process. According to the well-known economist Joseph Schumpeter capitalism functions as a process of "creative destruction." Destroying the mistakes to create new opportunities for innovative businesses. However this process is at odds with governments’ ideas and what most people actually want, they both would like to maintain the status quo and continue with an economy that factually is obsolete.
The feds, who mismanaged their regulatory responsibilities during the Bubble Era, are now bailing out mismanaged banks and corporations to protect lenders who weren’t able to properly manage their money and repay their debt. Preventing in the process capitalism to make the required changes, by leaving the incapable managers in charge. Governments take ownership of major sectors of the economy and industry expecting to do a better job by creating even more debt! The feds are borrowing $2 trillion this year alone, not knowing from whom and how being able to repay this. Eventually that must be the taxpayers that get charged.

This depression is getting worse with every effort undertaken by governments in their efforts to inflate the leaking bubble. Like a flat tire before being inflated it has to be repaired first.

The longer the process of creative destruction takes through inflating it with more money, the longer it takes to complete this process, and the higher the eventual bill will be. Reference can be taken from the situation in Japan where the malaise is going on for twenty odd years without any economical improvement, and from the depression in the 30s when it took over 15 years, well after WWII before the destruction was completed and the economy reactivated.

But if Governments really wanted to protect their wealth, their power, and their position in the world, they should fight this depression in an entirely different way. Instead of bailing out failed businesses they should let them go bust. Instead of leaving executives in charge that mismanaged their companies, they should fire them. Instead of propping up irresponsible banks, they should help those be eliminated. Instead of spending money on stimulus packages Governments should return money to taxpayers so they can stimulate the economy at their turn with purchases and investments. Taxes should be cut in line with governments’ spending. Enhancing savings and reducing debt, eventually investment and consumption will return.

It is obvious that governments are administering the wrong treatment with the wrong medicine. If governments do nothing apart from lowering taxes and cutting spending, the economy will be in a much better shape much sooner and much cheaper.