Let it all fall down

Governments around the world are trying out different formulae to tackle the financial crisis. They claim they are trying to reactivate the financial sector, to encourage banks to offer loans to small businesses and people, and to other banks. Other cases of government intervention are focused on preventing banks from going bankrupt.

This is all wrong. If the financial sector is in a financial crisis, let the financial sector sweat out its own illness. Any part of it that cannot survive the crisis should simply be left to die, because its demise means that it has no value. The crisis must be allowed to work as it should, promoting consolidation, discarding some old players and creating opportunities for new players to enter.

Government intervention is absolutely wrong. It is nothing but a quick fix, with lasting negative side effects, while prolonging the cost of the crisis, imposing it on generations to come. Furthermore, why should banks and other financial entities be allowed to earn loads of money for themselves (their shareholders) when the economy is fine, but they have to be helped by the government when things are not so nice anymore? Every individual and small business benefits from their work in times of prosperity, and they have to adjust to difficult times. The financial sector should be no different.

Is the problem really lack of trust among lenders? Is a bunch of public money going to help them regain trust? Not a chance. They should regain trust the old fashioned way: by going into business again (i.e., start lending) to then ascertain that customers begin repaying their loans. Why would banks feel compelled to lend again? Simply because it’s their business. The business of banks is based on risk. They take a risk lending money, and charge for that service. It’s a matter of waiting to see who can hold out longer; banks or their customers. My guess is that banks, without the gift from governments, would have needed to attract customers again sooner than those customers would have needed the loans.

The financial sector should be left to its own devices to try to recover, whatever that may entail. Having governments intervene is anti-natural; it is an external factor inserted into the normal life cycle of any company that ought to survive on its own merit. Of course, earlier government intervention had its share of blame in driving the economy and the financial sector down (read: unrealistically low interest rates in the U.S. for a long time, the 1977 Community Reinvestment Act), but this is no excuse to pour millions of public money to that financial sector, or to nationalise banks left and right, as several EU countries are doing.

In summary, the situation is outrageous: rather than reducing public spending, governments have, once again, disposed of our money to use as they see fit, without any clear indication that the amounts of money they are dumping on the financial sector is going to make any difference one way or the other.

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