Ideology and Fiscal Crises
George H. Blackford, 5/15/2013
That the free-market ideologues who dominate the
live in a
delusional world should
be obvious from their
blame the financial crisis and the resulting government fiscal crises on the excesses of government.
It wasn’t the
government that pursued the predatory lending practices that led to
housing bubbles in the
United States, England, Ireland, Iceland, Spain, and
innumerable other countries around the world.
It wasn’t the
government that issued $60 trillion worth of credit default swaps without
setting aside capital against the contingency that those insurance contracts
might have to be paid off.
It wasn’t the government that leveraged
itself 30 or as high as 75 to 1 using short-term liabilities to finance
It wasn’t the government that made bad mortgage loans
or that lent exorbitant amounts of money to
Greece, Spain, Italy, and Portugal at ridiculously low interest rates.
It was the private sector of the economy that undertook those fraudulent,
reckless, irresponsible, and foolish practices and that made all those bad
loans, not the government!
not have allowed any of these things to happen, but the fact is that
governments all over the world just sat back and watched them happen without
even batting an eye. Why?
The dominant fact in
the real world over the past forty years is that free-market ideologues have
dominated the governments in most of the developed countries of the world as
well as international financial institutions such as the IMF. These
ideologues have been able to convince policy makers to deregulate the world’s
financial system in spite of the hundreds of years of economic history in which
excesses in these markets have caused innumerable economic catastrophes—such is
the appeal of their ideological logic. (Frank
But logic and reality
are not the same thing. You can prove anything with logic if you start
with a false premise.
When you step outside
the make-believe world of ideological platitudes, and look at what has actually
happened in the real world over the past forty years it becomes painfully
obvious that it was deregulation of the financial system that has brought us
to where we are today, not the rise of socialism or government intervention in
the economic system.
This crisis was
brought on by private sector financial institutions being allowed to
leverage themselves to unconscionable levels as they expanded private debt
to the point where the economic system could no longer service that debt.
When this point was reached the entire world’s financial system in the
private sector of the world’s economy began to implode as private
investors tried to cover their behinds in an attempt to avoid the carnage
that was to come. The implosion of the financial sector, in turn, brought
down the real sector of the world’s economy and, along with it, the government
sectors in the various countries that were affected—especially
those countries in the Euro Zone and
Middle East—as tax receipts fell, emergency
government spending increased, and the bailouts began in the wake of the worldwide recession
that followed the private sector financial meltdown.
The point is, it
was the private sector of the economy that created problems faced
by governments today, not the other way around. The fiscal crises faced by
governments are the result of the
reckless, irresponsible, and foolish behavior
in the private sector of the
economy that led to the financial meltdown, not the result of excesses of
socialism in the government sector.
At the same time, the financial
meltdown in the private sector is the result of free-market ideologues being
able to convince policy makers that financial markets are self
regulating and should not be regulated in
spite of an overwhelming amount of real-world evidence throughout the history of
finance that financial systems are inherently unstable and must be regulated if
the kind of economic disaster we are in the midst of today is to be avoided.
This fact is obvious
to anyone who is able to go beyond ideological logic and platitudes and view the
world as it actually is. In addition to the obvious fact that it was the
meltdown in the financial sector that led to economic crisis we face today,
the fiscal problems faced by
governments in the Euro Zone are particularly revealing in this regard.
problems arise from the fact that—guided by free-market
ideological distrust of government—the
attempted to put together a monetary union with a central bank and court,
but without a central government. As a result, when the economic
crisis hit, and the
financial sector began to melt down, the
was faced with the same kinds of problems the
United States faced in 18th century
under the Articles of
Confederation where the central government did not have the power needed
to coordinate/mediate the relationships between the individual states.
As so many articles by
have pointed out, it is the lack of a central government in the
making it virtually impossible for the
countries to deal with the fiscal
problems caused by the private sector. Socialism has nothing to do with it. It’s the lack of
government, not too much government, that is the problem in the
as it was the weakness of the central government under the Articles of
Confederation that led to the problems we had at the beginning of our nation’s
When it comes to
countries like the UK and the US, the difficulties they are having in dealing
with the fallout from economic downturn obviously arise from the ideological approach
these countries are attempting to use to deal with their fiscal problems.
Both countries approached this crisis in the beginning with central bank and
fiscal stimulus policies that brought the economic collapse to an end within
a year. Then ideology came to the fore. Both the UK and
US are now attempting the same failed fiscal austerity policies that
adopted by the Hoover administration in dealing with the fallout from the
crash of 1929 and revived again by Roosevelt and the Democratic Congress in
1937, namely, to reduce the role of federal budget in the economic system.
The results of the UK and US in
reverting to the austerity policies of the Hoover administration are exactly
what one would expect from our experience in the 1930s where we saw the economy
collapse from 1929 through 1933 under the Hoover austerity policies, then a
comeback from 1933 through 1936 under the
New Deal policies, and then the
economy faltered again in 1937 through 1938 as the old Hoover austerity policies
were resurrected. (Chapter 15)
In the UK and US we saw a comeback
that begin in 2009 following the stimulus programs, and then in the wake of the
austerity programs that followed the turnaround in 2009 the economies in the UK
and US began to falter. The UK, being further along in the pursuit of
austerity than the US, has already succeeded in forcing its economic system into
a double dip recession, but it is just a matter of time before the US is able to
catch up as we continue to follow in the footsteps of Hoover and the UK in
pursuit of this ideological madness.
It should be noted that there was a concerted effort to blame the
financial crisis on rising affordable housing quotas placed on the GSEs by
way of the Community
Reinvestment Act (CRA) during the 2008 election. This turned out
to be a red herring. As was noted by the
Financial Crisis Inquire Commission:
GSE mortgages were far less
likely to be seriously delinquent than were non-GSE securitized mortgages:
6.2% versus 28.3%. . . . Research indicates only 6% of
high-cost loans—a proxy for subprime loans—had any connection to the law.
Loans made by CRA-regulated lenders in the neighborhoods in which they
were required to lend were half as likely to default as similar loans made
in the same neighborhoods by independent mortgage originators not subject
to the law.
Report concluded that while the GSEs
contributed to the crisis they
were not a primary cause.
Importantly, GSE mortgage securities essentially maintained their value
throughout the crisis and did not contribute to the significant financial
firm losses that were central to the financial crisis. The GSEs
participated in the expansion of subprime and other risky mortgages, but
they followed rather than led Wall Street and other lenders in the rush
for fool’s gold.
The FCIC also found that it
was the independent mortgage securitizers and originators that were the
major source of the problem, not the GSEs.(FCIC
I have been unable to find creditable evidence of any kind that
supports the notion that government housing policy was responsible for the
financial crisis that began in 2007. All of the evidence I have been
able to find points to the fraudulent, reckless, and
irresponsible behavior of our financial institutions and the individuals
within those institutions who made fortunes as a result of the housing
bubble. The reality of the situation is, I believe, best summed up by
. . . [C]onsider the
revisionist history that the federal government caused the Great Recession
, through its alleged meddling in the mortgage markets to advance its
affordable housing policies. This view unfortunately does not explain why
the policies in question predated the crisis by several decades without
precipitating an earlier financial crisis; why real estate markets
collapsed in Ireland, Spain, and other countries as well as the United
States; or why affordable housing policies should be blamed when the vast
bulk of subprime lending, led by new market participants like Countrywide,
took place outside the ambit of regulated entities covered by the
Community Reinvestment Act and the ambit of the government-sponsored
enterprises that guaranteed higher quality mortgages (although those
enterprises did buy some AAA tranches of securitized subprime debt for
their own investment portfolios). Numerous analysts have rebutted the
claim, but it persists, largely because the underlying belief system that
markets can do no wrong—and governments no good—so thoroughly pervades the
thinking of its proponents.