Measures against the crisis

The World economic crisis is being used as an excuse for undertaking packages of measures in the different countries, which in general are setting aside very large amounts of money. In the United States the amount in question is over 700 billion dollars, besides those, similar plans are being discussed in Great Britain (about 500 billion pounds), Germany (approximately 480 billion Euros), France (360 billion Euros), Italy, Ireland. The aim of these packages is to "restore confidence" in the financial markets. The unfavorable developments, however, are skillfully used by the various financial intermediaries (mainly the banks) to obtain chipper resources at the expense of the taxpayer instead of relying to market sources.

When these measures are being prepared a very important question is missed – what are the causes for the crisis? These causes could be found in the policies of the respective central banks and governments, which during the recent years were directed clearly towards money supply expansion. Maintaining lower interest rates (lower than the preferences of the market participants) together with budget deficits led to rapid increase of the money supply. This type of policy was inherent particularly for the central banks and the governments of the largest economic zones – the United States, the Euro zone (Germany, France, Italy and Ireland), Great Britain, Japan, Russia and Australia. As a result the real savings were reduced, while the investments increased, which meant that there was no adequacy between them. In other words, investments were made which were not covered with real savings, but only with additional money issue.

This process could not continue indefinitely, since it contributes significantly to reduction of the value of money, measured in goods and services. Examples for that are the rapid increases in the prices of gold, basic raw materials, fuels. Together with that a rapid growth is observed of the prices of financial assets (bubbles). Since the central banks have a constant objective to maintain relative price stability, measured by a range of indices, at a certain moment they have to increase the basic interest rates.  After a long period of variance between the market preferences and the policy of the central banks this action caused a sobering effect on the markets. It is a signal that the accumulated wrong investments could not be financed any longer, i.e. their artificial maintenance would be terminated. For their redeeming already there is not enough money, since the process of creating new ones is significantly slowed down. This phase must represent the hilling of the economy, since in it the resources must be redirected to projects which actually represent the preferences of the people. Let us remind ourselves that everything up until now was caused by the pumping of money into the economy.

In this situation, however, instead of leaving the markets to return to healthy, normal functioning and to reduce the biases caused by the lack of coverage with goods and services of the money, the governments and the central banks are using the occasion to further increase their intervention and respectively to worsen the situation. Various measures are being used – nationalization of banks, providing guarantees on their liabilities and assets (!!!???), purchasing of assets, etc. The politicians (in the governments and the central banks) have directed their attention to short term results from their actions; they are not interested in the long term results. Besides that they are influenced by the pressure of the banks and the large companies to provide chip resources at the expense of the taxpayers. As a result there is a process of redistribution of wealth with the explanation that the financial sector is the key for the economy as a whole and the bankruptcy of some institutions is impossible, since they are too large, as a market share and significance to the payment system, to be left to go bankrupt. From that however would suffer mainly the managers and the owners and eventually some of the creditors. Saving them however would be with someone else's money through additional money supply, which would lead to additional redistribution of income.

At present in Bulgaria there are several proposals for similar actions – increasing the guarantees on the deposits in the banks to 100 000 BGN, which means that almost all deposits would be guaranteed. This action would increase the probability for unfavorable outcome and a moral risk with respect to the banking system, since the depositors would not be interested in the risk profile of the respective bank. Besides that the banks would not be cautious in their investments, relying that they would be refinanced if necessary. The effect would be reinforced if the inter-bank deposits are guaranteed by the state. In principal they are not guaranteed and the intervention of the state would mean that the entire segment of the market would be radically changed. In addition such guarantee could not be provided free of charge, since it is a direct assistance to the respective banks.

Another nonsense idea is to provide credits by the state to the businesses, directed mainly to the medium and small enterprises.  That means, that on one hand the banks are given assistance, while from the other – they are deprived from business. If assistance is provided to such companies which could not get credit from the banks, which would mean that they are evaluated as non productive on the market and should not be getting financing at all.

Another similar idea is that the interest paid on mortgage loans for physical persons would be deducted from the taxable income, when levying taxes on the personal income. This is an attempt to repeat the scenario of the mortgage crisis in the United States as a Bulgarian variation, since namely the policy of the government with respect to these instruments is one of the reasons for the great boom of credits to high risk persons. Something more – this measure is contrary to the philosophy of the proportional income tax, which excluded such preferences and options for reduction of the payable tax and is based on clarity and maximum simplicity.

The measures which would be suitable, with reference to the crisis, during the following months are:

  • Conservative fiscal policy – do not spend money from the fiscal surplus on projects with unproven effectiveness. In stead part of the surplus could be refunded to the taxpayers according to the amount of taxes paid;
  • Do not increase the salaries in the public sector except at the expense of reduced public spending;
  • Maintain the stability of the currency board, do not conduct  monetary policy in any form and improve the supervision of the financial institutions by consolidating it within the framework of a single independent body;
  • Do not intervene on the inter-bank market by providing guarantees and others alike;
  • Do not save at any cost various businesses, bankruptcy acts disciplinary on the market participants.

The crisis is a suitable opportunity to undertake various unwise actions, which at other times could not be implemented by the politicians. In such situation, it would be necessary for the state, to acknowledge that it is only putting obstacles to the rapid adjustment of the market and to stop the unnecessary interventions.

 


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