The austerity breakdown

One more proof that some have decided to ride the horse backwards and fast: Spanish economist Juan Ramon Rallo recently said that “liberalism and austerity have not failed because no one has implemented them yet, not in most of Europe nor in the US.”

This must sound uncomfortably familiar to those buried in communist nostalgia who since the fall and dissolution of the old Soviet Union repeat to the faithful that true communism has not failed because there hasn’t been yet a true communist state. In both cases, the weak argument crashes against a wall of evidence.

The housing bubble was caused by the excessive liberalisation of the banking industry, which was allowed to stretch its resources to a breaking point by introducing financial innovations focused only in making up tools to throw the ball of risk at each other, until systemic risks were so hard to spot that nominal value of assets rose free within entities, once lost any sense of reality. The wealth reserves that apparently sustained the cycle of lending and securing loans were hot air, and the mortgage sector relied on it to boom… and burst.

My choice of the best description of what happened would be “The housing bubble and the financial crisis” by Dean Baker. Baker, and many others, explains how the main reason for our current crisis was the excess of freedom that banks enjoyed, particularly in opposition to the situation since the post-war days to the 1980s, when a basic but effective regulation kept banks safe.

If we agree that we want to stop credit crunchs and the like from occurring, we must accept what empirical evidence tells us. The rest is hot air, and following again streams of smoke leads to disaster: it is a grave mistake to stubbornly defend the application of the same strict rules whether the economy is growing or in recession, and social unrest and missed fiscal targets are testament to how wrong the current European policies are.

Keynesians, Friedmanians and others may still have a chance to show us what they have, but this utopian liberalism incapable of amending its narrow view of the human being has indeed failed. There is no such thing as noble competition between producers who never tempt the political power to gain advantage and care just for the long term of their businesses. And bankers are the least to conform to such picture.

Moreover, Ronald Reagan’s deregulation had the opposite effect: a bank, in order to survive, had to heavily speculate with prices of houses and mortgages to make short-term profits because a long-term strategy would turn it into a vulnerable victim of its competitors.

Let’s admit this: what a doctrine says matters much less than its consequences in history. Economics is a science that needs checks against the reality. No buts, no ifs, and certainly no ‘this is not the true it’ excuses.