Is the recession a failure of capitalism? At least that’s what is claimed so often in these days, especially in the German media, the left-wing media. “The time for reforms of the system has come” words and ideas we hear often these days, or “capitalism is dead!”
Is it a depression or bad recession? Or is it something rather usual, a normal recession like it is supposed to happen like here and then according to the Kenseyan Business Cycle? And is it the fault of capitalism? Can one blame the capitalist for what happened?
First of all, I think it is quite clear, it is a recession a big one. I guess it is even the biggest one since the Great Depression in 1929. This recession will probably last longer than usual ones, at least these are the stands which most economist predict these days. However, in order to determine the fact if it is a failure of capitalism one has to look into the reasons for this recession.
The probable start of this recession was when the housing bubble burst in 2007, at that time housing prices had been increasing steadily over the last decade. At the same time the building rate for new houses had been increasing. Everybody was profiting, which lead to more money being in the market, too much money and banks started lending money to people who couldn’t even afford buying houses. This lead to more houses being build on huge loans. This market was doomed to crash and the burst of the bubble had been expected for years.
So one might ask why did people continue to invest in this market, even though they new it is going to burst. There are several reasons for that, the first reason is that it was difficult to tell when this bubble would burst and there where still a lot of profits made, which you could have missed out. The second reason is that if you have money, it is totally natural that you try to make more out of it. This is human, some like to call it greed, but I don’t think it is greed if you try to get more money if you have the opportunity.
However, the burst of this market did not lead to the recession we are in now. The sad thing was that this market was based on cheap money, too cheap money. Banks started giving out money to people who could never afford buying a house. So suddenly hundreds of thousands could not repay there debts, as the burst of the bubble had lead to an increase in interests and a fall in the worthiness of the houses. Therefore people where sitting in homes which were less worth than they had been, but still had to pay back to the banks. These banks now faced the dilema of trying to get back there money which resulted in many houseforeclosers and mistrusts in banks.
The banks when lending the money for homes, had sold their risks to investors. I think here lies the key. These investors had then sold the risks in different packages to other investors and soon an uncromprehensive industry was created which just lost control about the risks they were selling.
Today the governments try to increase spending of consumers by lowering interrest rates. However banks are still afraid of lending out money and the governments are not able to really get their money to the people, therefore the spending power has not been incresing and brought down the situation.
Now is this a failure of capitalism? I would say NO. The whole economy has been brought into this recession by the wrong doing of the finance sector, the rest of the economy was still well functioning. The finance sector, sold risks, and banks sold these risks again and other people sold them again. These risks were always mixed up in different packages, and so most of the people, including the government, lost control and oversight of these papers. They had no idea of what they were actually dealing with and the real risks they possesed. When the housingmarket then crashed it came to light what they actually posessed, but it was too late. The stone got roling.
Now, this is a human error, which has nothing to do with capitalism, the banks and investers symplie did not understand what they were actually possessing and investing in. They did not understand one can not illiminate risks by selling them again and again.
The trade itself, the trade with risks, is not wrong at all. The insurance industry has been doing that for over 100 years and it proved to a functioning industry. However, they always now what they are possesing and are able to understand their risks. Unlike the investors in this crisis, who lost their money on these packages.
Therefore, I would say this recession is no failure of capitalism.
