By Anthony Shea.
Pascal Salin's thesis about the 2007 crisis will, one suspects, go against conventional wisdom. For him, this crisis is not the failure of capitalism, but that of Keynesianism and misguided interventionism by states and central banks. It was the lack of freedom - not the abuse of it - that provoked the crisis.
More precisely, two factors are at the origin of it: monetary policy and fiscal and fiscal policy. These factors are still at work twelve years after the 2007 embolism, so Pascal Salin's book, published in 2010, has not lost its relevance.
The monetary illusion
The criticism of P. Salin is fundamental, it concerns the very principle of monetary creation and the role of central banks. It applies it to the period before the crisis, or more precisely to the gestation period of this crisis. US monetary policy bears a heavy responsibility. In particular, to counter the growing inequalities in the United States, the Bush administration has encouraged the distribution of housing loans to low-income households, who should have known they could never repay . That's what, more than the bankers' spirit of profit, created the bubble whose break-up caused the 2007 disaster.
This episode is characterized by the distribution of fake rights over economic resources in the form of credit. Contrary to the Keynesian logic of increasing global demand by the budget deficit and the action on credit, Salin argues that monetary creation only leads to the distortion of production structures. This is the criticism of the Austrian School, led by Mises and Hayek, to which the author refers expressly.
This means that the excessive creation of money keeps interest rates too low in relation to the state of the economy. Savers become discouraged, seeing the low pay they are offered, and tend to consume more.
Companies take advantage of these low rates, and thus low discount rates, to launch long-term, deferred-profit projects. Practically, this means that the heavy and slow investment sectors invest (by borrowing) disproportionately. P. Salin takes examples of the building, or the car industry. From this excess of investment come surpluses of the supply and thus of the risks of crisis.
So we see that a double problem arises:
- the insufficiency of savings creates a scarcity of capital that could be invested in equity, and mortgages growth in the medium term;
- the excessively low level of rates does not stimulate production, but distorts it by unduly increasing the importance of certain sectors.
One could object to the above that support for consumption is in itself positive, but this is only temporary. And besides the consumption is perverse, it is translated, in France, by a deficit of the commercial balance (because we consume too much compared to what we are able to produce), synonymous with loss of added value in favor of the suppliers foreigners. We know that an economy in which we invest too little or badly is doomed to decline. By distributing unsecured credit through a corresponding production, the illusion of saving is created, while assignats are printed.
Twelve years after the 2007 crisis, the inefficiency of money creation is obvious, at least in Europe and unfortunately in France in particular. In spite of the massive interventions of the ECB, the growth of the production remains weak and in France the public deficit is abyssal. By intervening massively on the markets since the crisis, the central bank may have made it possible to extinguish fires, but at what cost?
The ostrich policy
Low interest rates exert a pernicious influence on public finances. They allow states to borrow too easily. This is illustrated by the success of the French debt, which is sold in large quantities at rates which only slightly outweigh those paid by the more virtuous countries. It's the temptation of ease.
Since creditors are caring, why not continue to spend more than you earn? Good people know that in general it ends badly, but nobody listens to them. We continue to live chugging, instead of making reforms.
But our objector of a moment ago comes back to the charge: at least, by distributing public money, we support the economic situation. This is true, but only consumption is supported and there is no prospect of growth that would have allowed at least the beginning of a recovery of fiscal resources. As economist Robert Murphy, quoted by Pascal Salin, puts it, the idea that production responds immediately to demand ignores the existence of capital, that is to say the accumulation of savings. It is not the demand that is too weak, it is the offer! Non-growth drags on, social unrest worsens and public financing needs are not reduced.
The good borrowing conditions could have allowed a little more ambition. Some steps have been taken, which go in the right direction, that of the reduction of taxation on savings, but it would be very premature to rejoice. By taxing savings less, we encourage those who can afford to save. But they are too few: the weight of tax levies is such that it largely dries the flow of income that could have gone to savings. And it is now a question of backtracking by re-taxing the rich! In our era of signals, here is one announcing the collapse.
Debt on the arms
France's debt continues to grow. The practice of the budget deficit is, we know, unfortunately very old. The 2007 crisis only aggravated the situation. The so-called austerity policies carried out in Europe in the following years have been convincing only in countries that have been able to reduce their spending.
Austerity that is poorly understood, such as in France, means that the tax burden is increased, thus drying up growth-saving savings, so as not to reduce public expenditure and thus avoid, with the success that we know now, to bring people down the street. We condemn ourselves to failure.
The debt results from poor budgetary choices, but also, indirectly from the monetary policy that keeps the country in the mediocre ease. The rates would be higher, it would take the bull by the horns, but it would be the worst of times, one where the burden of debt would increase perhaps unbearably. In the end the reality is revenge.