Sunday

13th Oct 2019

Opinion

The world needs free financial markets

  • After the bail-outs, there have to be pull-outs (Photo: EUobserver)

The G20 meeting ended having reached in reasonable conclusions. Of particular importance was the conclusion not to raise any barriers to trade.

The financial crisis has shaken the global economy and policy makers have had to focus on short-term crisis management. As time passes, however, it becomes increasingly important, to analyse the long-term picture.

Read and decide

Join EUobserver today

Support quality EU news

Get instant access to all articles — and 18 year's of archives. 30 days free trial.

... or join as a group

Many have argued that this is a crisis of the free market economy, with many arguing that the liberalisation moves of the last 25 years be rolled back and that governments become more interventionist.

Indeed, sales of books by Karl Marx are said to be up by several hundred per cent in Europe - one of the few items that increasing in sales these days - and governments are taking over one financial institution after another.

But this is not a crisis of the free market. Neither is it reason enough to reverse reforms that have increased economic freedom in recent years.

First of all, there will always be economic downturns. But tough as they may be as they happen, they are a small price to pay for the long-term prosperity increases. In western Europe, average real GDP per person is at least 14 times higher than it was in 1820.

In fact, the last 25 years of increased economic freedom have also been a golden age globally, especially the last decade. Global growth rates have never been as high – or reduction in extreme poverty as rapid. Freer financial markets were essential in this development.

Second, the crisis was to a large extent created by government, not markets. The US government used both monetary and fiscal policy to create the housing bubble. And what was created by government intervention, surely, may not be solved by more of it.

The US government's role

Free markets are characterised by creative destruction: Old products, companies and jobs are replaced by new and better ones. Without government intervention in the US financial markets, the decline would have been more limited and the market actors borne the loss.

How did the US government create the core of the crisis? First it did so when the US Federal Reserve lowered its interest rate to one percent between 2001 and 2003, fuelling the housing bubble. Second, it did so through various interventions in the mortgage market.

The Community Reinvestment Act fuelled bad risks in the credit market. Public authorities evaluate the number of branch offices of banks in low-income areas and how many loans are granted there. If these are considered to be too few, banks run the risk of being sanctioned, via fines for instance.

Then we have the Federal National Mortgage Association and Federal Home Loan Mortgage Corporation - Fannie Mae and Freddie Mac - two financial institutions founded by the US government subsequently sold to private owners but still receiving subsidies and agencies for politicians.

Governments should not be players

In short, sympathetic political aims of increasing home ownership among low-income households and minorities led to massive lending to people who could not pay: All in all $1300 billion in 2007.

As the downturn came, people could not pay, which everyone knew from the start. And then markets re-packaged the loans, which resulted in many more financial institutions were involved in bad credits.

So markets had a role. But if there had not been a great amount of government-created loans to re-package, the problem would have been smaller. The US government took a huge risk with all the tax-payer's money. Possibly a greater risk than any private player in the market would have taken.

There are definitely those in the financial markets who have made the wrong decisions. But the crisis would not have been of such magnitude had the government not played its main role. For all those now asking for more government, that is worth remembering.

Governments had to jump in with bail-outs to solve an emergency that they had partly created, but after the bail-outs, there have to be pull-outs. There is a need for sound and transparent regulation, but governments should set the rules, not be players. And tax-payers must get their money back.

What is wrong with foreign owners?

We urgently need to resist pressure for governments to stay involved in the financial sector – and even more important, to resist protectionist tendencies. The disasters of the 1930s were to a large extent produced by that kind of reaction to the crisis.

The proposal by French President Nicolas Sarkozy to create European Wealth Funds is just such a protectionist measure. What is wrong with foreign owners? Why should European countries compete in socialising their own companies? In the light of the role of Chinese wealth funds in fuelling the US bubble, surely that is another government intervention we could do without.

Governments need to keep focussed on necessary long term free-market reforms, not only crisis management. And they need to resist pressures to subsidise every industry – from shipyards to car makers – now that the financial sector gets a bailout. The financial sector is the heart of the economy, which makes it a special case.

If we subsidise every industry, deficits will soar and old jobs and products will remain – for a while. But we need to maintain change and progress in the economy. And that can only come from a free-market economy.

The author is a research director with the European Enterprise Institute, a pro-free-market think-tank, and co-author of the new policy paper The Financial Crisis – a Gigantic Politics Failure (EEI)

Disclaimer

The views expressed in this opinion piece are the author's, not those of EUobserver.

Let girls own the future

While our politics is dominated by old and bullying alpha males and the negativity they have injected into our times, there is at least one day of hope - and it is through unleashing the power of young girls.

Column

Habsburg lessons for Europe's foreign policy

The EU is facing similar challenges. Like the Habsburgs, it must work out ways to navigate an increasingly messy geo-political map and stand firm without the advantage of military predominance.

Are commissioner grillings going too far?

In these commissioner hearings politics and the law are very close to one another. The temptation to use legal rules and procedures for political ends is real and present.

Passing the baton: will Borrell buck the anti-rights trend?

As Josep Borrell faces questions from MEPs, a report from Amnesty International finds the EU's commitment to protect and support human rights defenders in its foreign policy is not consistently upheld - not between nor even within countries.

News in Brief

  1. Italy: EU cannot accept Turkish 'blackmail'
  2. Is a Brexit deal still possible?
  3. EU and UK to 'intensify' Brexit talks
  4. Norway hit by train strike over EU regulations
  5. Macron says he warned von der Leyen on Goulard
  6. France: EU will retaliate in aviation state aid battle
  7. EU considers new rules and agency against dirty money
  8. France against accession talks for North Macedonia, Albania

Defending the defenders: ombudsmen need support

Ombudsmen are often coming under attack or facing different kinds of challenges. These can include threats, legal action, reprisals, budget cuts or a limitation of their mandate.

Column

The benefits of being unpopular

Paradoxically, the lack of popularity may be part of the strength of the European project. Citizens may not be super-enthusiastic about the EU, but when emotions run too high in politics, hotheads may take over.

Stakeholders' Highlights

  1. Nordic Council of MinistersBrussels welcomes Nordic culture
  2. UNESDAUNESDA appoints Nicholas Hodac as Director General
  3. UNESDASoft drinks industry co-signs Circular Plastics Alliance Declaration
  4. FEANIEngineers Europe Advisory Group: Building the engineers of the future
  5. Nordic Council of MinistersNew programme studies infectious diseases and antibiotic resistance
  6. UNESDAUNESDA reduces added sugars 11.9% between 2015-2017
  7. International Partnership for Human RightsEU-Uzbekistan Human Rights Dialogue: EU to raise key fundamental rights issues
  8. Nordic Council of MinistersNo evidence that social media are harmful to young people
  9. Nordic Council of MinistersCanada to host the joint Nordic cultural initiative 2021
  10. Vote for the EU Sutainable Energy AwardsCast your vote for your favourite EUSEW Award finalist. You choose the winner of 2019 Citizen’s Award.
  11. Nordic Council of MinistersEducation gets refugees into work
  12. Counter BalanceSign the petition to help reform the EU’s Bank

Stakeholders' Highlights

  1. UNICEFChild rights organisations encourage candidates for EU elections to become Child Rights Champions
  2. UNESDAUNESDA Outlines 2019-2024 Aspirations: Sustainability, Responsibility, Competitiveness
  3. Counter BalanceRecord citizens’ input to EU bank’s consultation calls on EIB to abandon fossil fuels
  4. International Partnership for Human RightsAnnual EU-Turkmenistan Human Rights Dialogue takes place in Ashgabat
  5. Nordic Council of MinistersNew campaign: spot, capture and share Traces of North
  6. Nordic Council of MinistersLeading Nordic candidates go head-to-head in EU election debate
  7. Nordic Council of MinistersNew Secretary General: Nordic co-operation must benefit everybody
  8. Platform for Peace and JusticeMEP Kati Piri: “Our red line on Turkey has been crossed”
  9. UNICEF2018 deadliest year yet for children in Syria as war enters 9th year
  10. Nordic Council of MinistersNordic commitment to driving global gender equality
  11. International Partnership for Human RightsMeet your defender: Rasul Jafarov leading human rights defender from Azerbaijan
  12. UNICEFUNICEF Hosts MEPs in Jordan Ahead of Brussels Conference on the Future of Syria

Join EUobserver

Support quality EU news

Join us