This triggers both massive defaults on loans in the financial sector and a sharp reduction of revenues in the real economy. This is the crisis we have seen – it is purely ECONOMIC. The lending initially applied to counter falling consumption only postponed the day of reckoning. The downward long-term consumption trend has been shrinking profits in the real economy against the backdrop of easy profits from financial speculations thus channeling capital from production to speculation. Financial speculations were now believed to be an essential part of economic activity. Companies previously specializing in manufacturing alone would start receiving a major portion of their profits from speculative transactions. This financial overindulgence has been inflating various bubbles and exacerbating the ultimate performance of the entire economy. The FINANCIAL aspect of this crisis is thereby an effect, not the cause.
I came across numerous comments from various American and Russian economists, who are increasingly becoming convinced that assisting the banking sector in order to boost lending (while consumers remain highly indebted and unable to spend more) will have no effect. It is like treating cancer with a band-aid. The effectiveness of financial measures (if those are still engaged in) will be shrinking as time goes by simply because the main cause of the crisis will still remain unaddressed and continue to grow in its influence over the situation. The ability of stimulus programs to treat the cause rather than the symptoms of the current crisis has been called into question by many including TARP overseer Neil Barofsky who, in his report, warned Congress of increased risks for more financial complications to come our way.