Governments and business circles throughout the world have pinned their highest hopes for an economic recovery to various bailout programs. The one that has become the talk of the town is the US government’s $700 billion Troubled Asset Relief Program (TARP). In his quarterly report to Congress in late January 2010, Neil Barofsky, the TARP inspector general, unleashed a harsh criticism of the program and stated publicly what few politicians are apparently ready to admit these days – the bail-out is not working .
He mentioned that while the too-big-to-fail financial institutions are growing even bigger paying lavish bonuses to their executives, their incentives for risk-taking are also growing. Impudent expectations of more governmental bail-outs have eclipsed any common sense in boardrooms. Barofsky confirmed that since no “meaningful reform” of the financial sector has been implemented, it is still business as usual for Wall Street. He also pointed out greater interconnectivity between major financial institutions, which only speaks of coming full circle to the pre-crisis financial conditions.
His most sobering comment concerned the increased risks of another crisis as a result of governmental bail-outs. The fundamental problems that led to the current conditions in the first place have never been addressed and are even aggravated by the excessive liquidity that has settled down in various banks. The economy has not seen any significant increase in lending. It was initially believed that the sanation of banks would allow bail-out funds to trickle down to businesses and consumers and thus kick-start the economy. As “lending continues to decrease”, the situation with neither unemployment nor foreclosures have seen any noticeable improvement. Even though some points have been mentioned as positive results, Neil Barofsky believes that there is nothing that heads off another financial crisis.
Modern economists, lost in their mathematical equations, have failed to see the economic reality of capitalism, which is all about supply exceeding demand. This excess is the cause of globalization and the primary reason for the global crisis. The financialization of economic processes and the credit-generated boosting of demand have not solved the main fundamental problems that haunt capitalism once opportunities for expansion become somewhat limited. Living on credit, whoever dazzling and head-spinning that might have seemed, had to come to an end when household debts exceeded households’ disposable income. This prevented them from paying off their current debts or taking new loans to refinance what they could not pay. And this is the situation we are in now.
For several decades, the globalizing economy was boosted artificially by means of credit causing consumer to spend beyond their ability to consume. More and more capital was invested in hopes to see greater returns as a result of increased consumption. When the shopping spree was over, the existing overcapacity of the entire world economy (previously focused on large consumption markets like the US) could no longer find any outlets for their capital and thus put the future of many transnational corporations and banks at risk. The gigantic transnational economy was hanging by a thread.
The decision to save the system at any cost is in fact natural. Massive freshly-printed bailout funds were injected into the economy in foolish hopes that the mere presence of worthless money in banks would be sufficient to calm the panic down and restart the lending and thus the spending. The panic was in fact calmed downed, but no significant increase in lending is anywhere in sight.
The economic logic can tell us pretty clearly why that is still the case – banks are rightfully concerned that lower consumption will increase their risk of losing their money since companies are more probable to have realization problems. In these conditions, no mater how much money is given to banks, you cannot make them lend even at a gunpoint.
So the only conclusion that comes to mind is that the bail-out is a desperate attempt to prevent a catastrophic systemic collapse, but Mr. Barofsky himself said in his report: “Whether these goals [meaning curbing foreclosures and boosting lending] can effectively be met through existing TARP programs is very much an open question at this time.”  As more and more artificial liquidity is poured into the system, the less financially stable it becomes as the financial and real sectors continue to draw apart even further. This will generate a false impression that more stimulus is required, but over time it will require more, and more, and more. TARP is turning into a TRAP.
To those familiar with political economy (Marxian economics as I tend to call it even though it is a rather clumsy term), the options are clear – either pushing solvent demand up, which is now difficult for reasons specified above, or bringing supply down to more sustainable levels. I think there is no need to explain which direction elites are likely to try out. This brings about the same old expansionary question. When domestic markets are no longer solvent to buy, capital owners look abroad for new “victims”. I believe the recent tough talking by President Obama concerning China is in line with this logic. China is the largest market ever in terms of the number of consumers, but low wages prevent to this country from becoming the largest consumer. This statement of his seems a little bit too bold to me, even arrogant: “Our future is going to be tied up with our ability to sell products all around the world, and China is going to be one of our biggest markets” . This statement speaks for itself. If something like this has been said out loud and quoted by all news agencies, then there is no hope left to boost domestic US markets in the new future if at all. They are likely to go through hard times and no-one know how long it is going to last. The entire global economic model that fed corporations for several decades is now gone, and maybe it is gone for good. The leaders of the world are convinced of the necessity to seek after new markets, and China seems like the first candidate.
But it must be remembered that deliberate efforts to boost spending by raising wages will automatically raise all other costs within the country thus making it less competitive on the global market. Consumer lending is also tough since most Chinese household are poor. The obvious solution would be to divide the society into two major groups within the same economy – consumers (more affluent, educated, and living mainly in urban areas) and workers (poor, somewhat educated, possessing some skills but almost no opportunities in life, residing in the countryside) basically destined to work for the more affluent.
Thus, we have identified two ways (namely, further economic expansion or consumption stimulation) to address the current economic problem. They are likely to find their way into modern politics in some form, but we all should realize that these are only temporary solutions. Both are effective until additional economic resources are tapped into – those might include new markets, new consumers, new willingness to borrow, etc. Once those are depleted over time, the same problems are going to be back again. In fact, if those resources are not available now for whatever reason, there will be no other choice for the ruling elite to push for certain geopolitical and even military initiatives worldwide in order. This makes the world we are living in a very unstable and unpredictable place, and we are those who have been rocking this boat all along.
Financial stimulus packages will have to be withdrawn sooner or later. Some will end up being more effective than others, but they all have something in common – they fail to address the very core of the problem. I tend to think they were never designed to do that in the first place – they were to boost economic activity without changing the system in order to preserve the positions of those who benefit from it now. And the more I analyze the issue, the more convinced I become that this systemic crisis will initiate unexpected changes in the way we see the world and act in it. And it is the very economic system of ours that requires changing. Our economic paradigm is outdated and has not been conforming to reality for a long time. And until it is changed, today's TARP turning into a TRAP is not going to be the last one.
Boris L. Anisimov