For more than three years now, the West has been in crisis. Faced with this, the political agents, agreeing rather little on the means, put in place different strategies to face it. Reform of the financial system, economic recovery, and now widespread rigor. Much praise and criticism from each party, however few objective findings.
The regulation of the financial system.
Finance, always placed on the dock since the situation becomes unstable. Thus, the anti-financial crisis measure of the twenty-first century was, of course, the limitation of bonuses for market operators. Supported by unites by the European states, Brussels voted in 2010 a law to regulate the often extravagant remuneration of traders. Quite generally, the premiums will be much less liquid than before, 50% of the bonus will be allocated in a conditional manner likely to be repatriated in case of banking difficulties. The idea being that in case of crisis, the trader will have to pay before the customer. Once again, a moral measure that fits poorly in the context of a highly globalized market finance.
The first negative consequence remains the loss of competitiveness of financial institutions vis-a-vis their American or Asian counterparts. The reason is none other than the high elasticity experienced by the job market in the field of high finance. Another reaction, instead of reducing only the bonuses, the banks made up for the loss of this one, by an increase of the fixed salary. As a result, wages become much more rigid and can hinder the high flexibility of employment in the sector. In short, a very demagogic measure especially … instead of reducing only the bonuses, the banks compensated for the loss of the latter, by a rise in the fixed salary. As a result, wages become much more rigid and can hinder the high flexibility of employment in the sector. In short, a very demagogic measure especially … instead of reducing only the bonuses, the banks compensated for the loss of the latter, by a rise in the fixed salary. As a result, wages become much more rigid and can hinder the high flexibility of employment in the sector. In short, a very demagogic measure especially …
Another measure, much more punctual, nevertheless not necessarily more effective so far, was to prevent the short sale on Cac40 banking stocks. In absolute terms, the idea may seem interesting, however, in practice, it turns out to be completely inept. Several times, recently, or during the 2008 crisis, the banking sector has been clearly jostled by speculative movements. Faced with this, many countries are choosing to prohibit short selling (a technique to realize capital gains on the loss of value of a security). Thus, no one could voluntarily engage or speculative purpose these titles in the turmoil.
The problem lies in the fact that in finance there are more ways to achieve one’s ends than recipes for preparing a foie gras. Indeed, let’s say that despite the ban, we wanted to short all the banking stocks, it would be enough to find a product reproducing the evolution of the Cac40 (CFD for example), to enter long on it, and also to short all the values that compose it apart from banking stocks. Thus we would benefit our positions from the difference corresponding to the evolution of banking securities, of course, this is only an example and many other methods can be used.
As regards the possible tax on financial transactions recently proposed jointly by Germany and France. We have already talked about it recently, but the measure is still more absurd than the two previous ones. As financial products are perfectly substitutable goods, the markets that supply them are completely competitive. In this sense, penalizing transactions on a market, all players will have other desires than to leave it to look elsewhere. Generating a tax on Euronext and on the secondary market will only have the effect of sharply reducing trade.
The method of printing money
We are of course talking here about the monetary strategy put in place by Ben Bernanke in recent years. Quite modernly, we call this “Quantitative easing”, translate as “quantitative easing”. Some time ago, we would have talked about printing money. It is a weapon that we could call the last resort.
Before applying this technique, the central bank begins by lowering its key rate. Given that borrowing and savings rates are indexed on them, normally a fall in this rate should encourage credit, further disadvantage savings and consequently encourage consumption and investment. The Federal Reserve has applied this well, currently, the rate is between 0 and 0.25%. The limit of this method is simply that we can not lower the rate below 0. From there, it is possible that the maintenance of the lowest rate is not enough. Despite this, US growth could not take off, so the Fed decided in 2008 to launch QE1, a massive buyout of bankrupt assets of banks to the tune of 1400 billion dollars. In addition,
The result is considered bad by many economists, however, we are not able to know the hypothetical situation in which the Fed would have done nothing (maybe the US would have known much more trouble to generate growth in which case). It is, therefore, necessary to qualify the opinions, strangely it is customary to blame the directors of current central banks, yet the only responsible for the crisis remains Alan Greenspan (successor to Ben Bernanke). What is certain is that QE1 and QE2 have helped maintain strong liquidity in the economy and thus avoid a deflationary cycle (which they experienced in 29). However, the blade is double-edged, monetary creation inevitably causes an increase in inflation that could be paid in the future.
The big loan
Good solution 80 years ago, worse for this decade. At one point, our current president has obviously felt invested by Franklin Delano Roosevelt, though with perhaps less lucidity. Feel it in a rigorous mood these days, it has not always been. A big loan, a kind of new deal in the French, as if the weight of the debt was not enough, we add … The Keynesian plans, it is effective, but only when the State is in the ability to finance them. This loan will have cost a total of 35 billion euros, while today the state seeks to pick a dozen to reduce its deficit. The French government is sailing in the fog …
And the rigor …
This is a word we would not have known if Western governments had seriously steered their respective countries in recent years. This may be the best indicator of seriousness in politics. We have already spoken, but the rigor, as we know it, seriously affects growth. On the one hand, the state hopes to generate 0.3% annual growth with its large loan and another it does not give the impact on the growth of its phase of rigor. The moral idea (maybe even demagogic) of taxing tobacco, alcohol and sugary drinks is very good but in terms of consumption (and therefore growth), it is very bad.
The rigor, evident today, it should have been yesterday, what is a policy if it is not rigorously conducted. This is a quality, the politics of the cicada only pay when the winter is not too rough. Now, the states are of course in deadlock and therefore in the obligation to sacrifice a share of growth to ensure their signature.
In conclusion, as you can see, it seems to me that few measures have been effective during this crisis. Maybe the worst is yet to come, however, governments are already struggling to cope with storms, what will they do in the storm?