If governments in these countries had simply allowed many of the banks to fail, while protecting retail deposits, the capitalist solution would have worked out perfectly well:
1. Balance sheets of banks would have shrunk;
2. Borrowers would have been forced to cut their debts;
3. Worldwide deflation;
4. Unprofitable and overleveraged companies would have been closed down;
5. Economies would have contracted to the point where (some) capacity became profitable again;
6. Higher returns from such activity would have prompted new investments from surviving capitalists;
7. Economies would have resumed profitable growth, albeit in the lower trajectory.


Instead, we are left with the Keynesian nonsense of:
1. Government debt has ballooned to the point of no return across G-8;
2. Banks continue to have significantly overextended balance sheets;
3. Loan losses are being suppressed by irresponsible lending and vast quantities of money floating around;
4. Investors have resumed random gambling - also known as the stock market;
5. All this activity has created enough noise to warrant calls for a new global economic recovery.

The point isn't so much that the above situation isn't sustainable - even a 10-year-old can figure that out - but that a failure from this stage will not resurrect the capitalist spirit. Rather, we should expect people to wail for more government aid, higher allocations to certain industries and jobs and so on. (We are all Japanese now, Asia Times Online, September 5, 2009).

... A new report from the International Monetary Fund shows that the kind of recession we've had ... often leads to long-term damage to a country's growth prospects ... The same report, however, suggests that this isn't inevitable: "We find that a stronger short-term fiscal policy response" - by which they mean a temporary increase in government spending - "is significantly associated with smaller medium-term output losses".

So we should be doing much more than we are to promote economic recovery, not just because it would reduce our current pain, but also because it would improve our long-run prospects. But can we afford to do more ... yes, we can. ... You see, spending money now means a stronger economy, both in the short run and in the long run. And a stronger economy means more revenues, which offset a large fraction of the upfront cost ...

... Not being complete imbeciles, the UK government also recognizes that its actions will cause a significant financial hardship. Additional borrowing that doubles last year's total will fill this gaping hole of 220 billion pounds sterling in this year's budget. Mind you, this from a country that has already had the ignominy of a failed auction; and perhaps a whole lot more to come its way once the rating downgrades are baked into the cake.

How does it choose to counter the costs of bailing out: does it suggest a means of wiping out government waste (if you will pardon the tautology) or does it plan to provide greater incentives for savings? Neither, as it turns out: the government's magic bullet is to actually increase the top tax rate in the country from 40% to 50%, in a move designed to raise a further 6 billion pounds in taxes (a piffling 3% of the government deficit).

So let me get this right. You are the finance minister of a country where the number of people making a decent disposable income, say over US$100,000 per year, has sharply declined over the past year. You have already spent hundreds of billions on bailing out your sick banks and even sicker industrial companies. Now, facing a deep recession, you choose to actually further reduce the disposable income of your most productive citizens in order to drive home a political point?

To paraphrase Churchill, the UK economy is now a disaster, wrapped in a catastrophe inside a calamity. And someone just flushed the key down the proverbial." (see G-8's first bankruptcy, Asia Times Online, April 25, 2009).