Victory Over the Liberals

The European Central Bank will now place an unlimited amount of money at the disposal of struggling member states. However, this artificial money supply will not deliver the solution to economic problems it promises.

As an older colleague used to say, in life, being right is little more than a consolation prize. At a conference in Prague in early September, the Slovakian economist Ján Oravec claimed, "Never have we liberals been more right with our criticism than we are today. And we have never been as hated for it either." There’s something to this. Just a day later, the European Central Bank (ECB) broke the final taboo to print unlimited amounts of money, to save indebted welfare states from bankruptcy.

It is the small word "unlimited" that makes the big difference. The representatives and financiers of countries in crisis know this. They were jubilant over the ECB’s decision, much like the economists who had fervently explained how, regardless of the current situation, the "more egalitarian" path to economic prosperity is paved with debt-financed government spending.

 

Coup d’Etat at the Central Bank 

The only authority that was heeded by the free-spending governments was that of rising interest rates. The more creditors feared that they would not get their money back, the greater the risk premium – and thus, the greater the pressure on governments to put the brakes on expenditure. As of now, the last safeguard of financial stability has been removed and governments have free reign. This final victory over the "free market fanatics", was celebrated with euphoric stock market gains.

Meanwhile, the "Fed", the Bank of England, the Bank of Japan and the ECB as major issuing banks are providing unlimited money to their respective governments. How could the political insignificance of the liberals be any more explicit? After all, for almost 100 years, their predecessors have described in vivid detail why firing up the printing press to solve budgetary problems is not a brilliant idea.

An artificial expansion of the money supply does not bring the solution it promises. Rather, it is their cause. During the credit boom of the 1920s, Ludwig von Mises had already predicted the stock market crash. When lots of cheap money is made available, consumers are inclined to spend it, rather than having inflation devour it in their savings accounts. At the same time, businessmen are tempted into bogus investments. Money flows into projects that under normal circumstances would not be realised, because they could not afford the high capital costs. This all leads to bubbles, which sooner or later would burst, as Mises predicted.

This didn’t stop the Clinton Administration from legislating that banks must provide penniless citizens with mortgages. This delighted new homeowners, the construction industry and estate agents, who benefitted even further, when after 9/11, with the help of George W. Bush, the U.S. Federal Reserve lowered interest rates in order to prevent a slump in economic activity.

As a result, the booming housing market heated up even further leading to ever higher prices and more credit for homeowners to spend the money that banks were throwing at them. But then suddenly customers pulled the plug. As demand abated, prices collapsed, and the collateral of the homeowners dissolved into thin air. The debt, however, did not.

 

Evil Capitalism! 

Yet, the blame is not going to the big-spending governments and their well-intentioned interventions in market activity. Instead, it was the banks and their irresponsible "capitalism" that made it all possible, a system that has guided millions of people out of poverty, but in Western strongholds of prosperity is ranked among the greatest of all evils. Why?

"Because the Liberals have lost the most important battle: the one about images and concepts" said Oravec. The term capitalism is discussed only as "casino capitalism" or "financial capitalism". Even reputable publications like the Financial Times report light-heartedly on the doomed fate of those who believe in the market. As if markets made up a religion, whose existence must first be proven.

The Liberals have lost the ability to win over the people. While their opponents promise "unlimited" money for "social justice", the representatives of freedom can offer only blood, sweat and tears. Two hundred years ago, they persuaded people they needed no emperor or prince to guide them through life. Today, they explain in vain that ministers, provincial governors and bureaucrats are those who show them the way – whereby the Liberals could at least hope for a consolation prize.

 

 

Business journalist Franz Schellhorn is a graduate of the Vienna University of Economics and Business. He has been editor of Die Presse since 1997 and deputy editor-in-chief since 2011.

Translated by Kate Abnett from the Sept. 8, 2012 edition of Die Presse.