October 17, 2008

Time to face the truth of global financial markets

World share markets are trending downwards. Governments in democracies are desperately trying to hold back the tide of recession by throwing ever- increasing amounts of taxpayers’ money at banks and financial institutions without lasting success. In open competitive markets some businesses rise and others fall – they don’t all rise and rise or rise and plateau.

The sooner shady financial practices based on greedy manipulation of financial products is cleaned out of the financial system – the better. Covering the patient with billions or trillions of band aids will not deal with the underlying problem. The fact is that too many people borrowed too much money and then couldn't afford the repayments when circumstances changed. The banks and finance companies that shovelled out so much debt share the responsibility. Recovering from this will take a while. Yes it will be painful – and not just for the money traders but also for the ordinary wage worker and homeowner battling rising prices for groceries, rates and clothing. As we discovered in the 1970s and 1980s government’s cannot control everything – especially not technological changes, migration patterns or cross-border capital flows. They should not pretend they can. At the same token there is no need for despair. Economic cycles include periods of growth and periods of contraction. This phase will pass.

The wisest thing households and businesses can do right now is to adopt some old-fashioned advice and cut spending on unnecessary items, reduce debt, and look for new household income opportunities. Governments at local and central levels might usefully adopt the same advice.

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