The financial crisis has led to a raft of measures by governments across the world. Most are correct but insufficient.
These are the two questions to be asked after the battery of measures we have taken to mitigate the financial crisis over the last few days. The purchase of toxic assets, the reduction of intervention interest rates to create money, the increase in the amount of deposits guaranteed by the Guarantee Fund, the direct intervention of the state in banks, assuming their commitments, the injection of liquidity by purchasing healthy assets, the injection of equity in banks with state holdings in their capital, the award of guarantees to banks so that they can fulfil their function of giving credits to families and enterprises to protect the real economy from asphyxiation, the ECBâ??s increase of the number of banks that can access direct finance due to the fact that the interbank market is not working…
The spectacle being written by economic history and which we are witnessing first-hand has astounded the global economic environment and created panic in a good number of individuals who have watched their real and financial wealth diminish, together with expectations for future income from their pensions.
What more can we do? In my classes I tell my students that we live in a world similar to a baroque altar. It is laden with decoration and components, but we canÂ´t see what holds everything up. We are incapable of differentiating the structure from the surface; we only perceive the visual impact, the grandiosity of it all. I think that if we look for the essence, we encounter two problems: the value of financial assets has fallen because they were overvalued and the financial system is no longer financing the real sector of the economy due to the danger of recession it involves. In the first case, as a result of the wealth effect, families will stop consuming and start saving and, in a recession, that is the worst thing that could happen. Consumption is 60% of the aggregate demand.