The Core Of The Financial Crisis

By Mark Rogers

It is a universal truth that revolutions devour their children: this is ruefully acknowledged in the cases of the French and Bolshevik revolutions – considered “good” revolutions, as if Robespierre or Lenin were somehow accidents.

The revolution that is now unwinding with a vengeance is the Welfare State. It may seem overdoing it to call the Welfare State a revolution, but consider: it is normal to discuss the Welfare State in terms of safety nets, short-term solutions to modest problems like seasonal unemployment and housing for the poorest, or, in a more wide-ranging version of the arguments for it, as a necessary bulwark against economic catastrophes such as the Great Depression.

Yet the Welfare State itself devours so many resources and applies them without the constraints of market discipline, with the accompanying bloating of the civil service to administer it, that this in itself constitutes a revolution in economic and political habits. Add to this that as a result huge numbers of people have come to perceive government as a necessary arbiter of the way they live and the provider of their needs: this is an even bigger revolution.

For example, many people live in council flats and houses and survive on benefits including housing benefit. What the benefits system effectually does, in consequence, is to deprive people of any assets whatsoever, including themselves. That is, those who live entirely at the provision of the state do not exercise the assets they possess in hands and brains to carve out a living for themselves – it is not worthwhile to do so, as they are better off on benefits than working. This is a major reversal of those virtues that Keynes reviled (as we have noted here): industry, thrift, independence, a proper self-respect.

What this means is that the Welfare State is the chief driver of what we may call “de-development” in the western democracies. This takes two forms: the destruction of economic facts (see the discussionhere) and the culture of dependence on government. Both have their origins in the misplaced desire to assist the poorest in society. The subprime crisis, for example, has its origins in FDR’s “New Deal” and the creation of the government-backed savings and loans “banks”. The massive growth of these institutions in itself became a problem, compounded by the Clinton administration’s drive to force lenders to lend to the poorest African Americans, under penalty of being convicted and fined for “racism” if they did not do so – ignoring the economic reality that no-one’s interests were served by deliberately creating debt in households that manifestly could not afford to repay it.

The bundling of “toxic debts” into securities that could then be traded was the banks’ and the markets’ ingenious but short-sighted nostrum to deal with one consequence of government intervention that had gone badly wrong. It may have kept western economies afloat a few years longer, this juggling act by the banks – but the policy behind it seems to have been somewhat Micawberish, waiting for something else to turn up…

And what has turned up is the massive bankruptcy of the Welfare State, nowhere more obviously epitomised than in the eurozone. Entirely driven by the manifest fact that the Welfare State is unaffordable, as is bluntly stated by those who know this – those who don’t, harp on about services being “underfunded”, as if unsustainable taxation only needed to become even more unsustainable and the problem would be solved!

As James Bartholomew points out in his crucial book “The Welfare State We’re In” it is only in the Welfare State that the poor are taxed – in ultra-capitalist Hong Kong the poor pay no taxes because the threshold on earnings before taxation kicks in is high, meaning that everyone has a chance to better themselves.

It should be more widely understood that bankruptcies are a sign of a healthy economy – stripping out ill-conceived or unworkable economic projects. This is the core of the eurozone crisis: what are we being told doesn’t work?