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Belmont Club

by Richard Fernandez

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November 28th, 2010 - 7:07 am

German hints that the bailout of countries in trouble on the bond market would eventually reach a limit have hit European bank shares. Berlin’s new willingness to see the investors take a haircut came as trade union demonstrators in Dublin demanded that Ireland default or write down its debts.

But the flip side of demanding an end of taxpayer guarantees to banks also signals the end of debt-driven government spending. Having run out of the means to prop up profligate governments the politicians are now trying to hand the tab to the creditors. The Telegraph notes that Germany’s leader is handing the hot potato the creditors:

“Have politicians got the courage to make those who earn money share in the risk as well?” Merkel boomed in Berlin on Wednesday – in a speech that was disgracefully under-reported by the Western media.

But the potato came around in a circle. Politicians are now acquiring the sand to tell the bankers they are going to have to “share the pain”. But have politicians got the courage to realize that this means they can no longer borrow money on easy terms again? Well most of them haven’t thought that far ahead. One demonstrator said, “we should default–the idea that the workers of this country should pay for the gambling of the billionaires is disgusting”.  But how much more disgusting than the idea that governments were borrowing from billionaires to fund public spending and that this will have to stop?

The crisis is forcing the bailout machine to run down: countries cannot indefinitely force tax payers to bailout banks which are stuffed with toxic bubble assets, some of which were mandated by the governments themselves. It is less a crisis of the principle of capitalism as much as demonstration of what happens when things are distorted by government intervention. What the call for “more regulation” and ‘soak the rich’ proposals miss is that a large part of the crisis was caused by the breakdown of risk signals inherent in the public involvement in the economic high ground. At some point the banks ceased to be ordinary businesses which could fail; and they were that in part because they loaned the government money. They were special, and that broke the system.

The Telegraph argues that the Irish crisis has triggered a European wide meltdown because it would not go along with hiding the decline. “Ireland was among the first Western nations that tried to get real … declaring its banking sector losses, accounting for them on the government’s balance sheet and planning future borrowing so as to meet those liabilities”. But by ditching the makeup the true hideousness of the picture became evident and politically insupportable.

As a result, Ireland’s annual budget deficit has soared. But at least the numbers resemble reality. Most other Western nations, meanwhile, have allowed their banking losses to remain buried, lurking Japanese-style in the “shadow” banking system.

The big countries felt threatened by Ireland’s attempt to impose transparency and the market applause that originally greeted this effort. So the Republic’s stab at “fessing up and growing” its way out of the crisis, was effectively crushed by the big Western powers, who sensed an opportunity, at the same time, to have a go at Ireland’s highly-competitive corporate tax regime.

Now the cat is out of the bag and the fuse is in train. The sum total of these events, says Liam Halligan of the Telegraph means a ‘cataclysmic’ and ‘messy’ end of the Euro. But it also means haircuts for all. Equally importantly, it sounds the death knell of states which have refused to live within their means. The giant welfare state has spent itself into the grave. It is now possible to re-write Nietzche’s monologue of the Death of God in entirely secular terms.

Have you not heard of that madman who lit a lantern in the bright morning hours, ran to the market place, and cried incessantly: “I seek the Welfare State! I seek the Worker’s Paradise! Is it dead? Or is it just recovering? Has it gone on a cruise?

The madman jumped into their midst and cried; “I will tell you. We have killed it — you and I. All of us with a benefit check are its murderers. But how did we do this? How could we drink up the sea? Who gave us the sponge to wipe away the entire horizon? What were we doing when we unchained this earth from its sun? Do we hear nothing as yet of the noise of the gravediggers who are burying The End of History? Do we smell nothing as yet of the divine decomposition? States, too, decompose. The Welfare State is dead. And we have killed it.

Here the madman fell silent and looked again at his listeners; and they, too, were silent and stared at him in astonishment. At last he threw his lantern on the ground, and it broke into pieces and went out. “I have come too early,” he said then; “my time is not yet. This tremendous event is still on its way, still wandering; it has not yet reached the ears of men. Lightning and thunder require time; the light of the stars requires time; deeds, though done, still require time to be seen and heard. This deed is still more distant from them than most distant stars — and yet they have done it themselves.

But just as God did not die — He was simply replaced — the Welfare State will find its successor. We all of us want something for nothing. The bubble is burst. Until next time.

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