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Financial crises are always complex and difficult phenomena to explain. Since the current crises have occurred, we have been talking of “bubbles” as if they were the necessary outcome of the free market system. In our humble opinion the current financial crisis is an entirely political phenomenon, caused by bad regulation and overcome only by the reestablishment of an institutional system (what German economists and jurists called a political, economical and cultural “Ordnung”) based on responsibility and on the assumption of reasonable risk. We believe that speculators simply inform us about the criticalities and weaknesses of the system and we are also convinced that the opinion that the “stock market houses are like a broken clock,” as President of Italian Government Silvio Berlusconi said, only denotes ignorance of how markets work, or that one believes in an economic culture in which it is possible to make money in spite of the markets.
“Today the crisis is the cost of the separation between the political system and the real country…” — Flavio Felice
There are, in our opinion, three ways to analyze what is happening in the markets. The first is to look at the problem with purely economic perspective. The second approach is based instead on the crisis and cultural values that afflicts our country for decades. The third, which we would like to dwell on, combines those two closely related approaches.
It is the periodic comparison with the experience of the early nineties. Then, as now, we faced a serious crisis of confidence in the sustainability of our public debt. Today the crisis is the cost of the separation between the political system and the real country, a distance that fostered the “look short” perspective that guided the choices of our ruling class for too many years.
Speculation derived from the “supra-commissioner” in our country confronts the failure of an entire ruling class (political and economical élite) and the need to review the reasons for our social contract. This situation, however dramatic, might be a great opportunity. Decisive action is needed in a timely manner on the public debt and on constructing conditions that promote the creation of wealth. Legal and cultural conditions are essential to promote the production of economic value since we believe that Italy has enough resources to overcome the current crisis.
It will be necessary to do drastic cuts in spending and structural measures such as privatization, liberalization, raising the retirement age, reducing taxes on labor and so on. For the good of this country the emergence of a new ruling class is needed, a new élite free from conflicts of interest, able to redesign the system of relations between public authorities and private ones in a polyarchycal and subsidiary way, in order to operate on the competitiveness of enterprises, the labor market and corporate governance, to channel through the intermediary of a “healthy” banking system a share of household savings into investments in infrastructure and national production companies and to encourage their growth in size and improve the technology used and the quality of human capital.
This country and its markets need these signals to believe in the future.
Flavio Felice is an adjunct fellow at AEI.
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