Yes, libertarians’ capitalism has failed


Some theories about crises sparked by speculation bubbles show that there’s a correlation between them and growing inequality of income distribution. One of the reasons for this would be that inequality pushes people with the lowest income rates towards indebtedness to leave poverty behind.

A housing bubble looks indeed like a unique occasion to increase your asset price, often whether the borrower has enough income to meet the financial conditions or not. When a powerful government–the US’s did so from president Clinton days onwards–exerts pressure on banks to offer cheap mortgages, and deregulate the sector so banks can hide the risks that this activity generates, false asset value rises take the place of progressive fiscal policies, the whole of the European Union falls in the same trap and, some time later, the bubble bursts.

This view sits at the origin of anthropology, and it is key to Hyman Minsky and Paul Krugman, too: when wage earners feel their source of income is unsecured, the tendency to take on debt to increase their wealth is stronger, which escalates in a social environment in which the belief that a house is the best investment seems to be the consensus. Add long-term mortgages and too low interests, and you get an explosive combination.

Globalisation and deregulation of financial and goods markets have brought, among other changes, a contraction of salaries and higher uncertainty. On paper, that was meant to be positive because it would cut unemployment and improve productivity. This happened, but real average salaries stalled. While the technological boom created a more sophisticated a better-paid workforce that increased productivity, lower-qualified jobs saw wages drop. Only independent and specialised earners could take advantage of the new situation.

It was only natural, then, to force the credit supply to expand, and it was apparently reasonable for everyone to jump into the riskier wagon.

Again, on paper, the move was a good one and globalisation together with banking deregulation appeared to be a successful formula. But it was not. Banks depended on ever heavier leverage, and used securitisation tricks to impede others see the dangers.

Economists who argue that risk incentives help people become more entrepreneurial  and generate jobs and wealth forget that these factors can develop only among cultures that favour them. And cultures–working culture, economic culture, political culture–cannot be changed in ten years, nor in twenty. What all bubbles have in common is an empty promise of riches with little damage, amid the euphoria of the “this time will be different” mentality.

The ulterior motivation, though, is that citizens seek logical security in an advanced society with no need for sudden and outraging wealth. A stable and long-term job, an appropriate retirement pot and hopes for a better future for the new generations belong to an extinguished model. Housing speculation seemed a good enough alternative.

Free markets can never offer a satisfactory substitution of security and stability. Moreover, what many believed to be an equal tool to achieve their ideal has turned to be the source of painful debts, value losses and proof of government’s foolish behaviour. In the eyes of the public opinion, capitalism has failed with a loud, deafening crash.

So-called libertarians sell mostly smoke: their conception of individuals isn’t real, their economic model is ideology. We must revise our inner principles and describe the world as it is, instead of as we’d like it to be.

About the Author

Miguel Navascués
Miguel Navascués has worked as an economist at the Bank of Spain for 30 years, and focuses on international and monetary economics. He blogs in Spanish at: http://

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