Institutions in Crisis

Institutions in Crisis

European Perspectives on the Recession

New Thinking in Political Economy series

Edited by David Howden

This critical and thought-provoking book explores the causes and consequences of Europe’s failed political and economic institutions. Europe’s recession has created new challenges as market turmoil has shaken the foundations of the twin pillars of the new drive for European integration – political and monetary unions. This book critically assesses the patchwork solutions continually offered to hold the troubled unions together. Failed political policies, from the prodigious ‘Common Agricultural Policy’ to ever more common fiscal stimulus packages, are shown to have bred less than stellar results in the past, and to have devastating implications for future European growth. The contributors outline the manner through which European monetary union has subsidized and continues to exacerbate the burgeoning debt crisis. Most strikingly, the interplay between Europe’s political and economic realms is exposed as the boondoggle it is, with increasingly bureaucratic institutions plaguing the continent and endangering future potential.

Chapter 2: A Stock-taking of the Impact of the Crisis

Jörg Guido Hülsmann

Subjects: economics and finance, austrian economics, political economy, politics and public policy, political economy


1 Jörg Guido Hülsmann The present crisis of the global economy started with the publication of massive defaults of US subprime mortgage loans in July 2007. During the following 12 months, these initial defaults set in motion a wave of consolidation and contraction in the global financial industries. This wave has been followed by another wave of bankruptcies that swept over financial markets worldwide. The burgeoning financial tsunami has been slowed down, but not stopped, through massive interventions by the world’s major central banks, which greatly expanded the money supply and eased credit conditions. In the summer and fall of 2008, it reached a climax when two of the five largest US investment banks went bankrupt, and the three remaining banks abandoned their status to become commercial banks in order to benefit from public bailout. The defaults within the investment-bank sector were at the point of spilling over to a large US insurance company and to several public and semi-public banks. Within a few weeks or even days it would in all likelihood have entailed a complete meltdown of the financial markets. Few if any banks would have survived; their failures would have set in motion a deflationary spiral. The debt-ridden global financial industries would have been wiped out. Any sort of credit – public or private – would have become unavailable. The meltdown would have swept over the rest of the global economy: With bank credit unavailable or greatly reduced, most companies could not have financed their spending on...

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