"Owners of capital will stimulate the working class to buy more and more of their expensive goods, houses and technology, pushing them to take more and more expensive credit, until their debt becomes unbearable.Karl Marx, Das Kapital, 1867
The unpaid debt will lead to bankruptcy of banks, which will have to be nationalised, and the State will have to take the road which will eventually lead to communism"
Karl Marx, maybe 150 years late, but he does provide a depressingly concise explanation of the credit crunch.
However, you try to dress it up, the nationalisation of the banking system in UK and US (1) represents a colossal failure for the global financial system. Whether governments can do a better job at managing banks is not guaranteed. But, it is a painful blow for advocates of free market forces.
Defenders will say the financial crisis is not entirely due to unrestricted free markets. The US government, through Freddie Mac And Fannie Mae were keen to lend mortgages to a new generation of homeowners and this encouraged a build up of subprime mortgages. In many respects the government regulators failed to adequately deal with the growing problem of risk, toxic debts and a booming asset bubble.
But, it is hard to look at the crisis and not come to the conclusion that the private banks failed their shareholders and failed the general public. The free market mantra that the economy will maintain full employment and provide the most efficient distribution of resources seems a far fledged dream.
Back in 2006 and 2007, the Bank of England published a Financial stability review outlining booming asset prices and declining cost of risk. Banks generally ignored it and the Bank of England lacked the confidence to pursue it to policy changes. Probably by the end of 2006 it was too late anyway.
Now have a chance to rebuild a banking system putting into place safeguards for responsible lending and banking practises; there is no guarantee that government management will be any better. But, one hopes that many important lessons have been learnt from our present difficulties - and if we're lucky we might just avoid the Communist state Karl Marx predicted all those years ago...