As I mentioned in a previous post, an economic crisis is complex, and pretending to have the key solutions seems naive, but something must be done, even if it is just running in the halls up and down screaming uncontrollably. It would be good, though, to remember the story from the beginning (and summarised, in a way I can understand). Please correct me if I'm totally wrong:
Image: Foto Gratis
Once upon a time, there was a financial system, very little regulated one and eager to grow, as dictated by the laws of good practice. Thanks to the feverish and constructive minds of some of its members and with the connivance of those that relax during good times, such as some governments, insurers and risk rating companies, they found a good balloon to pump on growth.
Experts have already perfectly explained as the balloon is inflated: focus on giving mortgages to everyone (everyone wants a house, and if you can afford it, and on top of it seems as a good investment, even two). They made the real state business grow with euphoria and that the brick (literal brick) industry was fostered in many parts of the world. How do you clean the dirt? Those mortgages that should not have been appointed, are chopped, mixed with good and sold as an investment product at a price that should not be, spreading them around the world (the farther the better).
There comes a time when the balloon does not take in more gas (i.e., when a system has grown beyond its real potential) and mortgage bubble bursts. And then, the shit hits the fan. Hundreds of financial institutions (innocent and guilty) felt the explosion all over the world (globalization as we know, improves the speed in all ways). The financial system trembles, cracks a good bit, and we must all come for help (i.e., governments scratch their pockets to prevent the system from sinking, which would be even worse).
What is left after the wreck? Well, every house is a little different. In Spain, it seems that banks and savings banks, weakened, limit their supply of loans and credits to avoid having more defaults that cause them believe losses and weaken them even more (logical). That includes mortgages, and everything else! The government tells them: «Be brave! Live as if nothing, but just in case, consolidate a little. » «Yes, yes, yes. » they respond, but with a small mouth. Result: the business credit is reduced or becomes more expensive, or disappears. And what was the crisis of one or two sectors (financial and real state) becomes the crisis of all. Fear. People spend less, so companies sell less and with less credit they have to start firing people. Unemployment. Low demand, this looks bad, we can enter the dreaded death spiral, or deep recession, whatever you call it.
Then comes the tale's prince, the government does what it is meant to do. To avoid a serious bump tries to keep the economy running. How? Creating public works, hiring and employing thousands of people as a large corporation (which is never profitable). So people have a little more money in their pocket and the system does not collapse. Meanwhile companies still need credits, arriving bit by bit. We all suffer.
Image: Foto Gratis
This lasts for a while until the government runs out of money and ends up owing too much (yes, the government has its creditors too!). Now the issue becomes serious, and as fortunately we are not isolated, this puts us in the eye of the EC: we must remedy. Look at Greece! We must reduce the government deficit! No more short-sighted measures, it's over being politically correct, we must tighten our belts and start with structural measures. End of story.
Summary of the situation: All this underscores something, that the Spanish economy is not competitive. If it were, why would that change anything? But get ready, the best is to come.
Apart from the usual government saving measures (in the background, now serve as a brake on growth, as banks when they cut the credit to companies), Spain also needs… labor reform! Everybody says so. In other words, THE CAUSE OF THIS CRISIS IS THE CURRENT LABOUR REGULATION. Because if not the cause, why is the entire discussion of the economic life revolving solely around it? What I said before, a panacea. (Well, this is a fallacious argument: although not the cause, this could be one solution, or this is at least what government creditors that are calling for action claim, but let us continue ...)
So if, as seems, among other measures, reducing days of severance pay, everything will go forward. In other words, that is to say:
- That all companies are closing down, because they can not take layoff costs
- The 20% of GDP in Spain dependence on real state sector was caused by the layoff costs
- For businesses that want to grow can not for the layoff costs
- If the businesses need credit and do not have it, that is caused by layoff costs
- That the businesses losing sales on their products, is due to layoff costs
- That there is no entrepreneurship because of layoff costs
- If you want, you can repeat the above phrases replacing "layoff costs" with "price of electricity” and it would work the same
Gentlemen! Don’t you see? This is a sedative, it is not the cure. Let's see, no one can overlook that such measures can improve the cost structure of some companies (and in doing so, become more competitive) following this rationale, for instance:
- Firing employees costs less money, then I can rotate more staff if necessary
- With more rotation, I can pay lower wages
- With lower wages, less expense
- If sales fluctuate, I can grow or reduce staff structure at will, as if it were a variable cost
I have a couple of things to add, but I have already said too much, don’t you think?
Do you also think that labor reform in Spain was the natural consequence of the sub-prime mortgages in the U.S.? Is it because there are no layoff costs in the U.S.? Could all the U.S. banks have mitigated the impact of the bubble burst by letting go 80% of their staff? (the ones still running).
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