Voters love tax cuts. Government borrow in order to reduce tax and increase spending. Financial institutes help politicians to borrow money; in return, politicians relax their rules on financial institutes. Everyone wins, it seems... except that someone will have to pay eventually. That would be the ordinary people, especially those in the younger generation.
Everybody wins... it seems
By modelling the motivations of individal groups, one could understand how things might have developed. First, it is important to see that it is the governments that borrow money, and the financial institutes that lend out money. They have their individual motivations.
Governments borrow as much as they could. Through borrowing, they can reduce tax and increase public spending at the same time. Both are music to voters' ears. Most rational politician, regardless of their affiliations, tend to do that. Natural selection will get rid of those politicians who don't.
Banks didn't have that much money to lend out. But through increased leverage, they do. Leverage were increased by governments, through relaxation of regulations. The more money that a bank has at its disposal, the more money it has potential to make. The more money a bank makes, the higher the bonus of a banker. Naturally, bankers lobby their governments to relax regulations.
So governments help banks to make money, and financial institutes help politicians to borrow money. The general public gets tax reduction and more health and social services (governments believe that education doesn't matter, surprisingly). Everyone is happy.
But someone has to pay, eventually
Unfortunately, there is a limit in how high leverage can go. There is also a limit in how much a government can borrow, before nobody is willing to lend. The weakest links are going to burst first. Northern Rock as a bank failed. Iceland as a country defaulted. Greece is seriously imbalanced.
Now can the politicians and bankers still hold everything together? I doubt if they can. So much money created out of thin air. Some have benefited. Now the bubble bursts. Everyone will have to absorb some of the losses.
The financial bubble in the last decade or two is only a redistribution of wealth. The bankers have gained. Politicians in high positions probably benefit from the lobby industry, in one form or another. They both grow the bubble. From the growth, they take their rewards. But someone has to pay for their rewards. That responsibility goes to the ordinary people, especially those in the younger generation.
[End]
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