‘Germany must get moving’, the former German President Herzog demanded in 1997. Ten years later, this move has encompassed not only Germany, but gone through the entire world – but not in the way Roman Herzog imagined. Those who for thirty years preached that we should trust the self-regulating power of the markets and worshipped the lean state as the best of all possible states now suddenly have moved to doubt the markets’ power to heal themselves and call for the state to be their saviour.
Financial Experts search for the Errors
‘Certainly the banks have made mistakes’, Klaus-Peter Müller, the former boss of Commerzbank, admitted in an interview. But he stated exactly the same thing five years ago. He never said what the mistakes were. However, he sees the real cause of the crisis in a twofold failure by the state. After the speculative bubble of the 1990s, Alan Greenspan should never have operated such an expansionist monetary policy. And the Bush administration should not have let Lehmann Brothers go to the wall. But for the collapse of that bank, Commerzbank would have posted good results.
‘I can hardly bear to hear the word greed any more.’ That sentence is by Hilmar Kopper (former CEO of Deutsche Bank). If by these words he means that to explain away the financial crisis simply as the result of individual mistakes is itself mistaken, then one can agree with him. Because the moral outrage of voters stirred up by politicians with their broadsides of insults, or the pillorying of individual actors, are just as misguided as the fixation of public debate on the bonus payments to financial managers who have driven their banks to the wall.
Financial experts are right to direct attention to the miscalculation of risks which had grown exponentially alongside the innovative financial services, shadow banks, bank-free zones and the immeasurable extent of networking among the actors in the monetary sphere. Home owners, it was claimed, had miscalculated their long-term ability to keep up payments; dealers had forced mortgages on them in a wildly over-optimistic manner. Departmental heads in commercial banks allegedly failed to supervise and support their subordinates adequately.
Trading in derivatives, securitising loans and structuring them outside the banking supervisory body, founding off-balance sheet companies as special purpose vehicles, insuring default risks and securitising them, and channelling supposedly innovative, but actually incomprehensible, uncontrollable financial services into the global financial cashflows to the extent they did, are now seen as demonstrating gullibility, naivety and irresponsibility. Nevertheless, public supervisory bodies had also largely tolerated such practices and assessed them in an unduly lax manner.
Systemic Errors
The search of the financial experts for errors does go beyond the normal microeconomic perspective, but it remains within the boundaries of the established financial sector. For that reason, there should instead be a search for the structural deficits of the capitalist financial regime.
The first point to mention is the ‘monetary revolution’. The elastic money supply, along with an unrestrained grab for ‘the earth as a global piggy bank’ is a crucial explanation of the dynamics of capitalism. The natural limits of a barter or metal currency have been overcome since the banking system gained unrestricted power to print and lend money, which in turn no longer imposes any limits on the growth of the real production potential.
And for wealthy sections of the population in economically affluent societies, money is no longer used simply as a means of exchange, but also has assumed the function of a capital asset. As a means of storing and increasing value, it competes against property, consumer durables and stocks.
Secondly, the means for controlling the markets for goods and for capital are now diverging from one another. Controlling the markets for goods, as reflected in price levels, is restricted by real factors of production and real purchasing power. Controlling the capital markets, especially those involving financial assets, is determined on the demand side by subjective future expectations, which are not restricted by any real barriers.
On the supply side, there is an absence of restraints on the potential of the banking system to create credit, especially as the limits imposed by the central bank, which previously also had constituted a barrier within the real economy, are being evaded. The results have become evident in recent years: The interplay between the expansive granting of credits by the banks and the explosive expectations of the owners of financial capital that its value will automatically increase, have pushed one another up higher and higher. Thus the expectations of fictitious, credit-financed increases in assets were able to spiral speculatively upwards and divorced themselves from the economics of the real world.
Thirdly, the limitations on liability which were granted to Public Limited Companies (PLCs) were further undermined by the investment banks and financial investors, leading to systematic under-capitalisation. On the basis of an extremely low proportion of own capital, and the leverage effect of a high proportion of external capital, the yield on own capital could be expanded considerably. International accountancy rules displayed values close to those of the market, but they were based more on fictitious expectations than on real capital gains.
Fourthly, the rivalry between two financial styles, the continental European and the Anglo-American models, has contributed to the crisis through the hegemonial dynamic of the US financial model. Michel Albert has called ‘Rhenish capitalism’ bank-dominated: Private commercial banks control industrial companies through granting loans, their own holdings and personal relationships.
Companies are managed by the interplay of all the groups active within them, which are oriented towards reaching a mutual understanding. The managers work at balancing the interests of staff, customers, shareholders, banks and local authorities. Systems based on solidarity and financed on a pay-as-you-go basis provide assurance against the risks to society posed by old age, poverty and unemployment.
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Well said Mr Hengsbach. But is it realistic to assume that this can be really done? Now that the likes of Goldman Sachs again make billions of profits after being rescued by the US government only months ago it looks more likely we get back to business as usual. And it might get even worse now these people know that if push comes to shove we all will pick up the pieces!
I agree with most of what you said but how can it be done? I don’t think Anglea Merkel will take a lead.
A very good analysis of our current problems of political economy. In order to go for a strategy outlined by Prof. Hengsbach, the political forces of the left have to build coalitions. Labour movement, the churches, the ecological movement, the third world movement, they all should go together. We need solidarity across different social groups and national borders.