A POLICY OF SUBMISSIVENESS TOWARD FINANCE MARKETS
Economist Gustav Horn on the increased speculation crises, deficient controls and consequences for workers
[This interview published in: Berliner Zeitung, 9/29/2007 is translated from the German on the World Wide Web.]
Prof. Horn, we had the Asian crisis, the Russian- and Brazilian crises and the collapse of the LTCM hedge fund. Then the Internet bubble burst. Does a global credit crunch threaten starting from the US mortgage crisis?
Yes, we are now experiencing this. The importance of the finance markets has increased as well as the number of products sold there, especially the number of non-transparent products. With these products, investors admit at the end the profits were not as high as expected. Then massive losses, herd conduct and crises follow.
Finance market turbulences seem to increasingly threaten the economy.
Crises become more frequent and more significant. If the finance market were only a peripheral phenomenon of economics, turbulences could be ignored. But the global capital market finances global economic activity. Thus we have a global problem.
According to the textbook, financial enterprises are service providers. They should provide credit to businesses and households.
The financial sphere has made itself independent. Today concrete economic investments are not the only financed enterprises. Today independent financial products enable profits to be realized. Inestimable risks are hidd3en in these products. Still there are there.
New powerful actors like hedge funds and Private Equity companies are underway on the markets. The value of global speculative securities - "derivatives" - is ten times the global economic output. Can this mass of speculative capital be controlled?
Capital streams can be influenced but not really controlled. At the moment, we large3ly refuse an attempted governance or control. For a long while, a policy of submissiveness prevailed that renounced on regulation. We are now paying the price for that.
Still there are finance- and stock exchange monitoring investment guidelines and rules for personal capital resources.
While rules exist, they are certainly not tight enough regarding the risks of individual financial products. The current crisis shows that banks cannot rightly assess the risks.
What must be done?
To stabilize the finance markets, we need regulations that make the products transparent. Every customer and every bank should know the risks that are involved. The finance monitoring must test new products and estimate the risk. Finance market transactions must be made more expensive. For example, a stock market sales tax is urgently necessary. This already exists in many countries. If one would have to pay a price for a stock market transaction, the incentive to gain more information about the products would be strengthened.
Can crises be prevented?
No, only contained.
Finance market critics warn of a casino capitalism given the inflated finance sphere. Are businesses only objects of speculation for global investment capital?
I would not go that far. However the finance markets are certainly powerful. Businesses are increasingly forced to satisfy the finance markets - the investors. Every business manager must grapple with analysts today and submit to the desires of the capital markets.
This pressure raises the profitability of businesses.
However working conditions deteriorate. Less and less business profits land in the hands of employees. We have falling wage rates worldwide. Conversely, more and more profits land with the finance markets and their power over firms grows.
How should the unions react?
Unions must build their counter-power. This counter-power consists in a regulation of the markets. This regulation must be transnational.
Germany's initiative to regulate hedge funds has met with little approval in the US and Great Britain. These countries are in competition for global investment capital. How can an accord be reached between these states?
Still there is a worldwide interest in persons working in businesses - the majority of people - whose life and working conditions are not destabilized by the finance markets. The current crisis shows the dangers of unregulated markets. In the US and Great Britain, people suffer under this crisis.
What dangers do you see as a consequence of the current credit crisis?
At present the situation is still obscure. The banks will provide information at the end of the month. Some banks - like Deutsche Bank - admit mistakes and quantify their risks. This process will intensify. How intensely the threatening or real losses of banks will influence their awarding of credits is the crucial question. Will they strongly raise the interest rates and confer fewer credits so the investment process comes to a standstill? That would be severe.