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Capitalism and Speculation

Banks all over the world bought these speculative objects through subsidiaries called "special conduits" that did not appear on the official banalce sheets. The mortal sins of the economy are the speculative practices oftheoverpaid top managers, not state initiatives.

By Werner Rugerner

{This article "Der Nothelfer des Kapitalismus" published in: Ossietzky 1/2008 is translated from the German on the World Wide Web,  http://sopos.org/aufsaetze/478a0ffd820b6/1.phtml.]

We all know them, the deadly sins of the market economy. They are invoked publically again and again in the discussion of the minimum wage and salaries of top managers: state interventions as mortal sins against pure doctrine!

But what is also happening at the same time? The same top managers cry to the state: Intervene! Save us! Give us billions of credits! Otherwise the market economy will perish!

Five months ago the mortgage crisis erupted in the US. The banks forced easy bargain credits on millions of Americans. In the US, rents are so high that buying their own home on credit seems a cheaper solution to many young and less wealthy families. The profit-greedy banks awarded credits without the usual securities, without the borrowers' own capital and without proof of income at fantastically low initial interest rates.

The banks knew this would not work out well. They bundled tens of thousands of these credits and resold them with a risk premium to other banks. Banks all over the world bought these speculative objects through subsidiaries called "special conduits" that did not appear on the official balance sheets. German banks also did this. They created "special conduits" in a financial oasis and bought bundles of rotten credits in the billions with the help of credits from other banks.

The crisis began in August 2007. When the interests skyrocketed, American households could not repay their credits. Purchasers of bad credits like the Dusseldorf Bank of Industry and Credit (IKB) faced bankruptcy. Deutsche Bank was the first to sound the alarm and cried to the state: the IKB cannot repay credits from Deutsche Bank. The state must help.

The state credit agency for reconstruction (KfW) leaped into the breach. The special credits of the IKB with the imaginative names "Rhineland Funding" and "Rhinebridge" were supported with guarantees of two, three and five billion euro.

The same thing happens everywhere in the West. The well-paid top managers cannot or will not say how many rotten credits are hidden in the hundreds of "special conduits." Therefore state banks, the KfW, the European Central Bank, the US Federal Reserve and so on stuffed hundreds of billions of euro of state money into the private banks. The state of Saxony has taken over a failure guarantee for nearly three billion euro for its Saxony regional bank. The national budget is rubbish.

This is not the first time state aid has rescued bankrupt private banks. The Berlin bank scandal is one example. First, the banks were privatized. Then they went bankrupt. Since then they have been supported for decades with billions from the national budget. Social spending is mercilessly slashed. The prophets of the pure market economy demand intervention as the most obvious thing in the world.

The New York Attorney General Andrew Cuomo carries out investigations of the banks for "conspiracy to rob homeowners." However the state is not giving him the necessary funds. The financial guru of the western world, Alan Greenspan, head of the US Federal Reserve until recently, knows the problem is a little bigger. "If the crisis had not erupted with the rotten mortgage credits, it would have broken out with other repackaged financial products," he says.

The conspirators are not identified at all. They have their state and the taxpayers.

The mortal sins of the economy are the speculative practices of the overpaid top managers who only survive with the help of the state. The mortal sins are not state interventions which are sensible and necessary.

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