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The Casino is Closed: Reasons for the Crash

In this interview, Ulrich Schafer discusses the greed for fast money, a world without rules and why the market alone cannot regulate everything. The state simply abandoned control over many economic areas. The financial world in particular was left to itself.

Reasons for the Crash

Interview with Ulrich Schafer

[This interview published 2/2/2009 is translated from the German on the World Wide Web,  http://www.fluter.de/de/76/thema/7429/?tpl=86. Ulrich Schafer is an economics editor of the Suddeutsche Zeitung newspaper.]

[Bankrupt banks, insolvent businessmen, millions of people without jobs. The worst economic crisis since the end of the Second World War has shattered the trust of people in capitalism. How could it come this far? In this interview, Ulrich Schafer discusses the greed for fast money, a world without rules and why the market alone cannot regulate everything.]

Mr. Schafer, very honestly, did you foresee the crisis?

Ulrich Schafer: I saw it coming some time ago. When the crisis began two years ago in the US, it was very clear the crisis would not remain an isolated American real estate crisis but would grow into a worldwide financial crisis.

States spend hundreds of billions of dollars. Nevertheless banks go bust and the economy crashes. How could this worldwide chaos occur?

Ulrich Schafer: The short answer is many persons in bank offices and the stock exchanges were very greedy. They did not respect financial risks and businesses imploded that were simply too dangerous.

What is the long answer?

Ulrich Schafer: The crisis has a pre-history that goes back three-and-a-half decades. Since the beginning of the 1970s, there has been a worldwide process of privatization and deregulation. The state withdrew more and more from economic life. That had positive consequences. Many businesses experienced a modernization push and many things were inexpensive for customers like telephone charges for example. The state simply abandoned control over many economic areas. The financial world in particular was left to itself and organized the global stock- and currency trade without state rules. The deals on the free markets were increasingly risky which led to the first great crisis in the middle of the 1990s.

What crisis occurred in the 1990s?

Ulrich Schafer: The crisis of threshold countries. Mexico, Thailand and South Korea experienced a rapid upswing for years. Although unprepared, they had quickly liberalized and opened their capital markets to the world economy. Sometime or other, the boom of these countries stood on shaky foundations. Speculators bet against the currencies of these states Thereupon these currencies crashed. The second crisis is connected with that currency speculation. Global capital was withdrawn from the bankrupt states and flowed back to western industrial countries like the US fueling the boom of the New Economy. The hype around the interest led to fading out risks. Then it dawned on people that an Internet startup with only a hundred employees that made no profit could not be worth billions of euros like Lufthansa for example. In the year 2000, this bubble burst and the stock exchanges fell 70 to 80 percent.

That was not even ten years ago. Didn't anyone learn lessons from the crash of the New Economy?

Ulrich Schafer: Unfortunately no. The foundations for our present crisis were laid at that time. After the end of the New Economy and the terrorist attacks of September 11, 2001, the American Federal Reserve lowered the interest rates to stimulate the economy with cheap money. With the many dollars, people bought houses that they really could not afford. Banks gave credits for risky businesses. Stockbrokers speculated with ever more fantastic securities and borrowed money on credit for that speculation. This bubble of cheap money has now burst and the consequences for the economy are not yet foreseeable.

Aren't persons simply too greedy to act in an economically responsible way?

Ulrich Schafer: Unfortunately there are many reasons for the crisis. One important reason is certainly the unconditional belief that the market regulates everything. Over years a simple doctrine of salvation was preached: the state should always be reserved since the market has all power. From past experiences, economists must know the market needs limits within which competition can be orderly. Without such rules, the financial markets decay to casinos. When the person sees how easily money can be earned, he will obviously want to more easily earn more and more money. Greed always existed but had a very easy time in the last twenty years.

How much money did the belief that the market regulates all things cost the world?

Ulrich Schafer: The current projections of the International Monetary Fund say the banks and funds burned up approximately two trillion dollars up to now. Even more is involved since the states try to support the financial world and the economy with several trillions. At the end, citizens will pay for this with their tax funds.



[The second part of our interview with the economic journalist Ulrich Schafer focuses on prescriptions against the crisis like new rules for an international financial system, the battle against tax havens and upper limits for salaries and bonuses of bank managers.]

What must the states do now to cope with the crisis?

Ulrich Schafer: In the short-term, states worldwide must stabilize the banks and support the economy. In other words, they must do everything so the coming economic downswing will not cost so many jobs and the economy can go uphill again as fast as possible.

Will everything then continue as in the past?

Ulrich Schafer: That would be a great mistake. I don't think there is a chance for real reforms. Everywhere in the world, politicians say the economy cannot continue this way. We need new rules for our global financial system.

What rules are necessary?

Ulrich Schafer: There cannot be a second banking system alongside the official banking system. In the past, banks simply shifted risky businesses to special conduits and hid them from national monitoring authorities. These conduits are mostly located in tax havens like the Cayman Islands in the Caribbean or the British Channel Islands where there are hardly any controls. There is a shadow banking system beside the real banking system. This should be prohibited. These secret conduits should at least be listed in the balance sheets of the banks. Reserves for these bu9sinesses must be kept ready. Then shifting the businesses to subsidiaries would no longer be rewarding.

Shouldn't the tax havens be closed?

Ulrich Schafer: That would certainly be sensible. What is the point of creating rules for financial corporations that only encourage them to settle in tax havens where they aren't controlled? Another possibility would be to force financial corporations to apply for licenses where they work. Many financial conglomerates like hedge funds have their legal headquarters in the tax havens, often only in notorious mailboxes. Their offices are in New York, London or Frankfurt where they earn their money.

Many experts demand an international financial monitoring.

Ulrich Schafer: Such a control authority would be very important. It could annou9nce: the following products are allowed or prohibited. When banks devise a new security, they should apply for a license. This would be similar to a pharmaceutical company that needs an approval for a new medicine... New financial products should be controlled. As another important point, there should be an upper limit for salaries and bonuses for bank managers. Concerning bonuses, it would be better if persons were rewarded with special payments for the long-term success of a bank over a few years, not for the short-term profit at the end of the year.

For many years, it seems clear the state should play a greater role in the future. However there are also economists who warn that the state intervenes too much. What would be a middle way?

Ulrich Schafer: The state should not try to guide individual economic branches or tell firms what businesses they should pursue. The state should not bailout enterprises that are not viable. Then sound businesses would quickly want money from the state since the competition has also pocketed money. There the state is on very thin ice and strikes its limits. This is somewhat different with the banks. If the financial system collapses, the whole economic system breaks down because the banks provide the economic circulation with money. For many people, it is hard to understand why those responsible for the chaos should be bought out by the state. Therefore politics should give a new mechanism to the financial system to avoid such a crisis in the future.

Will everything be all right then?

Ulrich Schafer: In my opinion, the market economy needs reforms so people can trust capitalism again. The capitalism unleashed and driven by the financial markets has strained countries enormously. The gulf between rich and poor has become much larger. The poor in society bear ever-greater risks. The possibilities of advancement for persons from the middle class become exceptional. Therefore the state must invest in the training and education of its citizens. This obviously costs money. Politics should obligate people who earn great sums in our society. Paying more taxes now rather than living later in a torn society makes sense. The riots in the Paris suburbs several years ago and the violence on the streets of Greece before Christmas show that societies can break apart. This could also happen in Germany.

Ulrich Schafer, born in 1967, has worked as an economics journalist for Spiegel and since the beginning of 2007 for the Suddeutsche Zeitung newspaper.

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