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The Crisis of Capitalism: Credit-Doping

"The social market economy blows the wealth of this society in speculation rather than higher wages, higher pensions or unemployment benefits.. All capital transactions with tax havens should be prohibited.. The state will be handed over more and more to its financial sponsors and their oligarchic control. Instead of democratization, we see growing centralization.."

By Rainer Roth

[This article published in the German journal Ossietzky 3/27/2009 is translated from the German on the World Wide Web,  http://www.linksnet.de/de/artikel/24308. Rainer Roth teaches at the University of Frankfurt.]

The causes were the same in the US and Germany. Massively increased worldwide capital surplus led to the enormous expansion of the balance sums of banks that more than doubled in the last economic cycle from 2000 to 2006 to $75 trillion, not including business off the balance sheets. In the euro-zone, the balance sums of the banks even increased faster than in the US. From 2000 to 2008, German banks created 2 trillion euros while the GDP only increased 500 billion euros. Germany whose exports amount to half of the GDP profited greatly from credit doping that kept the economy alive worldwide.

Credits were the main form of investing the capital surplus. Two-thirds to three-quarters of bank profits came from the lending business. However the over-supply of money capital forces down the interest level and thus undermines the main source of bank profits, interest.

... Interest rates decrease when profit-rates fall in the long run. Therefore Karl Marx said: "The interest-rate tends to fall... owing to the growth of borrowed money-capital." The fall of interests and interest-margins contributed greatly to a long-term decline of banks' capital profits, which sank to a new all-time low in the last 2000-2003 crisis. The methods for mastering this problem were the starting-point for the deeper financial- and economic crisis from 2007.

The principle of these methods was increasing profit with enormous use of credits with as little of their own capital as possible and multiplying their own capital profits. That caused the explosion of guarantees of credits in the form of securities, credit default swaps, conduits off the balance sheets, hedge-funds and holding companies and the explosion of sales of bets on prices, exchange rates, currencies, raw materials and so on.

These methods were not "mistakes" by greedy bankers bereft of social responsibility but practical necessities dictated by the economic laws of capital exploitation. They are also in effect in a Germany that clothes itself as a social market economy, Axel A. Weber, the president of the German Central Bank, recognized in Handelsblatt: "The losses (of the paper economy in Germany) come from securities portfolios to compensate for the trifling margins in the banking industry at home and yields on the capital market or in the real estate market abroad." Almost no one makes such an excellent confession on the development of profit rates.

The reasons why the toxic assets/securities were created in the US and purchased in Germany were the same: enormous problems in the commercialization of surplus capital. Capital exploitation, whether under neoliberalism or the social market economy, leads into financial crisis, not out of it. According to the German Finance ministry, a trillion euro in capital in the assets of German banks had to be written-off so the "social market economy" can "solve" the crisis. One basic condition of this crisis is that this wealth produced by wage earners has the quality of being capital and doesn't satisfy social needs and improve the living conditions of the broad masses. The social market economy prefers to blow the wealth of this society in speculation than in higher wages, higher pensions or unemployment benefits.

"Genuine renaissance of the social market economy" was proclaimed as the goal of the nation-wide DGB (German union) demonstration on May 16, 2009. The earlier call for a demonstration against shifting the crisis burdens on March 28 in Frankfurt and Berlin attributed to the intervention of Attac and the Left party (Die Linke). This demonstration urged a "system change" to a "solidarity" society on the basis of a socially and ecologically tamed market economy. Whether under the formula "market economy for humans." "Solidarity redistribution or distribution justice, the proclamation of a social capital exploitation is always illusory.

Attacking, not defending, capital exploitation, the basic condition of impoverishment and crises, is the challenge of wage earners.


The German IG Metal union now demands: "To protect the real economy from infection by the financial market crisis, trust in the banking system must be restored." But can the real- and financial-economy be kept apart? Industrial corporations or conglomerates manage vast capital surpluses. The capital excesses that inflate the financial market are produced in the so-called real economy. Banks, insurances and pension funds have the money of businesses and private households that are excess, that is temporarily or permanently fallow in the reproduction of capital. Reflecting the close connection of the financial- and real-economy, the supposedly solid real economy could not have realized growth rates of the last economic cycle without the enormous expansion of indebtedness, financial markets and the fraud profits from the real estate- and stock market bubbles. The explosion of the money supply, an indirect consequence of the demand for credit furthered production. As long as business was hunky-dory, the representatives of the "real economy" and their social partners did not complain and even praised the US as the land of low interests.

Credit-doping possible through the credit surplus of the real economy produced the heyday of the real economy. But it is also one cause of this deep present-day crisis. Production exceeded society's consumption capacity on account of production by private owners for unknown markets. The credit demands that gave wings to the real economy grew far beyond the real solvency of society and now must be written-off in the trillions. Credit, an indispensable component of the real economy, leads to profound shocks to current production as the financial crisis shows.

The present financial system as constructed cannot continue. What must be urgently changed?

The most important reality that determines whether the banks can be responsible for their losses without state aid is their own capital. The less is their own capital, the more banks need state assistance. They want to assume as little responsibility as possible for the incurred risks. The state should assume these risks.

The capital of US commercial banks came to $1.3 trillion at the end of 2008 and the balance sums $12.4 trillion. Thus the ratio of their own capital to their balance sums amounted to 9.7 percent. The banks of the so-called social market economy in Germany are in a worse state. In October 2008, they had their own capital in the amount of 386 billion euro, their balance sum of 8.030 trillion. The ratio of German banks' own capital at 4.6 percent was only half that of the U.S. The flagship of the social market economy, Deutsche Bank, has its balance sum of 2.061 trillion euro with its own capital of 32.8 billion euro. Fraught with risk, Deutsche Bank had assets in the amount of 319 billion euro. If only ten percent of that were written-off, its own capital would be consumed and Deutsche Bank would be bankrupt unless it received new capital.

"... If a bank went bust, the investors and holders of bank loans would have to shoulder part of the losses, which could trigger a chain reaction" (Frankfurter Allgemeiner Zeitung) Demands like the following result: The capital holding requirement for investment banking must be raised considerably, perhaps to 20 percent of the total balance sum, not only to the risk-adjusted balance sum. That was in effect up to the 1940s.

The deposit security fund of private banks is so outfitted that the banks could actually answer together for bankruptcies and not the sate.

Guaranteeing credits should be prohibited and their insurance by buyers of negotiable credit insurance securities, which are not liquid in the insurance case.

Hedge funds and holding companies must be closed or if not closed subject to the same capital holding requirements as banks.

Trade with financial products like stocks, currencies and so on must be covered with a value-added tax. Taxing the sale of a stock, not the purchase of bread, is crucial.

All capital transactions with tax havens should be prohibited. German banks alone have invested 295 billion euro in tax havens, above all in the Cayman Islands. This sum is greater than the German budget.

Lowering the top tax rate, lowering the corporation tax rate, and abolishing the property tax have proven to be means to bring play money to financial corporations, inflicting gigantic losses on society. The top tax rate and the corporation tax must be raised again to 56 percent. Instead of strengthening the fraud capital of banks, the funds should be used for massive investments in education, renewable energy, local public transit and public housing construction.

These demands would considerably lower the profit rates of banks and the net profit rates of businesses. From the newly levied taxes on profits and assets, a crisis fund urged by Attac could be funded to mitigate the consequences of crises. But the financial markets would not be disarmed. Their weapon, money capital, which they collect and invest, would still be in their hands.

Joining these demands with the desire that a great financial crisis like the current one not be repeated and the real economy never caught again, as the German IG Metal union thinks, would be illusory.

Crises arise because financial and industrial corporations exploit capital in competition each for itself and produce for unknown markets or sell financial products. Whether markets were receptive is first revealed afterwards. Again and again the mass of commodities and masses of capital were driven beyond the receptivity of markets. Thus the foundations for crises existed despite stronger restriction of capital exploitation. There is no reason for trust in capital exploitation as a stable foundation, even if limits are set to capital.


No democratic control of the financial markets would be realized with the above measures. Control of markets is a contradiction in itself. Markets consist of unknown effects of unknown decisions of an unknown number of unknown people who act on unknown private calculations. By their nature, markets are uncontrollable because they are anarchic.

What does democracy mean? The present crisis is leading to a huge concentration in the banking industry. Exploitation of one bank by another, monopolization, is the motto. The state still leaves management to these highly concentrated banks. The allocation of state funds to endangered banks and corporations happens outside public view. This is largely left to a special budget and its administrators who are not subject to any governmental control. Since the bailout programs for banks and the economy will be mainly paid with state debts, the state will be handed over more and more to its financial sponsors and their oligarchical control. Instead of a process of democratization, we see a process of growing concentration in a few hands. The massive expansion of state indebtedness for overcoming the present crisis is even endorsed by the German DGB union. The dominance of financial corporations is strengthened. The above-mentioned measures could considerably limit their capacity for awarding credits.

The wealth of capitalist societies is expressed in the amount of money capital. This wealth is not used to develop areas that yield below-average profit or no profit, for example building local and long-distance public transportation, developing renewable energy, constructing apartments, building educational-, cultural- and sports-facilities or promoting agriculture and the trades. This wealth will not be used in expanding all the possibilities for developing individual abilities or in massive reduction of working hours, disease prevention, better health care, free satisfaction of basic needs for mobility, massive expansion of child care and so on. This wealth will not be used to combat poverty that as the reverse side develops just as fast as wealth. To an incredible extent, the wealth will be thrown away. On the basis of this asocial economy, there is ultimately no solution for the problems it produces. "Solving" the crisis with the explosion of state credits prepares the next crisis if the present one can be overcome.

A system-change is certainly necessary so the economic surplus will not be capital any more and the worker will not be a commodity. The producers of wealth must also be the owners of their conditions of production so that wealth is used for the maximum satisfaction of their needs and not destroyed in crises and/or blown in speculation. That would be the precondition of a society, which could be described as solidarity. (Translator's note: Elsewhere Rainer Roth has urged that "knowledge maximization" should replace "profit maximization.")

We live in an economic system in which people do not have the economic flow under control (because no one wants crises but are ruled by the products of their own labor through practical economic laws that operate like natural laws but are made by humans and thus are not eternally valid. When people are no longer ruled by the elements of capital accumulation, one can say the time will dawn when there is freedom instead of bondage.

Explaining the present crisis must include "a clear confession to the social market economy and against shareholder value capitalism," said DGB chairperson Michael Sommer. This is also the government line. "The principles of the social market economy must be respected worldwide. That will bring the world out of its crisis," German chancellor Merkel declared. Minister of finance Peer Steinbruck located the crisis in the US, not in Germany.

The total indebtedness of the US at around 50 trillion dollars is 3.8 times the gross domestic product (GDP), the aggregate value of all goods and services produced in a year within a national economy. A significant part of US credits - claims of US debtors - were sold worldwide, above all mortgages. Credits to insolvent debtors were packaged as securities and secured with credit-insured papers without sufficient cover.

Germany's total indebtedness is unknown. This indebtedness may be at two- to three times the GDP of 2.5 trillion euro. German banks have it. As the Frankfurter Allgemeiner Zeitung said, "financial products from Wall Street were enthusiastically brought into our house." Humiliation of human dignity occurred. The maximum development of the potential of all people should become the only goal of human activity.

Knowledge-maximization should replace profit-maximization.





"The Quiet Coup" by Simon Johnson, Atlantic Magazine 2009

"2009 Preliminary Report of the UN Stiglitz Commission on the Financial and Economic Crisis"

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