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The High Risk Business of Banks

The model of financial market capitalism collapsed with the greatest crisis of the financial markets since the worldwide economic crisis at the end of the 20s. The enormous accumulation of financial assets was based on redistribution of incomes continuing for 30 years.

By Jorg Huffschmid

[This article published in: Frankfurter Rundschau, 2/24/2009 is translated from the German on the Internet,  http://www.fr-online.de/in_und_ausland/wirtschaft/debatte/?em_cnt=1680825&.
The model of financial market capitalism collapsed with the greatest crisis of the financial markets since the worldwide economic crisis at the end of the 1920s.]

Politicians all over the world seem determined to draw lessons from the financial crisis. All financial markets with their active persons and products should be regulated completely. Bankers and speculators should be put on a short rein.

In the future, greed, megalomania and regulation gaps should not plunge the world into chaos. This is the program of the German government, the EU, the US and the G20.

The regulation gaps arose when the financial markets were internationalized and financial oversight could not keep up. This first made possible the wild worldwide speculation that has now broken down. These gaps should now be closed. A summit is scheduled for April 2009.

Resolutions at the summit to make markets more transparent, limit trade with credits and completely prohibit short selling would be important steps in the right direction.

The fixation on regulation gaps turns reality upside down. The financial markets hurry on ahead of politics, it is said. Politics tries but cannot keep up with the speed. Therefore the backlog must now be made up.

Oh no, not at all! Politics opened the door wide for the speculators by loosening or dismantling existing regulations. Politics removed political restrictions on international capital transactions.

Through "Basel II," politics largely privatized the financial monitoring and left it to the banks. In Germany, highly speculative hedge funds may be expelled for the first time since 2004 after the parliament rolled out the red carpet for them.

If this is now revised and financial markets are put under stronger a control, that is important and good. But the pressure that drove banks and other financial actors will drive them in the future to increasingly risky strategies without far-reaching political interventions. Where does this pressure come from?

It is the pressure of the investor whose financial assets increase more and more and who expects profits. Realizing this on the traditional way of production of value and surplus value becomes increasingly hard since productive investment opportunities grow more slowly than opportunities of financial assets.

In this situation, the financial investors offer themselves as providers who promise to profitably invest the financial assets. They compete for the money of owners and are more successful the higher the profits they gain.


What caused the enormous accumulation of financial assets? This accumulation results from two sources: firstly, the redistribution of incomes continuing for 30 years. More and more money moved to the rich that was not productively reinvested - because too little was left to the poor and middle classes to buy additional goods and services.

Secondly, the increasing privatization of old age insurance led to investing insurance benefits once paid directly to pensioners on the capital markets for a few decades.

Redistribution, privatization and liberalization resulted in the rise of finance market-driven capitalism and were expressions of a shift of economic wealth and political power in favor of a tiny elite of corporations and rich families who carry out the commission of financial investors.

Whoever wants to create stable financial markets in the long-term must not only convert or discipline banks if necessary. Limitation of speculation is important but not sufficient. Long-term stabilization must change the distribution relations in favor of mass income and withdraw old age security from the capital markets.

Instead of laboriously curbing the pressure of financial markets again and again, politics should aim at preventing this pressure from arising.


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