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Protecting Capitalists or the Welfare State

Banks and hedge funds brought disaster upon themselves and their customers with their "innovations" and financial products unmasked as "toxic waste." "Too much credit," not "too much money," triggered this catastrophe. Financial management may never be uncoupled from the real economy and lead a life of its own without economic justification or social responsibility.

By Wilhelm Hankel

[This article published in: Frankfurter Rundschau, 7/31/2009 is translated from the German on the Internet,  link to www.fr-online.de.
Wilhelm Hankel, an emeritus professor at the University of Frankfurt, is a refractory and wise macro-economist.]

For crisis management in Germany and the other western states, there seems only one way out: the socialization of frozen bank debts (under the name "bad bank") and state relief for businesses on the verge of bankruptcy.

Damage to the real economy, the world of employment and the welfare state can only be limited this way. This strategy is the central thread in which western governments orient themselves and simultaneously the rescue rope to which they cling.

Germany's citizens are very uneasy about this strategy. The elders remember the bitter experiences of their parents and grandparents with boundless inflation of state debts, multiplication of money, inflation, assets losses, state bankruptcies and monetary reform. Why those with most culpability for the present misery are the least responsible for the damage they caused is not obvious to the younger ones.

The financial crisis could soon expand to a legitimation crisis of the West. The "Washington Consensus" (invoked in Berlin, London, Paris and Brussels) that the world after the removal of the "industrial accident" world crisis will run as before is not accepted in the new threshold countries.

Doubts grow there about a globalization that is only another word for the dependence of their markets on the West and its key currency, the US dollar. People do not want to be suppliers or bankers of the West.

Western crisis management succumbs to an illusion if it believes the consequences of the crisis can be "spirited away" without removing its causes. Whoever suspends bankruptcy judges, annuls indispensable free enterprise principles (and values like liability, responsibility and compensation) paralyzes the motors of market-based self-regulation.

Criticism of the state bailout packages has nothing to do with the pseudo-arguments of neoliberal market radicals. The raging speculation orgies of high finance triggered the crisis, not the relics of state socialism (as central banks under state contracts).

Banks and hedge funds have brought disaster upon themselves and their customers with their "innovations" and financial products unmasked as "toxic waste." "Too much credit," not "too much money" triggered this catastrophe. But whoever deserves the state as a crisis-trigger and seeks to eliminate the state as a nuisance element is more blind to reality than the monitoring authorities for the money- and capital markets that first saw the crisis when it claimed its first victims.

Is it a self-delusion or deception when politics deludes its party diehards with a unity that does not exist? To one, the rescue of "capital" is involved while others want jobs and the welfare state to be safeguarded. Who seriously believes the crisis will engender a new solidarity pact between capital and labor?

The truth is that each of the two sides wants the other to pay. The self-delusion of the left lies here. The money for bailout from the crisis must be collected from the little people, savers and taxpayers. Big capital has nothing to lose but its debts!

Both sides deceive themselves if they believe converting private capital and private debts into "public property" will change the consequences of the crisis. In the future, the management of "revitalized" banks and businesses working under state largesse has no other choice (if it wants to be more competent than the old) than to go further than their predecessors.

They stand under the same crisis- and cost-pressure. The banks do not lower their interests, businesses dismiss people instead of hiring new people and force down wages. Nationalization changes nothing in the problems of the crisis.

Must we sit back and wit until the crisis dissolves with acceptance of painful and politically explosive losses of assets, income and jobs. A realistic and competent crisis management that grapples with earlier experiences and offers solutions does not exist.

If most crises start from the real sector (financial breakdowns), the state is urged to improve the general economic situation, the factors influencing investment- and consumer conduct.

Today's financial crisis has other causes. It started from the global financial sector triggered by its seemingly "innovative" products and techniques. The inventions, the top institutes commanding the market and its managers fatally underrated the risks of their own inventions damaging their institutes and society. Repetition must be prevented; this crisis should not lead to the next.


Three demands ultimately based on very old discoveries of the discipline are directed to politics, legislation and the banking world.

Firstly, credits are forwarded savings (transfers of "real" capital formation to investors seeking foreign capital). Therefore they cannot and may not be replaced by bank transactions "on paper" (uncontrolled inter-bank credits) and speculative investments. Secondly, the legitimate profits of banks cannot come out of speculative financial affairs. They must be earned in the "real" economy because the businesses pay the bank interests from their profits.

The alarm bells should have sounded for all responsible actors when more was earned in investment banking than in the reala economy (which was true for over a decade before the crisis). This always means capital is misguided and wasted. Thirdly, a guiding principle follows for a practical policy, financial legislation and bank management. Financial management may never be uncoupled from the real economy and lead a life of its own without economic justification and social responsibility.

The planned new financial architecture has to take this in account globally and nationally (or across the European Union). If it ignores this commission or shelves it for the time being, the next crisis is programmed even before the current one ends.

The untrustworthiness of German crisis management is manifest in that the one inflicting harm is rewarded instead of bringing justice for the injured. A fraction of the state funds and guarantees raised for bailing out banks and firms would be enough to balance the losses of injured buyers of bank debt prescriptions, certificates and derivatives.

The market economy, money system and the welfare state will not collapse under the burden of several spectacular bankruptcies of banks and corporations or the loss of surplus regional banks. These bankruptcies represent structural corrections far more than system risk. The latter would only be the case if the bank net tears or the credit- and payment transactions grind to a halt as in a power failure.

What should be done about jobs that cannot be preserved because they are not profitable? This is not the case. Politics and the banks should recall the function (and legal form) of credit institutes: payment agencies of the state central bank. In the extreme case, this did not happen.

Direct customer businesses could be taken over and (according to the credit industry law) the interests and profit margins of the banks regulated. In the case of a boycott, the banking world had bad cards. Earlier bank managers knew this but bank managers today are in denial.

Wanting to save jobs that cannot be preserved because they are not profitable is also a waste of capital. What is the alternative? In the first Great German coalition (40 years ago), the Karl Schiller/Franz Josef Strauss duo demonstrated how the state as a public investor can successfully brighten the economic climate and create demand for new jobs.

At that time over a million jobs were created in approximately two years (1967/68). In Germany, two-thirds of all public infrastructure are in cities and communities. These investments permanently improve the citizens' quality of life: hospitals, schools, local transportation, sewage systems, street lighting, libraries and so forth.

All this is in dire straits. The crisis shows how much money could be mobilized for that. The German basic law even prescribes these activities: in Articles 91 (community functions) and 115 (how they are financed: through credits).

The horse is saddled. Where is the rider?

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