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Bankers Rule

The state became indebted to bailout the banks. Now the state pays them ever higher interests. The state should guarantee the deposits of small savers, not the debts of banks to other banks or hedge funds or the assets of multi-millionaires. The financial sector must be shriveled, the sector that became much too big and uncoupled from the real economy.

Interview with Sahra Wagenknecht

[This interview published 8/5/2012 is translated from the German on the Internet. Sahra Wagenknecht is an author and chairperson of The Left party (Die Linke) in the German Bundestag.]

The Euro crisis is in its third year. Politics cannot calm the financial markets and should not try, says Sahra Wagenknecht, political-economic spokesperson of Die Linke (The Left party). Politics should strip the markets of power instead of trying to regain the trust of the markets.

Ms. Wagenknecht, after recently reading your remarks, it seems you could soon join the FDP...

Sahra Wagenknecht: There is a rather tiny possibility of that...

Why is there only a tiny possibility? In your new book, you quote the FDP-pillar saint Ludwig Erhard. In the Euro-crisis, you urge that banks accept liability for risks and go bust. You are against state interventions like bailouts for banks or Greece and garner praise from the liberal corner.

Wagenknecht: Erhard must be protected from the FDP. Erhard wanted "prosperity for everyone." The FDP wants riches for a small minority. Together with the CDU, the SPD and the Greens, it nationalizes the billions in losses of the banks while the profits remain private. That has nothing to do with liberalism.

The German government relied on three strategies to solve the Euro-crisis: austerity for the state budgets, increasing competitiveness through reduced piece-labor costs and guarantees of public debts in the form of the Euro-bailout umbrella and the European Central Bank. What is wrong with that?

Wagenknecht: That doesn't work as we see in Greece. The country was virtually insolvent two years ago. Europe's taxpayers take over an expanding part of its debts. Greece's original creditors - banks, hedge funds and wealthy private investors - were protected from losses. Debts increase because the austerity dictates worsen the economic crisis. Soon the country will not be able to handle its debts. This means the taxpayer will be bled white. Costs in the billions come to Germany. Repeating this process in Spain and Italy would be sheer madness.

Spain is much better off than Greece. Its debts measured as a share of the economic output are half as large.

Wagenknecht: Spain's debts have quickly escalated with the current policy. At the beginning of the financial crisis, they amounted to 36 percent of economic output. Today they are nearly 80 percent. Banks are revitalized with tax funds so investors who became very rich in the times of the real estate boom do not lose any money. European taxpayers are now forced to pump 100 billion in the Spanish banking sector. Spain saves deeper and deeper into crisis and has to pay extremely high interests. At the end, there can only be insolvency.

The European Central Bank could do something against the high interests by purchasing Spanish bonds.

Wagenknecht: At best that would help in the short-term. The relief measures of the Central Bank fizzle out again and again because they back an unworkable rescue-strategy.

What works?

Wagenknecht: First of all, a great incision is necessary. The Euro states should cancel all the debts that go back to the bank bailout. Then they would have a debt rate of 60 percent.

The Euro zone now has outstanding market-based promissory notes of around 8 trillion Euros. This amounts to 80 to 90 percent of the Euro economic output. In one blow, an incision recommended by you would cost creditors 4 trillion Euros of their claims, a gigantic expropriation.

Wagenknecht: Why should normal citizens be bled white after tax money was pulverized for fraudulent banks? The social state is the asset of the little people. If the social state is shattered, that is expropriation.

The banks had to be bailed out. Otherwise the credit stream would dry up and the financial system would collapse.

Wagenknecht: The important functions must be guaranteed: deposits, payment transactions and the credit business. The states should never be liable for the debts of banks from abstruse speculative intrigues. What happened? The state became indebted to bailout the banks. Now the state pays them ever higher interests.

You seek to make the banks liable through a debt cut. Such a cut would destroy billions in assets. Then the savers would be liable at the end for the bank bailout...

Wagenknecht: The state should guarantee the deposits of small savers, not the debts of banks to other banks or hedge funds or the assets of multi-millionaires. Those who profited from the financial market boom of the past decades must be liable with their assets. The financial sector must be shriveled, the sector that became much too big and uncoupled from the real economy. We have too much debt today...

A quarter of all Euro-state debts have foreign addresses, for example the US or Great Britain. They could lose hundreds of billions - and would probably not be amused.

Wagenknecht: A debt cut is not unusual. Hundredsof debt cuts have occurred since the Second World War. Investors get interests when they take risks. Whoever judges risks wrongly has to bear the consequences. That is the market economy.

Many European funds and banks would not survive such a liberal interpretation of the market economy. Their losses from the debt cut would be too massive. Would you drive the system to the brink?

Wagenknecht: The state has to guarantee the functions of the financial system that are important to the real economy. The betting kiosk must be closed. Fraudulent businesses and derivatives must not be bailed out with tax money. The bankruptcy of these areas of the financial sector would be good.


Wagenknecht: Finances are a public asset. That is the meaning of the term "system relevant." Something may not perish because otherwise the system falters. What is system-relevant should not be in private hands. Otherwise we experience the same thing again and again. In good times, profits are privately appropriated. In bad times, society is saddled with the losses. With a public banking sector, the state bears the risk of banking transactions.

Wagenknecht: Nationalizing is completely insufficient. Another business model is crucial, one committed to the public interest instead of profits. A large part of what banks do today would be strictly prohibited: derivative business and raw material- and currency-speculation. The result would be smaller banks that can do honest boring credit business and thus offer safe investments to savers like savings banks today.

All derivatives are not bad or toxic. For example, some derivatives serve exporters as security against exchange rate fluctuations. Would you also eliminate these?

Wagenknecht: Only an infinitesimally small part of currency-derivatives support real businesses. Most derivatives are pure financial speculations that damage the economy.

If the Wagenknecht-debt cut would occur, the trust of the financial markets would be destroyed. No one would lend money to Europe. Who will supply the money?

Wagenknecht: The European Central Bank could supply the money. The EZB should lend money directly to the states, not buy bonds from the banks - as presently happens. Then Spain would not pay six percent any more but 0.75 percent - the interest rate at which the EZB lends money to private banks. Today states are dependent on the interest-dictates of the financial markets which destroy any democracy. If they could refinance directly from the EZB, the interest rate would radically fall. Hysterical markets, rating agencies and the whole mischief would be averted.

The direct state financing of the EZB would be prohibited...

Wagenknecht: The EZB does many things now that are prohibited...

Do you want to prevent states taking escalating credit from the Central Bank and increase their debts higher and higher?

Wagenknecht: An upper limit could be introduced. The EZB could lend money to states up to a budget deficit of four percent of economic output. That would be appropriate with economic growth of two percent and inflation of two percent.

The history of the currency union demonstrates that such upper limits are not observed.

Wagenknecht: A functioning sanction mechanism must be created. When a state contracts excessive debts, it must be obliged to raise its property taxes until the debt rate is again at 60 percent of economic output. That should be the condition for direct EZB credits.

That sounds like a proposal that could have a majority in Europe.

Wagenknecht: The majority doesn't have great assets and would be unaffected by this sanction - unlike pensioners, workers and jobless today. I believe the dependence of states on financial speculators proves its irrationality daily and doesn't have a majority any more. That politics must constantly bow before the sponsors means the will of bankers rules, not the will of the voters. What kind of democracy is this?


Sahra Wagenknecht, "Millionaires' Tax as the Best Debt Brake," March, 19, 2012

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