Financial Markets Cannot Govern Us


During the past two weeks, German President Köhler and former Chancellor Schmidt, together with 16 elder statesmen from across Europe, have taken an extraordinary initiative in respect to the financial crisis and the need to promote a model of “decent capitalism” for the world economy and the global financial system.

By Michael Liebig

On May 15, German President Horst Köhler gave an interview to Stern magazine, which has caused quite some furore in Germany and internationally, because he decribed the financial markets as a “monster.” In fact, Köhler said a lot more on the current financial crisis in this Stern interview which, however, was barely covered in the media.

After stating that “we were close to the breakdown of world financial markets,” Köhler continued with the much-quoted “monster” sentence: “There is one positive aspect of the crisis: Now every person who is responsibly thinking in the [financial] sector itself must have realized that the international financial markets have become a monster, which has to be shown the limits… The over-complexity of financial products and the possibility of making big leveraged trades while just minimally risking one’s own capital, have made the growth of the monster possible, which barely has a foundation in the real economy any more. Add to this bizarrely high salaries for financial managers.”

“Disgraced” Bankers

“The ‘global players’ really haven’t covered themselves with glory,” Köhler added rather sarcastically. “One has to hold up the mirror to the financial world, which has really disgraced itself. And I’m still waiting for a clearly audible mea culpa.” He contrasted his experiences with poverty in Africa (no senior German state figure has visited Africa as often as Köhler has) with what he had seen “in the City of London, when young investment bankers emptied champagne bottles over each other’s heads after receiving their bonuses.”

After stating, “only a capitalism has a future which is ready to accept responsibility,” and that “capitalism is more than bagging the profit,” Köhler urged that the following measures had to be implemented: “We need a more rigorous and efficient regulation, more capital liability for propriatory transactions, more transparency and an international institution, which independently supervises the stability of the global financial system.”

Similar measures, when proposed by Germany at the Heiligendamm G-8 summit in June 2007, were flatly rejected by the US and British governments. That was just a few weeks before the financial crisis hit full force. Now these proposals have become a kind of international consensus. But Köhler then added a sentence which is likely to have more far-reaching implications: “I recommend a self-confident advocacy of the continental European financial and banking culture: monetary stability, long-term thinking and respect for those who save instead of short-termism and financial alchemy. We Germans must make a strategic review of our finance sector.”

Koehler’s blunt criticism of the “disgraced” financiers, was received well in German public opinion. Most German bankers prefered to stay quiet, knowing their reputation nosedived over the past months. Deutsche Bank CEO Josef Ackermann said, he “didn’t feel being addressed” by Köhler, because he had already aknowledged that “mistakes” had been made, however, the “demonisation of financial innovations” was inappropriate.

Some observers insinuated that Köhler wanted to appeal to the “left”, because he is running for his second term als President of Germany. That argument is missing the point in two ways. First, the Social Democrats (SPD) are not backing Köhler as their canidate for President, but they support political scientist Prof. Gesine Schwan. And, secondly, resentment and anger at the banks are no longer something reserved for the “left.” What Köhler said in the Stern interview is something that is not only the view of the majority of the population, but is shared in significant sections of the “elite.”

More to the point, are critical remarks on Köhler which ask why it took him so long to articulate what he is saying now? After all, the financial crisis has been dragging on for almost a year. And wasn’t Köhler the head of the International Monetary Fund (IMF) from the year 2000 till March 2004? Already then, others had stated what Köhler says now.

“The Letter of the 16”

Among those who have been warning for years that neoliberal financial capitalism was heading for disaster is Helmut Schmidt. The chain-smoking, highly popular former Chancellor has used almost each of his many media appearences to pronounce his warnings against the “new, speculative predatory capitalism.”

Four days after Köhler’s Stern interview, an open letter, titled “Financial Markets Cannot Govern Us,” was released. This “Letter of the 16” on the financial crisis received quite some media attention. Datelined May 19th, the open letter is addressed to the current (rotating) European Union Presidency, the President of Slovenia, Danilo Tuerk. The 16 signatories include:

– former German Chancellor Helmut Schmidt
– former French Prime Ministers Laurent Fabius and Lionel Jospin;
– former Italian Prime Minister Massimo d’Alema;
– former Danish Prime Minister Poul Nyrup Rasmussen
– fomer Swedish Prime Minister Goeran Persson,
– former Finnish Prime Minister Paavo Lipponen,
– former EU Commission Presidents Jacques Delors and Jacques Santer, – and former German finance ministers Hans Eichel and Otto Graf Lambsdorff;

Germany (3), France (3), Italy (1) Luxembourg (1) and the Scandinavian countries (6) are well represented, and there also signers from Ireland and Romania. There are no signers from Britain, Holland or Spain.

From a German perspective, it is a “sign of the times” that Lambsdorff’s signature is on the open letter. For many years, Lambsdorff was heading the European section of the Trilateral Commission and he was also active in the ultra-liberalist Mont Pelerin Society. In 1982, it was Lambsdorff who introduced an early neo-liberal agenda – of the Reagan/Thatcher variety – into (West-)German politics. On top of this, it was Lambsdorff who engineered the toppling of Helmut Schmidt as Chancellor in 1983.

When trying to find reasons why Lambsdorff teamed up with all these social democratic elder statesmen, I would argue that Lambsdorff’s faith in his fellow neo-liberals of the “second generation,” Anglo-American-inspired variety has been shaken, because the financial crisis has proven the once loud-mouthed neo-liberals are stupid – and for someone like Lambsdorff this is unforgivable.

I would also imagine that Lambsdorff, like other European elder statesmen, clearly sees the geo-political implications of the US-centered financial crisis. They had relied for more than half a century on American world leadership. Welcome or not, US leadership was a fact – and it was based on the USA’s economic and financial power. As the result of self-inflicted strategic and economic-financial disasters, the leadership role of the USA has shrunk from being a “fact” into a mere “factor” in world affairs. In simple words: Do not expect anything really important – good or bad – from the US for the time being. And the US response to the financial crisis demonstrates that: Hectic “crisis management” cum politburo-like “feel good” declarations. Ever more liquidity is being pumped into the financial sector while the real economy is sinking into a recession. To be sure that this point is not missed, the “Letter” states: “The accumulated debt of households, financial and non-financial companies and of the American public authorities amounts to more than three times the US GDP, twice the level in 1929.”

If the US is paralyzed, others will have to do something of consequence vis-à-vis the financial crisis (and beyond). The “others” notably include Europe. I would assume that the more far-sighted elements in the European elites recognize the strategic danger that Europe will be squeezed in between a declining and paralyzed America and the new power dynamics in Asia and Latin America. If Europe does not take the initiative, then the new rising powers will – China, Russia, India, Brazil and others, mainly in Asia.

What other interpretation would make sense when reading the following section of the “Letter of the 16”: “The current financial crisis diminishes the West’s ability to a better dialogue with the rest of the world on global challenges, in managing the effects of globalisation and global warming – just when Asia’s extraordinary economic progress poses unprecedented new challenges… It is time to set up a ‘European Crisis Committee’ gathering high-profile politicians, former heads of state or government or finance ministers as well as renowned economists and financial experts of all continents. This Committee should […] present to the [EU] Council of Ministers, the member states of the UN Security Council, the Director General of the IMF, and all authorities and bodies concerned a set of proposals to limit the effects of this crisis and to prepare a World Financial Conference in order to rethink the rules of international finance and the goverance of global economic issues.”

That seems to me to be the core message of the “Letter of the 16”. The USA has become incapable of acting (even if that means just vetoing), the rising new powers seem not yet ready to take the lead, so Europe has to take the initiative. “We were warned of the dangers,” states the “Letter” in respect to the financial crisis, citing Alexander Lamfalussy in his time at the BIS, Paul Volcker, Paul Krugman, Warren Buffet, the Bank of England and “other lucid individuals [for whom] the bell rang years ago.” The “Letter of the 16,” is not a review of past, but a wake-up call for Europe to take action.

If the basis of such a European initiative is what is stated in the headline of the “Letter” – “Financial Markets Cannot Govern Us,” it is certainly a step in the right direction: “This crisis is a failure of poorly or unregulated markets, and shows us, once more, that the financial market is not capable of self-regulation… The financial world has accumulated a massive amount of fictitious capital, with little improvement for humanity and the enviroment… The problem is a model of economic and business governance based on under-regulation, inadequate supervision and an undersupply of public goods… Free markets cannot ignore social morals. Adam Smith, the father of laissez faire economics, also wrote The Theory of Moral Values and Max Weber connected hard work and moral values to the advance of capitalism. Decent capitalism (that respects the dignity of man, to use [Indian economist] Amartya Sen’s words) needs effective public policy. Profit seeking is the essence of a market economy. But when everything is for sale, social cohesion melts and the system breaks down.”

I do not think at all that the “Letter of the 16” is yet another appeal by political “has-beens” for yet another “commission” or “committee” on pressing world problems. In the coming weeks, up to the July G-8 summit in Japan, we will probably see first indications of an “European initiative” on the financial system. On June 24, Chancellor Merkel will deliver the laudatio for Schmidt at the occasion of him receiving an honorary award in Berlin; it will be most interesting to hear what she will say. Of crucial importance will be what the rising powers in Asia and Latin America will have to say about such an European initiative. The time is ripe for the new powers to articulate

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