Entering a new Era

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The escalation of the American financial crisis during September translates into the end of the era of post-modern financial capitalism. The crisis is generating a new relationship between market and state, finance and the real economy. The fact the issue of a “new multipolar architecture” for the international financial system is becoming a central issue among the world’s leading governments, is not only indicated by the speech of French president Sarkozy before the UN General Assembly.
by Michael Liebig


One is well advised to be careful on using the term “historic” for current affairs. The financial ruptures in the United States during the month of September however do deserve to be characterized as ”historic.” Over the past couple of days, many comments have appeared in the German-language, mainstream media which clearly indicate that the US-centered financial crisis is being regarded as a paradigm shift. The Sept. 23 Neue Zuercher Zeitung editorialized, that we witness “the end of an era” as “there are indications that nothing will be the same as before the outbreak of the financial crisis – on the international financial markets an irreversible transformation has set in.” Not only on financial markets, I would add.

The lead editorial of the Frankfurter Allgemeine Zeitung on Sept. 21 acknowledged that a rupture has occurred not only in the financial realm, but also geopolitically. “Will this century be called American? Arguably not, if things go on like this. Right now, towards the end of the first decade, the United States have reached a low point… The crash has hit America’s policy at its core. Neoliberalism and neoconservativism have collapsed.” This is written in paper with an editorial policy which, literally until yesterday, had supported and/or rationalized American neoliberalist and neoconservative policies. Even more indicative for the commotion in the minds of the FAZ editorial board is the paper’s front page on Sept. 19: The lead editorial, titled “After the Downfall,” is accompanied by a photography of rumpled one Dollar note and short text saying that now the sentence ”In God We Trust” on the Dollar note is probably what counts most.

The German word for “downfall” – Untergang – has a very special historical connotation. Germans have experienced the untergang of a system three times in the past century: 1918, 1945 and 1989. Then we had the “post-Cold War” era of American supremacy and now –19 years after the fall of the Berlin Wall – this era has come to an end.

Over the past couple of months there was a fascinating debate in the German and Swiss press whether Germany and Europe can “decouple” from the crisis in America? I think the events over the past two weeks have resolved this debate. Europe will take the initiative and go its own way in dealing with the consequences of the American crisis. Not only the speech of French President Nicolas Sarkozy at the UN General Assembly is a clear indication of this.

A new political and economic discourse

The reaction of pragmatist Angela Merkel to the financial crisis in the USA is telling: Since Sept. 19, Chancellor Merkel has almost daily blamed the American and British governments for having obstructed her – quite moderate – proposals at the Heilgendamm G-7 Summit in June 2007: For more financial market “transparency”, capital requirements on leveraged debt, and regulation of hedge funds and rating agencies. Merkel said she had never shared the fashionable view that globalization would mean the weakening of the state. Financial regulation in Germany was mostly adequate, but EU regulations needed to be improved, she said. The real problem was the lack of “binding international agreements for rules against irresponsible financial speculation.”

The tone of the German government got sharper, after US Treasury Secretary Paulson said that he would “aggressively” urge other countries to assist the United States in setting up the $700 billion state-run bailout fund buying up illiquid and/or worthless “assets” of private banks. This “toxic waste dump” scheme, announced on Sept.19, is generally described as a shocking surprise. But it is the logical consequence of the American crisis, as you could read a year ago in Solon (The current Financial Crisis – its economic and geopolitical consequences, Oct. 15, 2007)

Finance Minister Peer Steinbrück said that US financial crisis was “homemade”, that the situation in the German banking system was quite different and that there was no reason why the German government should get involved in the American mega-bailout. Also, economics minister Michael Glos said, Germany would not participate in Paulson’s bailot scheme, refering to a German proverb which can be roughly translated as: “Everybody should clean his own house and the street on front of it – the town will look neatly”. Mrs. Merkel’s spokesman said it in more diplomatic terms: Between the United States and Germany, “there exist differences in repect to the responsibilities for and the effects of crisis”.

The rejection of participation in Paulson’s “rescue plan” is backed by the opposition parties and the leading economic institutes. Exceptions are – funny enough – the leader of the Left Party, Oskar Lafontaine, and Norbert Walter, the chief economist of Deutsche Bank, which has a significant presence in the USA. However, Deutsche Bank has bought a 30% stake (plus an option for another 20%) in Germany’s Postbank, which has 14.5 million “small” customers. A rather radical turn-around for Deutsche Bank which until recently focussed on investment banking and wealthy clients. With great relief, German public opinion is now remembering that 70% of the German banking system are governed by public law; mostly municipal S&Ls and cooperative banks.

French Prime Minister Fillon too said that France was not responsible for “broken dishes” in America. And the French head of the IMF, Dominique Strauss-Kahn, told the FAZ on Sept. 24: “Let us not forget, first of all, we have an American crisis and most of the losses have occurred in America. Therefore dealing with this crisis is foremost an American task.”

Even, the British government will not likely get involved in the Paulson scheme. Opposite to the London Telegraph’s Ambrose Evans-Pritchard mantra about the economic collapse of continental Europe, it is Britain, precisely because of its dependence on the “financial industry,” that has once again become “the sick man of Europe”. That European – and emerging market – stock markets have tanked as much or more as those in the USA is not due to “investors’ fears” of a massive recession in Europe, but largely the result of emergency capital repatriations by Americans. These capital repatriations mean exchanging euros into dollars which explain why the dollar has remained rather stable under crisis conditions. The current dollar exchange rate is certainly no sign of confidence in the US economy.

Of course, the Europeans will cooperate with the USA in crisis management for preventing a chain-reaction breakdown of the financial system. But, I am quite sure they will not accept to be blackmailed into subsidizing the homemade bankrupty of the US financial sector.

When George Bush goes to the United Nations General Assembly, declaring “our economies are more deeply connected than ever before,” governments around the world know perfectly well what his message is, but he will not get the subsidies he is asking for. For sure, the next President will try again. The broad answer will likely be simliar to what Russian Prime Minister Putin said: There should be in due time serious talks about a “new financial architecture,” but one that is based on the lesson learned that the “whole world cannot depend on a single money printing machine”.

Putin’s view is certainly not an isolated one. The German press has rather extensively covered the reactions in Latin America to the US crisis. Brazilian President Lula da Silva is quoted saying the US should mind their own business, Brazil would not be pulled down by the American crisis. The very banks that had lectured and pressured Brazil for decades, had now collapsed by their own doing. And Argentina’s Christina Kirchner is quoted saying that the same Lehman bank, which only a short while ago had warned that Argentina may become insolvent again, is now bankrupt.

The creditworthiness of the United States

The really fundamental issue in the US financial crisis is the creditworthiness of the United States as whole. With the nationalization of Fannie Mae and Freddie Mac, Congress raised the federal debt ceiling from $9,800 billion to $10,600 billion, with Paulson’s bailout scheme the debt ceiling will be raised further to $11,300 billion. The US government now “owns” the liabilities of Fannie Mae, Freddie Mac and the insurance giant AIG, which probably add up $6,000 billion. The fiscal year 2008/09 budget deficit will probably reach $1,600 billion.

Sooner than later, the issue of the creditworthiness of the USA will come up. The possibility of an American moratorium is the “elephant in the room” of international finance. Hints on the creditworthiness of the USA are already being raised in the European press, albeit cautiously. On Sept. 20, the NZZ wrote: “The solvency of the American state could increasingly come under pressure,” as total US state debt could reach “up to $20,000 billion.”

In an interview with the FAZ on Sept. 17, the 82-year old American banker Peter G. Peterson said: “Soon America will be indebted to foreigners in a dimension which is comparable to the indebtedness of certain developing countries.” Peterson called the latest financial ruptures in the USA “the most extraordinary events that I have ever seen,” and compared the current challenges facing the USA with those in World War II.

Sarkozy’s Initiative

Speaking after Bush before the UNGA, French President Nicolas Sarkozy has called for an international conference “before the end of the year to examine the lessons of the most serious financial crisis the world has experienced since the 1930s.” After meeting Brazilian president Lula da Silva, Sarkozy said that the G-8 countries plus China, India, Brazil, Mexico and South Africa should participate in the conference. Lula added: “The international economic institutions have neither the authority nor the instruments necessary to stop the anarchy of speculation. We must rebuild them on a an entirely new basis.” Sarkozy said, the proposed international conference would have the task “to rebuild together a regulated capitalism, one in which not whole chunks of financial activity are left to the sole judgement of market operators, but one in which banks do their job which is to finance economic development rather than to engage in speculation.”

When Sarkozy called for the international conference to be convend before the end of the year, one has take into account that until Dec. 31, France holds to rotating EU presidency, and on Nov. 5 we will know who will be the next US president. Sarkozy’s proposal is of course coordinated with Germany. Germany’s premier “elder statesman” (and most popular political figure), former Chancellor Helmut Schmidt, has proposed exactly the same as Sarkozy. Germany was represented at the UNGA by Foreign Minister Frank-Walter Steinmeier. In an interview with Wirtschaftswoche from New York, Steinmeier, who will also be the Chancelor Candidate of the Social Democratic Party next year, made a crucial point for the structural reform of the financial system: The finance sector has to serve real economy. Said Steinmeier: “Germany has not run after economic fashions by becoming fixated on the service and financial sectors… That certain countries generate almost their whole national income from financial activities cannot be our benchmark. Therefore, today we are the strongest industrial economy in Europe. That the financial crisis has not effected Germany to the degree we see in the USA and Britain is also connected to the strong industruial backbone of our economy.” Steinmeier added, “We are in a transitional phase. The world is searching for a new order. For sure, this order will be multipolar.” Indeed, the ancien regime of post-modern financial capitalism is finished, we are entering a new era.

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