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Europe and the End of Financial Capitalism

Posted on: August 4, 2011

http://www.huffingtonpost.com/alexander-goerlach/europe-and-the-end-of-fin_b_907769.html

Unless we continue with government aid packages, the banking system will collapse. At least that is what you hear from the bankers themselves. Alright — we must prevent that collapse from happening. Governments must nationalize the profits that the banks accumulated with taxpayer money since the financial crisis. If bankruptcy was avoided with billions of dollars of rescue packages, then the banks owe the people. And the nationalization of profits would also be an adequate punishment for years of reckless speculations and predatory lending that drove the world to the brink of collapse.

The next step will be the creation of regulatory tools that prevent the resurgence of greed. A turn to the Muslim World might help: Islamic banking strictly regulates the use of speculation and interest rates. We know that the 21st century will bring food shortages; wars will be fought over access to water and grain. Yet we continue to allow speculation on these vital resources. People in developing nations are especially vulnerable to price fluctuations that are caused by the men in suits and air-conditioned offices.

Why do the people not rise against that system? Because we are sedated by a rhetoric that explains such egregious forms of investment as a feature of the free market. Yet the declaration that “my money works for me” is as revealing as it is false. When I make money, someone else is losing money. The mechanism behind the redistribution of money is not the survival of the best ideas, as the proponents of the free market want to tell us. Instead, investments are loaded with risk while toxic assets are being passed back and forth among the big players. Whoever holds the assets when the music stops, loses.

But who would buy something so risky? Only those who don’t know better. But the banks did know. Their obscure betting practices and the conviction that the state would bail them out of a worst-case scenario were their blanc checks that justified recklessness. Their investments were an order of magnitude larger than the money they actually controlled.

We thought that our long-term investments — life insurances, retirement funds, savings — were save with the banks. Actually, that money was used to keep the financial casino going. The German chancellor and treasury secretary explicitly stated that our savings are indeed save. Why are they so keen to press that message? Because the state would have to jump in if the banks squandered those investments.

Here’s another rhetorical fallacy: “The markets”. Who is that supposed to be? It is a grammatical construction that reminds me of the remark that “the organ is playing”. When you walk past a church on Sunday and the sound of the music fills the air, people often mention it: “The organ is playing”. As the parishioners exist the church after the service, they pay their compliments: “The organ played nicely today”. But the organ does not play. The organist does. You might not see him from your bench inside the church, but that does not mean that he is not there. You also cannot see “the markets”. We mystify them without looking at the people and decisions that explain market behavior.

When we say that the markets are in turmoil, what we mean is that the Wall Streets of this world are in turmoil because people are worried about their speculations and the future of their business. They fear that the system could collapse. The spinster phrase “too big too fail” is another great success of the financial industry that managed to dictate policy to a deeply disturbed political establishment.

Now is the time to realize that the mechanics of debt-driven financing are no longer a viable path. States used to be able to accumulate debt when it was still possible to measure economic output reliably. Today, the export of cars or washing machines has been replaced by twisted investments whose risks and real value can hardly be determined. Money that used to originate from labor and production was leveraged through collateralized debt obligations and credit default swaps. The victims of that game of poker were the small-scale investors and mortgage recipients.

Short-term thinking means that it has become impossible to make long-term claims about the economic situation of a state. The system is too complex, too fragile and too much intertwined to rule out sudden collapse and domino effects. One crisis can reduce decades of progress to a pile of economic rubble. No matter how radical Greek spending cuts are, the country will be saddled with debt for decades. A similar situation can be found in the US and in some other countries of the Eurozone.

Do we all need a haircut to reduce our national debt? The most important task, I believe, is to break the narrative that has sustained the financial industry for so long. Politicians are tasked with the reconstruction of leadership. We must no longer tolerate that bankers can keep them on a short leash, pushing and pulling them into whichever direction benefits them. Leadership can be reduced to individuals. Chancellor Merkel, get back our tax money!

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