BANKRUPTCIES PROHIBITED

By Richard von Heusinger

[This article published in: Frankfurter Rundschau 9/8/2008 is translated from the German on the World Wide Web, www.fr-online.de/.]

The curtain has fallen. The first act of the global financial crisis has ended. The US government nationalized the two mega-banks Fannie Mae and Freddie Mac. Taken aback, the public rubs its eyes. The rescue can easily cost US taxpayers $300 billion. Compared to this, the eight billion euros ($11.5 billion) poured into the regional IKB bank by Germany were peanuts.

With all shock and bewilderment, capitalism functions this way. America allowed its two real estate banks that refinance $5.5 trillion in mortgages to go bankrupt. However even if banks can still shoot around the globe today, people will no longer have their money, firms will not have credits and finance ministers worldwide will be mired in crisis meetings. The rescue corresponds to the textbook example of “too big to fail.”

Capitalism is a system based on debts and credit. To function, it needs trust, trust in the mechanism that banks will always meet their obligations. Fannie and Freddie could not do this any more. Therefore the state had to intervene. Banks are not normal enterprises and should be subject to a more rigorous monitoring. They are all quasi-public institutions because the taxpayer is always liable without further appeal. Even the liberals who trust in the market more than the state must gradually realize this. The conventional principle that the one who fails is eliminated from the market is not in effect for banks.

That is the crux of the matter why the ideology of deregulation was such a fire risk for the financial markets and banks. “The market” can neither judge the risk of credits nor rightly offer incentives for the banks. The fatal error of the Federal Reserve chief Alan Greenspan is that he promoted market forces after extremely overrating them.

The rescue of Fannie and Freddie was necessary and helps get a grip on the crisis. There is hope for improvement if the home prices in America stop falling. Therefore the two most important players on the mortgage market must be ready to refinance new credits.

All this is the first act. Act Two has the makings of being nastier. The crisis has long reached the real economy. Global demand will fall. Firms will have to put their expansion plans on ice. Problems of firms that cannot use their credits any more are joined to the problems from the financial sector. This will be the next blow to the banking sector. Nothing will be left to the governments than to help bring the balances of banks in order by tax funds and new debts – whether through economic programs or new rescue projects.

Act Three beginning in the coming decade will bring a new strict regulation of the international financial markets and banks. The governments must now rescue what can be rescued with our money.
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More News from the Casino (from www.nachdenkseiten.de):

James K. Galbraith: Policy and Security Implications of the Financial Crisis - A Plan for America

On June 16-17, 2008, I had the pleasure of meeting in Paris with an exceptional group of close observers of the financial system. The meeting was international and non-partisan, convened jointly by Economists for Peace and Security and by the Initiative for Rethinking the Economy. I presided over two days of off-the-record discussions.

What distinguishes this crisis from the others are three facts taken together: (a) it emerges from the United States, that is from the center and not the periphery of the global system; (b) it reflects the collapse of a bubble in an economy driven by repetitive bubbles; and (c) the bubble has been vectored into the financial structure in a uniquely complex and intractable way, via securitization.

No one in the group expects the financial crisis to have disappeared, or even to be under stable control, by January of 2009. At that time there will no doubt be immediate priorities: more fiscal expansion, fast action against the wave of home losses to foreclosures, plus fast action against financial speculation in commodities would seem as of now to head the “to-do” list. But the financial problems will not go away. And that means that a benign credit expansion, such as got underway for Clinton in 1994 and carried him through his presidency, is not in the cards now.

For these reasons, the Paris group agreed that in the next administration the problems of the financial sector should take a very high priority, as an integral part of broader economic strategy. The financial crisis needs to be addressed at its most fundamental level, which is the purpose, functioning and governance of financial institutions–and their regulators.

The entire point of a regulatory system is to regulate. It is to subordinate the activities of an intrinsically unstable and predatory sector to larger social purposes, and thus to prevent a situation in which financial interests dictate policy to governments. That is however exactly the situation we have allowed to develop. The job of the Federal Reserve and of the other responsible agencies must now be, in part, to re-establish who is boss. Specifically, there must be a thorough-going revamping of the financial rules of the road, to dampen financial instability, to deflate the commodity bubble, to reduce the enormous monopoly rents in the financial sector, to set new terms for credit management and to generate productive capital investment where it is most required. This is in large part the Federal Reserve’s job, though it has strong inter-agency and international dimensions.

There is no need for panic. It will be far easier to rebuild the financial system than to cure the urban and suburban blight that an unattended housing crisis will leave behind, let alone to undo the damage of conditions approaching famine in some countries.

Regulatory powers are a matter of will and determination as much as they are of new laws. A will to act can put an end to the self-fulfilling prophecy that governments are (in this area) intrinsically overwhelmed by the complexity of markets. The next administration should therefore move swiftly to repair the vast damage done to regulatory capacity in recent years. It should emphasize the acquisition of authority–filling in the regulatory black holes that have been allowed to develop. It should appoint strong regulators to vacancies on the Federal Reserve Board and elsewhere. It should rebuild the staffs of the regulatory agencies, paying adequately to tap and retain top talent, including senior experts. It should hire enough people to have systemic competence, and it should eschew zealots. The country needs an effective ongoing regulatory system, not a platform for the careers of a few new Rudy Giulianis.

The way out of this dilemma – the only way out – lies in multilateral coordination and collaboration – a joint effort by the US and its creditors. And this means that the next administration must return, rapidly and with a credible commitment, to the world of collective security and shared decision-making that the Bush administration has been at pains to abandon.
Quelle: James Galbraith [PDF - 372 KB]