“WE ARE IN AN EPOCH SHIFT”

Interview with Peter Bofinger

[The financial crisis has destroyed the myth of Wall Street and now shakes the foundations of society, says economist Peter Bofinger. In this Spiegel Online interview, he speaks about the death of turbo-capitalism, the failures of politics and the return of the strong state. This interview published September 29, 2008 is translated from the German on the World Wide Web, www.spiegel.de/wirtschaft/0,1518,druck-580333,00.html.]

Spiegel Online: Mr. Bofinger, did “turbo-capitalism” die in the fall of 2008?

Bofinger: Yes. It died in the last two weeks with a great bang. The age of reassessment now begins on the financial markets.

Spiegel Online: What triggered the bang?

Bofinger: Many factors came together: the collapse of Fannie Mae and Freddie Mac, AIG and then the bankruptcy of the US investment bank Lehman. Up to their declaration of bankruptcy, the hope prevailed on Wall Street that at least the bank deposits would be safe. Hardly anyone expected that the US government would let the largest investment bank of the country to go bust.

Spiegel Online: The Lehman bankruptcy destroyed the myth of Wall Street. Financial jugglers are no longer regarded as invulnerable. Was it a mistake not to save Lehman?

Bofinger: It was clearly wrong. The mutual mistrust of banks will increase even more.

Spiegel Online: How could it happen that the financial system has so fallen out of control that the danger of a core meltdown is now raised again and again?

Bofinger: In a certain regard, the triumphant advance of Anglo Saxon capitalism was a concomitant to the Cold War. New dynamic markets that brought prosperity for many people arose through the collapse of the planned economies in Eastern Europe. Free markets and unbridled speculation were equated with freedom. The belief was that all reins must be taken from the markets to solve the problems of humanity.

Spiegel Online: Was the state defined as evil and the free markets as good?

Bofinger: In the public discussion, the state fell more and more on the defensive and the power of markets grew. Hedge funds and shadow banks like the conduits of IKB (a German regional bank) and unregulated investment houses like Lehman fueled the financial system with increasingly risky speculations. An inscrutable net of mutual debts and dependencies developed worldwide. Free markets became wild markets. The post-socialist blessing became the turbo-capitalist curse.

Spiegel Online: What mistake did the state make?

Bofinger: The state allowed the monitoring of banks to be de facto privatized. Up to July 2007, the dominant idea was: when rating agencies described a loan as safe, it was safe. The state hardly examined what risks were hidden in the balance sheets of the financial houses.

Spiegel Online: Politics allowed the markets to run wild and citizens also contributed their part. More and more people financed their own life on credit.

Bofinger: In Anglo Saxon countries, turbo-capitalism has marked a lifestyle where contracting debts is trendy and saving is Philistine. Since the banks could resell the debts of their customers on the financial market, nearly everyone suddenly obtained credit in the United States and Great Britain. Many institutes did not test the incomes of their customers with documents before they granted them credit.

Spiegel Online: Is the dislocation and turbulence on the financial markets also possible on the commodity markets?

Bofinger: The danger that the market destroys itself cannot be excluded there. The globalization of the commodity markets has increased social inequality. The majority of employees no longer share in the growing national economic prosperity. The state should channel the effects of globalization through minimum wages and more education investments. Sooner or later, parties will gain power that say: Stop this@ Tighten the borders.

Spiegel Online: Do you think turbo-capitalism encourages extreme political id3eas?

Bofinger: One does not need much imagination. There will be populist politicians who exploit the growing discontent with the market economy and plead for protectionist measures. That would be fatal for an export-oriented national economy like the German economy.

Spiegel Online: What must the state do now to bridle the financial markets?

Bofinger: Three measures could be catalysors: building a global credit register, creating a state rating agency and a minimum standardization for guaranteed credits.

Spiegel Online: The hierarchy of power between politics and the economy has shifted through the US bailout package and the prohibition on short selling on stock exchanges. Are we in the West witnessing the return of the strong state?

Bofinger: It is now clear to everyone that seeing the state as the enemy of the market was wrong. In the long run, functioning markets require a stable state framework.

Spiegel Online: The relation of many citizens to the state may change through the present financial tremors. Politics assumes the role of rescuer in emergency. In the last years, people like Paul Kirchhof dominated the debate. This constitutional judge described the state as a hydra and demanded: Give back the money of the citizens!

Bofinger: Politics now has the chance of carrying on an image-campaign for the state. Too many politicians have long argued like Mr. Kirchhof. They constantly urge tax cuts. The impression arose that the state did not need the money of citizens. However the message of the state must be the exact opposite: We need your money and will use it responsibly. Whoever is for the market must also be for an efficient state with adequate financial resources.