THE MARKET MUST SERVE SOCIETY

Conclusions from the collapse of the banks. The actors are not corrupt; the system in which they act is corrupt

By Friedhelm Hengsbach

[This article published in: sueddeutsche.de 10/1/2008 is translated from the German on the World Wide Web, www.sueddeutsche.de/finanzen/520/312435/text/print.html. The Jesuit Friedhelm Hengsbach, 71, professor of Christian Social Ethics, directed the Neil-Breuning Institute in Frankfurt.]

“Everyone should put his own house in order” – so the German economics minister Michael Glos reacted to the American government’s desire that leading economic nations support the bailout package for needy banks. Germany and partner countries in the G7 refused this desire of the United States. This was an American problem. Strange reactions appear among financial experts and politicians in dealing with the real estate-, credit-, banking- and financial crises. This was a partial and manageable problem. Subsequently individual traders were ostracized as greedy because they pulled a fast one on unsuspecting homebuyers. People became outraged over the great negligence of the heads of departments in investment companies who did not see the deals of the traders, looked away or drove them to profiteering throu9gh salary incentives. These traders were allowed to act irrationally and blind to risk. The rule system itself should be judged corrupt, not the individual actors.

Remarkably many financial experts did not see the linkage of financial risks. Business- and credit-risks striking individual institutions that were not narrowed down became general and infected neighboring financial enterprises. These risks triggered an earthquake in the whole financial system so businesses of the real economy, especially small- and medium-size firms, could not receive any investment credits any more. Real economic growth fell. The prosperity of whole population groups is endangered. All this was outside their tunnel vision that only focused on transactions within the monetary sphere.

TENDENCY TO EXAGGERATION

The short-windedness and the tendency to exaggeration in a phase of stock market upswing was also connected with the widespread superstition of financial experts that the self-healing powers of the market would balance those risks in one field and scatter then over diverse market segments. Future risks are already announced in the current signals given by stock prices. Some held the signals of capital markets as an effective instrument for pressing national governments to a “rational” economic policy. They even called the finance markets the fifth branch in democracy.

Why is overcoming the financial crisis a global and political challenge?

The vigorous rivalry of two financial styles could lose intensity through the crisis. Some even speak of a point victory of the continental European over the Anglo-American financial system that is expressed in the bankruptcy of leading American investment banks. One financial system is seen as driven by the securities market and the other as dominated by banks. The Anglo-American system is more dynamic, more short-winded, more profitable and also more risky, people thought, while the European system is more sedate and more sustainable supplied with patient shareholders. In the finance capitalism of the US, business is regarded as capital investment for institutional stockholders acting defensively and bought and sold to realize a higher profit – while businesses in corporative capitalism of the Euro-zone are regarded as an alliance of persons where the interests of everyone engaged there are guaranteed.

The judgment of German politicians that the financial crisis is a problem of the US is understandable insofar as the real estate- and mortgage crises, trading with risky credits and founding conduits outside bank balance sheets started from that crisis. In Germany, the euphoria over exclusive investment banking has died away. Financial experts’ opinions about the strength of a universal bank are positive. The big banks have pulled the ripcord and turned again to private customers, sometimes in the form of dubious mergers.

SUPERFICIAL JUDGMENT

Nevertheless political judgment remains superficial because all countries of the world are drawn into an American financial crisis. The United States is not dead set against public bailouts. The dollar’s loss in value, an incalculable fiscal- and financial policy of the US along with growing state debts and balance of payments deficits will influence growth in the world. The episode of the unilateral hegemony of the US seems more and more superseded by a multilateral regime of economic- and currency-zones and up-and-coming threshold countries.

Overcoming the financial crisis is a global and political challenge. Firstly, the recognition that every market including the securities market is a social cultural interaction subject to the norms of justice and fairness should be reawakened. The former bishop of Limburg, Franz Kamphaus, once summarized this: In the past, the village green and market square were surrounded by the church, town hall, school and hospital. Without these social institutions, there would be no market. This is also true for today’s global financial markets.

Secondly, considerable mental and political corrections of financial actors and politicians are imperative. Financial experts should acknowledge that stability of the monetary sphere and the banking system is a public asset that is more than the sum of the profits of financial firms. International financial management is also subject to the public mandate to increase quality of life of the world population, above all of the poor. Politicians should scrutinize those laws that grant a privileged place to financial investors and aggressive short-sellers. Thirdly, political interventions should not be short-winded and exaggerated. Public oversight, monitoring, scrutiny and control should be extended to all financial firms and all financial centers and preventively to the supposedly innovative financial services.