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Commentary :: Economy
The Crisis of Speculative Capitalism
The bubble bursts when debtors cannot pay and a bankruptcy crisis develops at the end.. The illusion of the stock exchange as a roulette with guaranteed permanent profits burst with the New Economy bubble.. Only the worldwide regulation of the financial markets can avert their collapse.
THE CRISIS OF SPECULATIVE CAPITALISM
By Rudolf Hickel
[This article published in: Blatter fur deutsche und internationale Politik 10/2007 is translated abridged from the German on the World Wide Web, www.blaetter.de/artikel.php.]
The great fear of the stock market crash is heard again. The mega-speculators in the banks and funds in their raging pursuit for profits were really set right long ago. Seven years ago the illusion of the stock exchange as a roulette with guaranteed permanent profit burst with the New Economy bubble. However the world economy has been shocked by a new surprisingly severe crisis of the financial markets since the end of July 2007. In this new century, the international financial markets have been thrown out of joint a second time – at a shorter interval.
Despite the full-bodied declaration of intent after the last stock market crash, the courage to regulate the financial markets to prevent their future uncoupling from the productive economy is obviously still lacking. This uncoupling is driven by speculation. On the contrary, as the latest real estate crisis shows, serious “financial innovations” were seemingly created not long ago. But in reality these were dubious, high-risk financing instruments created past the declarations of intent of the financial markets.
Mortgage banks in the US misused the low-interest policy of Alan Greenspan. With a prime interest rate of one percent, homeowners since 2003 were enticed with wicked bait to refinance their homes on the basis of credits with variable interests. A normalized fraud driving many homeowners to their knees followed the cheap loan costs in the first two years. In 2005 and 2006, 20 percent of the total volume of mortgage credits of $3.2 trillion were so-called sub-prime loans, literally mortgage loans with insufficient solvency and credit-worthiness of borrowers. In the next step, German banks bundled and sold these credits by creating “conduits” and offering short-term securities for sale on the basis of long-term toxic securities…
BEFORE THE “MINSKY COLLAPSE”
The case of the Saxony regional bank only represents the tip of the iceberg in the worldwide financial poker. It has long been an example for global greed, incompetence and irresponsibility… The current crisis has a system. In the search for fast profits for excess liquidity, every means seems just – to managers of pension funds, banks, hedge funds and private equity funds. The latter two are known as grasshoppers or mosquitoes…
Big private banks are also mixed up in these dubious businesses. Credit pyramids built on sand regularly arose in this way. The collapse was foreseeable. The mortgage banks in the US forced the insolvency of their credit customers. The stock prices on the exchanges also quickly fell in the system crash. The foreseeable consequences of the past credit orgy are now shown to us. New credits were and are accepted to settle payments due from earlier credits. To this end, highly speculative “junk bonds” are used more and more frequently. These are loans that already received a bad rating from rating agencies. Some time or other, the hour of truth will inevitably come. The bubble bursts when debtors cannot pay and a bankruptcy crisis develops at the end.
Early on, the US economist Hyman Minsky (1919-1996) analyzed the dominant “speculative capitalism.” Against the neoliberal fairy-tale of efficient financial markets, he demonstrated how speculative bubbles arose on unregulated financial markets and ultimately must burst. Today the financial markets stand at the edge of the “Minsky collapse.” The bill for the profit greed through trading in credits must be paid. We now witness a brutal purging crisis through which the speculative overratings on the financial markets will be corrected. The realistic evaluation of the market value of businesses of the productive economy moves into the foreground again – until the next overrating bubble forms with new financing instruments.
While necessary, these market corrections inevitably produce losers. In Germany, a slump in economic growth is also expected. Much capital will be destroyed.
The negative consequences for the productive economy are more serious. Some financial institutions grant credit restrictedly on account of the liquidity crunch under the tremors of the shock. The ones who suffer are the small and medium-size firms, which despite serious investment plans are now punished for the dubious speculative businesses of others. The weak private consumer demand in Germany may also take its toll.
The private provisions for old age must be critically reexamined I light of this crisis in Germany. There is more and more emphasis on the speculative financial basis thanks to intensive propaganda efforts. One thing is certain: Since the neoliberal promise of inexhaustible and stable world financial markets is a chimera, old age provisions on this basis would be very insecure as long as they can be misused for a pursuit of high-risk profits. The minimum legal security must be expanded, not to mention legal protection against speculative greed.
“CONTROL THE CONTROLLERS”
What should be done to overcome this concrete financial crisis and avoid future malformations? First of all, monetary policy is necessary. The crisis of the New Economy was overcome relatively quickly because the central bank plugged the financing holes arising through the collapse of the credit pyramids. In addition, the assailed banks needed a signal for cheap liquidity supply by the central bank to prevent the negative domino effect of the financial crisis. The US Federal Reserve lowered the discount rate very quickly…
The markets are falling more intensely in the present liquidity crisis. The really critical paradox of the situation lies here. On one side, enormous quantities of capital circulate on the international financial markets and press for Germany and Europe. On the other side, these volumes can be quickly recalled in the moment of crisis. Thus we face a long-lasting oversupply that can be reduced in the short-term in a liquidity crisis on account of increasing greed for profits on account of deficient use of profits for consumer production. One implies the other. We cannot speak of a mastery of the crisis.
Therefore essential instruments must be used against the system crisis that set out against the unregulated financial markets. If the global economy should not be haunted by crises at an every greater speed, the misuse by speculative financial investors must be combated at the root.
To this end, the directors of banks must be called to account who allowed the dubious businesses with guaranteed credits although they may not have known this in isolated cases. A serious risk consciousness is lacking here. They should learn from the near bankruptcy of the Saxony regional bank. The portfolios outside the balance sheets and not controlled any more by monitoring groups and managed through conduits must be disclosed in the future on the balance sheets. Whether the financing instruments for guaranteeing loans should be prohibited because of rotten credits, should also be considered.
A frightening lack of control of the financial markets is revealed in the present system crisis. The private enterprise rating agencies that should have noted risks in the balance sheets in their assessment of businesses completely failed. Therefore “control the controllers” must be the motto in the future. A corresponding proposal of the French president Nicolas Sarkozy will be presented at the next meeting of the G8 ministers of finance. The work of the monitoring boards for the financial services sector must be strengthened and linked internationally. The creation of a worldwide credit registry is necessary along with examination and approval of new financing instruments.
That the G8 summit at Heiligendamm has not brought any progress in this regard is already getting its revenge today. Although German chancellor Angela Merkel entered the negotiations with a will for improving transparency and control, she ran aground in the rejection by the Anglo-Saxon states and in the resistance of the financial giants in Germany. Ultimately only the worldwide regulation of the financial markets can avert their collapse – together with the disastrous effects on production and employment. However if what is absolutely necessary cannot succeed in the foreseeable future, the present crisis will not be the last but only the prelude to crises on the way today.
By Rudolf Hickel
[This article published in: Blatter fur deutsche und internationale Politik 10/2007 is translated abridged from the German on the World Wide Web, www.blaetter.de/artikel.php.]
The great fear of the stock market crash is heard again. The mega-speculators in the banks and funds in their raging pursuit for profits were really set right long ago. Seven years ago the illusion of the stock exchange as a roulette with guaranteed permanent profit burst with the New Economy bubble. However the world economy has been shocked by a new surprisingly severe crisis of the financial markets since the end of July 2007. In this new century, the international financial markets have been thrown out of joint a second time – at a shorter interval.
Despite the full-bodied declaration of intent after the last stock market crash, the courage to regulate the financial markets to prevent their future uncoupling from the productive economy is obviously still lacking. This uncoupling is driven by speculation. On the contrary, as the latest real estate crisis shows, serious “financial innovations” were seemingly created not long ago. But in reality these were dubious, high-risk financing instruments created past the declarations of intent of the financial markets.
Mortgage banks in the US misused the low-interest policy of Alan Greenspan. With a prime interest rate of one percent, homeowners since 2003 were enticed with wicked bait to refinance their homes on the basis of credits with variable interests. A normalized fraud driving many homeowners to their knees followed the cheap loan costs in the first two years. In 2005 and 2006, 20 percent of the total volume of mortgage credits of $3.2 trillion were so-called sub-prime loans, literally mortgage loans with insufficient solvency and credit-worthiness of borrowers. In the next step, German banks bundled and sold these credits by creating “conduits” and offering short-term securities for sale on the basis of long-term toxic securities…
BEFORE THE “MINSKY COLLAPSE”
The case of the Saxony regional bank only represents the tip of the iceberg in the worldwide financial poker. It has long been an example for global greed, incompetence and irresponsibility… The current crisis has a system. In the search for fast profits for excess liquidity, every means seems just – to managers of pension funds, banks, hedge funds and private equity funds. The latter two are known as grasshoppers or mosquitoes…
Big private banks are also mixed up in these dubious businesses. Credit pyramids built on sand regularly arose in this way. The collapse was foreseeable. The mortgage banks in the US forced the insolvency of their credit customers. The stock prices on the exchanges also quickly fell in the system crash. The foreseeable consequences of the past credit orgy are now shown to us. New credits were and are accepted to settle payments due from earlier credits. To this end, highly speculative “junk bonds” are used more and more frequently. These are loans that already received a bad rating from rating agencies. Some time or other, the hour of truth will inevitably come. The bubble bursts when debtors cannot pay and a bankruptcy crisis develops at the end.
Early on, the US economist Hyman Minsky (1919-1996) analyzed the dominant “speculative capitalism.” Against the neoliberal fairy-tale of efficient financial markets, he demonstrated how speculative bubbles arose on unregulated financial markets and ultimately must burst. Today the financial markets stand at the edge of the “Minsky collapse.” The bill for the profit greed through trading in credits must be paid. We now witness a brutal purging crisis through which the speculative overratings on the financial markets will be corrected. The realistic evaluation of the market value of businesses of the productive economy moves into the foreground again – until the next overrating bubble forms with new financing instruments.
While necessary, these market corrections inevitably produce losers. In Germany, a slump in economic growth is also expected. Much capital will be destroyed.
The negative consequences for the productive economy are more serious. Some financial institutions grant credit restrictedly on account of the liquidity crunch under the tremors of the shock. The ones who suffer are the small and medium-size firms, which despite serious investment plans are now punished for the dubious speculative businesses of others. The weak private consumer demand in Germany may also take its toll.
The private provisions for old age must be critically reexamined I light of this crisis in Germany. There is more and more emphasis on the speculative financial basis thanks to intensive propaganda efforts. One thing is certain: Since the neoliberal promise of inexhaustible and stable world financial markets is a chimera, old age provisions on this basis would be very insecure as long as they can be misused for a pursuit of high-risk profits. The minimum legal security must be expanded, not to mention legal protection against speculative greed.
“CONTROL THE CONTROLLERS”
What should be done to overcome this concrete financial crisis and avoid future malformations? First of all, monetary policy is necessary. The crisis of the New Economy was overcome relatively quickly because the central bank plugged the financing holes arising through the collapse of the credit pyramids. In addition, the assailed banks needed a signal for cheap liquidity supply by the central bank to prevent the negative domino effect of the financial crisis. The US Federal Reserve lowered the discount rate very quickly…
The markets are falling more intensely in the present liquidity crisis. The really critical paradox of the situation lies here. On one side, enormous quantities of capital circulate on the international financial markets and press for Germany and Europe. On the other side, these volumes can be quickly recalled in the moment of crisis. Thus we face a long-lasting oversupply that can be reduced in the short-term in a liquidity crisis on account of increasing greed for profits on account of deficient use of profits for consumer production. One implies the other. We cannot speak of a mastery of the crisis.
Therefore essential instruments must be used against the system crisis that set out against the unregulated financial markets. If the global economy should not be haunted by crises at an every greater speed, the misuse by speculative financial investors must be combated at the root.
To this end, the directors of banks must be called to account who allowed the dubious businesses with guaranteed credits although they may not have known this in isolated cases. A serious risk consciousness is lacking here. They should learn from the near bankruptcy of the Saxony regional bank. The portfolios outside the balance sheets and not controlled any more by monitoring groups and managed through conduits must be disclosed in the future on the balance sheets. Whether the financing instruments for guaranteeing loans should be prohibited because of rotten credits, should also be considered.
A frightening lack of control of the financial markets is revealed in the present system crisis. The private enterprise rating agencies that should have noted risks in the balance sheets in their assessment of businesses completely failed. Therefore “control the controllers” must be the motto in the future. A corresponding proposal of the French president Nicolas Sarkozy will be presented at the next meeting of the G8 ministers of finance. The work of the monitoring boards for the financial services sector must be strengthened and linked internationally. The creation of a worldwide credit registry is necessary along with examination and approval of new financing instruments.
That the G8 summit at Heiligendamm has not brought any progress in this regard is already getting its revenge today. Although German chancellor Angela Merkel entered the negotiations with a will for improving transparency and control, she ran aground in the rejection by the Anglo-Saxon states and in the resistance of the financial giants in Germany. Ultimately only the worldwide regulation of the financial markets can avert their collapse – together with the disastrous effects on production and employment. However if what is absolutely necessary cannot succeed in the foreseeable future, the present crisis will not be the last but only the prelude to crises on the way today.
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