THE FINANCIAL MARKET MUST BECOME A PUBLIC SERVICE

By Philippe Mastronardi

[A new order of capitalism is necessary, writes Philippe Mastronardi, professor of public law at the University of St. Galen, Switzerland. A public investigative committee should find out who is responsible in the failure of authorities in the financial market crisis. Is it the financial market oversight, the finance department or the Bundesrat (Upper House of Swiss parliament)? This article published January 28, 2010 is translated from the German on the Internet, www.woz.ch/dossier/Kapitalismus/18880.html.]

THE BLIND SPOT

Is that the right question? An institutional crisis faces us, not individual failure. Our politics betrays our most important political values – democracy and constitutional state – as soon as it must solve unexpected problems. The Bundesrat (Upper House of Swiss parliament) bypasses the parliament and invokes the emergency law to bailout UBS (mammoth Swiss bank). Basic rights are violated and legal authorities exceeded to appease the US. The US resists a Swiss profiteering that can hardly still be concealed under the mantle of banking secrecy. Switzerland is discredited when it does not recognize the limits of tolerable egoism. Egoism makes one short-sighted; greed makes one blind.

Switzerland suffers under a blind spot in its collective range of vision. The dominant neoliberal conception for the relation of state and market is blind for the social and democratic prerequisites of our market economy. The dominant view refuses to see capitalism critically as a basic prerequisite of our social order and therefore cannot question that capital in our economic system decides how the other factors of production are applied – how much labor power – workers – and how much land and energy – nature – should be used and consumed and what should be paid for that. The dominant orientation fades all this out. The market –especially the capital market – becomes the place of “freedom” from which our social order is increasingly defined. The power of the market is accepted and at most limited where its abuse becomes unbearable. From this view, the state is only needed to fight misuse. The state then serves as a monitoring over the deregulated market. Market laws are regarded as primary and politics and the law as secondary. They are only desired as reactions to the economy. The unspoken concept behind this orientation is the primacy of the economy over democracy and the constitutional state. No wonder democracy and the constitutional state are despised under these premises when a “system-relevant” business is bailed out which threatens to crash as a result of its own arrogance.

The conditions are more complicated than we like. Capitalism cannot be defined economically. Capitalism is not simply a market system in which the production factor capital decides over investment, production and labor. Capitalism is a social order. Therefore it cannot be left to economists to determine which laws of the market should operate. We are all urged to join in decision-making. Everyone must decide what affects everyone. Democracy must order capitalism.

Why does reality run differently than we want? This is because we do not notice the blind spot in our eye, the false belief that the free market makes us free. We cannot see a blind spot when we always look in the same direction. But that is what politicians and academics like to do most. In that way they advance the fastest. However they can not really change direction when what is imminent becomes a crisis. To overcome crises, we must learn to see our world from different directions. We need a genuine pluralism of perspectives on our situation, readiness to examine our conduct according to different political criteria and criticize and change where necessary.

THE NEW PERSPECTIVE

One cannot do this alone. We must unite in groups of open persons who want a dialog about possible perspectives. The Swiss kontrapunkt group with over twenty members from the human sciences, social sciences and economics is such a think tank. The interdisciplinary group of professors will uncover hidden aspects of our public cooperative life and seek new solutions for our economic and social policy. This group published its conclusions on the financial market crisis in a study titled “Learning from the Crisis – On the Way to an Order of Capitalism.” Its most important findings and demands are:

• The market economy is certainly that economic system which grants the individual the greatest chance of development. The thesis that the “free market” brings about prosperity for everyone is a myth. The real freedom of all citizens demands that we civilize the market economy. Democracy must order the market so all people can exercise the same civil rights in the economic process. The financial market crisis has made clear we must reorder capitalism according to our political principles.

• The present worldwide economic crisis in large part can be referred back to momentous system errors of global financial management. Unrestrained capitalism, the uncontrolled influence of the economy on politics and the imbalances of large countries in the balance of payments trigger crises. The financial market creates a money glut which is the real cause of today’s financial market- and economic-crisis.

• The relation of state and economy must be redefined according to the principle of the guaranty state. The goals and expenditures of the state serving the public interest must be decided democratically and constitutionally. The state has to guarantee realization of these goals. The conversion of these goals can be entrusted to private actors where they are better suited. For the financial market, this order of precedence has the consequence that the financial market is a public service (like electricity, streets and the post office). Money and credit are prerequisites of economics and form the infrastructure of the real economy. The functioning of the money economy is a public service that must be fulfilled by financial management in the commission of the state. Therefore the state should provide money as a means of payment and credit to the economy and ensure banks allocate the necessary money and credit for investment, production and consumption. Private money creation must be limited so it corresponds to the development of the economy. Only in this way can the currency bubbles be prevented that triggered today’s crisis.

• The so-called “full money reform” (Vollgeldreform) which transfers exclusive authority to create currency to the central banks could be one possible development of this system. Our bank accounts would then no longer be demands against the private banks but money for which the national bank would be directly liable. This would be unlike today where they take our money as their property to build their own assets.

ORDERING CAPITALISM

These principles lead to a new concept of capitalism. Capital is socially-obligated and should be limited by the state so it is used in a socially- and environmentally-friendly way. An “ordered capitalism” should be sought. Capitalism is given a form that obeys the principles of society, politics and the law. Instead of being an end, capitalism would be a means of our democratic and constitutional social order.

Why has our political system failed in the financial crisis? Our system failed because our authorities did not see on time that the interest policy of maximum profit is not tenable any more. We all abandoned the balance of the liberal ideals of freedom, equality and fraternity – today solidarity – in favor of self-interest or desire for personal advancement, whether individually, in the financial branch or as the Swiss nation. We forgot that competition is only good when it runs in fair framing conditions. We have to democratically redefine these framing conditions again and again so they serve the general public. This necessitates a rethinking. Liberal economic policy means creating framing conditions for the real freedom of everyone in economics, whether as owner, producer, employee or consumer and not enforcing a primacy of the economy (or of capital) over the civil public. When one branch – financial management – removes itself to bring the rest of the economy into dependence, it must refocus on its commission serving the whole economy and the general public. The financial market must be ordered so it can fulfill its welfare task without becoming an end-in-itself. Such a new financial market system is the core of a constitution of capitalism.

Philippe Mastronardi (63) is a professor of public law at the University of St. Galen, Switzerland and co-editor of “Learning from the Crisis – On the Way to a Constitution of Capitalism,” Bern 2010, Haupt Verlag, 179 pages, 39 francs.



BANKS MUST BECOME SMALLER: THE MANIFESTOS OF 2008 AND 2009

Learning from the Crisis: Radical Reforms are Necessary

By Philippe Mastronardi, Christoph Stuckelberger and Mario von Cranach

[This second manifesto of kontrapunkt on the financial market crisis from 3/29/2009 is translated from the German on the Internet, www.ratkontrapunkt.ch/fileadmin/Redaktion/Dossier2009/2_2_Manifest_2009.pdf.
The kontrapunkt study group consists of 20 interdisciplinary scholars in Switzerland.]

In May 2008 kontrapunkt blamed the amoral conduct of many actors of the economy for the three current crises (the environmental-, financial- and hunger crises). In the meantime a worldwide economic crisis has developed out of the financial crisis. This worldwide crisis threatens the existence of more and more fellow-citizens and spreads insecurity and fear. With legitimate outrage, the general public has experienced the excesses of financial management and enormous damage. Our demand for a socially- and environmentally-friendly market economy is shared by many. Ethical principles are the necessary foundation. These principles must be concretized in demands for a fundamental change in culture, politics and the economy. This is the theme of the second manifesto.

The financial market crisis rests on a crass market failure resulting from the one-sided short-term orientation of capital in the profit principle. This is well-known. Politics must react to this with long-term control of the market for the sustainable promotion of the general well-being. But politics does not do this. This is a crass political failure. We have allowed ourselves to be defined too much by the economic logic of utilitarian maximization. We thought we could recognize and correct developments on time.

Politics and the economy refuse to learn essential lessons from the crisis. The egoistical conduct that caused the crisis is stamped “excess.” The reasons for the collapse are described as “exceptions” so the fiction of the “free market economy” can be maintained as the normal case. The will to system consequences is lacking, that is the overdue paradigm shift from the primacy of the “free market” to the primacy of free persons in a free society.

The current programs remain on the level of lobby-politics below the level of concrete politics. The essential priority of concrete politics before the economy is vital. A clear precedence of the democratic and constitutional public order (the public order) before economic value creation (the utilitarian plane) is crucial.

1. SUBSTANTIAL CHANGES IN THE SYSTEM ARE NEEDED

The relation of society, state and economy must be redesigned. A free society of free persons needs a state that democratically defines public interest and gives the economy goals to be served. No “free market” is future-friendly that gives individual persons the right to enrich themselves by harming society. The economy has to fulfill a public welfare function in service to society. The economy is given its freedom by the politically organized society as far as it observes this freedom in responsibility. Its freedom is lost to the extent it violates this responsibility. If this happens, politics must redirect the freedom of the economy in responsible paths. This is especially true for the financial market.

The financial market has the function of a public service for the real economy. For our modern life in division of labor, money and the payment system have become as important as the energy supply, transportation services, education and security. The state has to intervene when the market and competition cannot guarantee provision with money and a functioning payment system. Politics can either carry out the public service itself (nationalization) or guarantee it with the help of rules, conditions and warranties. In any case, the state must limit the financial market with concrete measures.

2. LIMITATIONS OF FINANCIAL PROCESSES AND STRUCTURES ARE NEEDED

Increasing financial assets and indebtedness: the top 2% of the Swiss population earn 20 times more than the lowest 10%; 3.7% of the population own 50% of Swiss assets. Together with other factors, this unequal distribution of income and assets led to the enormous growth of book values (securities) and currency (credits and account balances) for a few private and institutional investors. Additional factors contributed to this increase of book values and currency: the interest share included in nearly all prices of consumer articles and the forced savings of employed persons through pension funds that function according to the capital-covering principle and the multiplication of financial investment products that largely have a bet or wager character. Since the currency is lent, a corresponding indebtedness always faces the financial assets consisting of money-balances, assets and credits. Thus the risks for financial systems grow; debts are increasingly risky.

The relation of financial management to the real economy: In all developed countries, the financial assets (money balances and currency) grow considerably faster than the gross domestic product (GDP). On average, their relation today is 4.5: 1. Fluctuations in money balances destabilize the whole economy. In part, currency lacks cover. In addition, there is an unheard-of acceleration of financial transactions caused by electronic communication. The average daily transactions of the world financial management (transactions = money supply times speed) amounted to 30-times the daily GDP of the world. Financial management removed itself from the real economy and became a dangerous bubble.

Possible measures against these dangers:

1. Limitation of the size of financial assets (for example, through proper taxation)

2. The de-acceleration of transactions by a corresponding control of the financial markets (and fees on stock market transactions),

3. Narrowing credit creation through capital-holding regulations.
The dangerou9s size of Swiss banks: the balance of the three largest Swiss banks in 2007 amounted to 7-times the GDP (in comparison: in the US 0.35 and in Germany 1.24 of the GDP). A collapse of these banks endangers the whole economy. Therefore the state must ensure that risks represente3d by big banks like UBS and CS are checked and distributed so a bankruptcy of a badly run institution does not trigger a state bankruptcy (cf. the warning example of Iceland). These two corporations must be scaled back to a size in a viable relation to the Swiss economy. Parallel structures must be constructed that diminish the risk of a crisis (bank licenses; a system of canton banks; cooperatively organized institutions).

DANGEROUS FINANCIALO PRODUCTS AND TRANSACTIONS

The freewheeling invention of dangerous (“toxic”) financial products and the execution of market-damaging transactions (for example, short-selling) must be controlled and stopped when necessary.

Without these limitations, the present state support of mammoth banks itself becomes a considerable system risk. Growing state indebtedness endangers the states’ future action possibilities. Support measures hamper the necessary change.

3. INTERNATIONAL MARKET REGULATIONS ARE NEEDED

The current worldwide economic crisis calls for internationally binding regulations, a global order of economics. This implies supra-national frameworks for global competition. These go back to UN organizations since an equal participation of states and their populations is possible on the global plane. Otherwise the categorical order would be inverted. The political world community must set the points for the partial economic order, not vice versa. These frameworks should include the following elements:

• The worldwide financial market needs a redesigned structure in the interest of a real economy oriented in the public interest.

• The order of the market economy must ensure participation of the labor market in the success of the capital market.

• The gap between he lowest and the highest wages of a business should be closed.

• For profits and growth of businesses, upper limits should be set that are oriented in the principle of sustainability and sanctioned by negative incentives (profit- and growth fees).

• Tax flight through tax evasion or fraud must be combated through legal aid agreements of OECD countries including the little offshore financial centers.

Such agreements should be concluded with constitutional states among the developing- and threshold countries.

In these questions Switzerland in the past shamelessly sacrificed its political convictions to an egoistic lobby policy (as with banking secrecy) and thus endangered its good reputation. If it now under international pressure opens itself to a reorientation in individual aspects, it can also stand the test in questions of the financial market as a full member of the international community of states. As a small state, it should open itself and support a comprehensive international cooperation. Switzerland depends on a fair global policy. A multi-plane model of the democratically-guided worldwide economic order should be carried out with worldwide, regional and national authorities. The goal is a subordination of the economy under a socially-useful policy of responsible freedom, not a far-reaching state regulation of the market.

4. A NEW CULTURE OF POLITICS AND THE ECONOMY IS NEEDED

Our present economic order (and political praxis in its towrope) relies one-sidedly on competition. The efficiency and advantages of individuals without regard for the culture of solidarity, thankfulness and justice are considered moral justification. The solidarity orientation of people is faded out. In our motivation and conduct, we are oriented and dependent on cooperation with others, not only on competition. We seek and need fair teamwork with others, not only ou9r self-interest. Otherwise there is no human society. The future political constitution of the economy must be taken into account.

The trust crisis of the financial market today impels this change. This crisis cannot be comprehended in the categories of competition. Trust is presented, not negotiated. Trust is the highest good of the category of competition. Therefore the trust of customers in the world of banking (and the banks with one another: “credit” means trust!) can only be restored by changing economic rationality.

Institutional changes are necessary but not sufficient. The prerequisite for this is that the conduct of us citizens can change. We should not only aim at quantitative growth (for example maximizing profits from capital investments). We should not measure happiness and quality of life only in material values.

A cultural problem in politics and the economy lies behind the system problem. Therefore a cu9ltural change complementing the institutional reform must be introduced. The state and the law should form crash barriers or guard rails within which a certain measure of egoism is generally tolerable. In addition the state and the law must promote a culture of cooperation which is necessary if we want to live together in peace in a globalized world limited in all resources. This cannot happen without a minimal ethical consensus. A political consensus about the principles of freedom, fairness and material justice in our public life together is necessary. The conflict of interests must be carried out over these goals and crash barriers. Observance of these limits can be enforced with positive and negative sanctions (incentives and penalties).

APPEAL

With this appeal, we turn to the Bundesrat, the Swiss council and the political parties and urge the creation of framing institutional conditions indispensable for realizing the four goals. Many things can be realized through institutional initiatives and national legislation. Where necessary the Swiss constitution should be revised. Short-term measures must also be oriented in the suggested political reform of the financial markets.

Kontrapunkt, the 24-member “Swiss Council for Economic and Social Policy” originated on the initiative of the “Network for a Socially Responsible Economy.” The group will deepen public discussion on political themes through interdisciplinary contributions. This discussion has often been unsatisfactory and polarizing. Kontrapunkt seeks to reveal overlooked aspects and contribute to the objectivity of the debates.