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Interview :: Economy
Financial Crisis as Organized Irresponsibility
In the years 2002-2006 guaranteeing mortgage credits was the greatest source of profits for investment banks. US policy massively promoted and in no way curbed awarding dubious credits. In 2003 Warren Buffett described derivatives as "financial weapons of mass destruction."
FINANCIAL CRISIS AS ORGANIZED IRRESPONSIBILITY
Interview with Prof. Max Otte
[Was the financial crisis only a failure of bankers or perhaps even a political or criminal kind of conspiracy? Professor Max Otte of FH Worms is certain. The financial crisis was a failure of the modern economy and the political system! This interview published by The Economic Circle, www.european-circle.de is translated from the German on the Internet, www.european-circle.de/machtpolitik/meldung/datum/2010/08/11/merkel-haette-opel-nicht-retten-duerfen.html.
. Max Otte, PhD (Princeton), b.1964, is a professor of international economics at the FH Worms University of Applied Sciences, Koln. See also the new book, Bernd Schunemann, Die sogenannte Finanzkrise – System Failure or Organized Global Criminality? Berliner Wissenschaftsverlag, 109 p, 2010]
European Circle: Everyone thinks the bank- and financial crisis was a logical consequence of the mismanagement of some bankers worldwide. You say it was very different. What do you mean?
Otte: To begin, social phenomena involving actors’ expectations and actors are involved in all crises. At the end of 2005 I was one of the first to warn of a worldwide economic crisis.
European Circle: Where did you gain your insight?
Otte: I watched the system of US subprime mortgages and saw what had to happen! I stood rather alone with my prognosis. The financial crisis was triggered by a system of organized irresponsibility in which the principles of sound financial and legal conduct were suspended all over the world.
European Circle: Who were irresponsible?
Otte: At least nine groups of actors who played a role in the crisis can be identified. All of them have massive responsibility for this crisis. The central banks believed in keeping the economy going through cheap interests. Such a policy punished savers and invited borrowing for risky projects. Since the dynamic of the US economy slackened after 2001, vast amounts of money sought unhealthy unwholesome ways. From then on, there was a chain reaction.
European Circle: Can you be more specific?
Otte: Money was invested in real estate. A house of cards of credits arose. Credits – recognized as securities – were resold and not held in the books of the banks. The investment banks issued more and more stocks and speculated on the stock exchange with guaranteed sureties and structured products. The investment banks accepted no medium- or long-term responsibility for the consequences of their transactions. In the years from 2002 to 2006, guaranteeing mortgage credits was the greatest source of profits for investment banks. US policy massively promoted and in no way curbed awarding dubious credits. All this could be seen. The consequences were manifest: Merkel would not let Opel starve.
NEW ECONOMIC SYSTEM IS IMPERATIVE
European Circle: Where are we today?
Otte: The crisis came over us and now we must avoid the future crisis. I will not list the individual programs that keep the circulation of the economy going. We need an economic system that ensures this does not happen again. Financial actors who take great risks should have reserves to bear the consequences. Rules should be simple so they can be enforced. In Europe, a European Council for System Risks of the Financial Markets is proposed. The governors of the 27 central banks, the European System of Financial Oversight with the three European monitoring boards (for banks, insurance and the securities trade) and the national authorities will be part of the council. In a complex system, long decision-making processes and the rivalry between state actors ensure that monitoring will always be far behind the financial market actors.
European Circle: That does not sound hopeful.
Otte: The power gestures of politics are an optical illusion. When the crisis is over, capital will still govern. In the course of the financial market crisis, the international accounting rules were loosened and not reinforced so banks did not have to show their losses but could hide them. Ultimately politics pursues the goal of quickly letting the banks earn enormous money again so their negative capital accounts can be revitalized. By weakening the balancing rules, the legal foundations of the market economy are threatened. We are headed for a “socialism for banks and bankers.” Isn’t the price too high? Is free rein given to an arbitrary treatment of economic aspects?
CORRUPT RATING AGENCIES
European Circle: Are the rating agencies continuing as before?
Otte: That is totally perverse. The functioning of the rating agencies is largely untouched. They should observe transparency rules but may continue to profit from issuing products. Only consultation services should be prohibited. European politics has long neglected establishing a public European rating agency as a counterweight to the private Anglo-Saxon cartel that dominates the market.
European Circle: Are the “grasshoppers” – hedgefunds – put on a short leash?
Otte: That is only appearance. Derivatives and certificates hide considerable risks. In 2003 Warren Buffet described financial derivatives as “financial weapons of mass destruction.” Nevertheless these products were hardly regulated after the financial crisis. In Europe there should be rules for managers of Alternative Investment Funds. Hardly any rigorous rules are planned. The funds should merely be registered and some rules prescribed on risk- and liquidity management. The capital holding rules can only be described as a bad joke. These capital holding rules in no way envision liability toward investors. Rather the lawyers of the fund management receive royalties if the fund runs into problems.
POLITICS IS POWERLESS OR HELPLESS
European Circle: Is politics only saber-rattling?
Otte: Exactly. For a long while, the gestures of politics were really only saber-rattling. The system that led to the crisis continues. So it is only a question of time until the next bubble develops.
European Circle: Can we prevent this?
Otte: Great financial crises have been a regular phenomenon of modern capitalism since the tulip mania from 1635 to 1637. However they are largely ignored by the modern economy. The economy is always political. What are central are conflicts of interest between states, social strata, groups and branches, the question who receives how much of the cake, not whether “the market” or “the state” dominates. That the modern mathematical economy ignores this is reprehensible. In the 1980s, Maneur Olson wrote “The logic of Collective Action” and showed how interest-groups take the largest pieces of the cake in a weak liberal state until the society is immobilized. This was the theme of his other great work “Rise and Fall of Nations.”
European Circle: Can the social market economy survive?
Otte: The concrete organization of market forms and liability rules is always important for a functioning and just market economy. If we form the rules so fast investment banking businesses or “Private Equity” are preferred legally or in accounting over classical banking, we should not be surprised when we have an economy with thriving speculation. If the rules make borrowing preferred over saving, successful managers pull in rewards for their speculation and in the case of failure charge the general public for the costs. We help those who enrich themselves at the expense of solid banks, middle class businesses and citizens.
POLITICS MUST INTERVENE
European Circle: What do you propose?
Otte: If we do not nationalize businesses that must be bailed out by the state, we attack the basic ideas of a liberal market economy. If the business becomes insolvent, one’s capital is wiped out. That is the state. One can privatize the business again later.
European Circle: Should Merkel take over Opel or a bank?
Otte: Opel had to be settled. The state had to take over the bailed out banks, restructure and then privatize them again. Sweden successfully demonstrated this in the 1990s.
European Circle: How do you see 2011 as a gloomy prophet?
Otte: At best mixed, with a small residual risk of total collapse.
RELATED LINKS:
www.attac.de
www.freembtranslations.com
“The Quiet Coup” by Simon Johnson:
www.theatlantic.com/doc/print/200905/imf-advice
“Attac’s Bank Tribunal: The Jury’s Verdict” by Friedhelm Hengsbach:
portland.indymedia.org/en/2010/04/399020.shtml
Interview with Prof. Max Otte
[Was the financial crisis only a failure of bankers or perhaps even a political or criminal kind of conspiracy? Professor Max Otte of FH Worms is certain. The financial crisis was a failure of the modern economy and the political system! This interview published by The Economic Circle, www.european-circle.de is translated from the German on the Internet, www.european-circle.de/machtpolitik/meldung/datum/2010/08/11/merkel-haette-opel-nicht-retten-duerfen.html.
. Max Otte, PhD (Princeton), b.1964, is a professor of international economics at the FH Worms University of Applied Sciences, Koln. See also the new book, Bernd Schunemann, Die sogenannte Finanzkrise – System Failure or Organized Global Criminality? Berliner Wissenschaftsverlag, 109 p, 2010]
European Circle: Everyone thinks the bank- and financial crisis was a logical consequence of the mismanagement of some bankers worldwide. You say it was very different. What do you mean?
Otte: To begin, social phenomena involving actors’ expectations and actors are involved in all crises. At the end of 2005 I was one of the first to warn of a worldwide economic crisis.
European Circle: Where did you gain your insight?
Otte: I watched the system of US subprime mortgages and saw what had to happen! I stood rather alone with my prognosis. The financial crisis was triggered by a system of organized irresponsibility in which the principles of sound financial and legal conduct were suspended all over the world.
European Circle: Who were irresponsible?
Otte: At least nine groups of actors who played a role in the crisis can be identified. All of them have massive responsibility for this crisis. The central banks believed in keeping the economy going through cheap interests. Such a policy punished savers and invited borrowing for risky projects. Since the dynamic of the US economy slackened after 2001, vast amounts of money sought unhealthy unwholesome ways. From then on, there was a chain reaction.
European Circle: Can you be more specific?
Otte: Money was invested in real estate. A house of cards of credits arose. Credits – recognized as securities – were resold and not held in the books of the banks. The investment banks issued more and more stocks and speculated on the stock exchange with guaranteed sureties and structured products. The investment banks accepted no medium- or long-term responsibility for the consequences of their transactions. In the years from 2002 to 2006, guaranteeing mortgage credits was the greatest source of profits for investment banks. US policy massively promoted and in no way curbed awarding dubious credits. All this could be seen. The consequences were manifest: Merkel would not let Opel starve.
NEW ECONOMIC SYSTEM IS IMPERATIVE
European Circle: Where are we today?
Otte: The crisis came over us and now we must avoid the future crisis. I will not list the individual programs that keep the circulation of the economy going. We need an economic system that ensures this does not happen again. Financial actors who take great risks should have reserves to bear the consequences. Rules should be simple so they can be enforced. In Europe, a European Council for System Risks of the Financial Markets is proposed. The governors of the 27 central banks, the European System of Financial Oversight with the three European monitoring boards (for banks, insurance and the securities trade) and the national authorities will be part of the council. In a complex system, long decision-making processes and the rivalry between state actors ensure that monitoring will always be far behind the financial market actors.
European Circle: That does not sound hopeful.
Otte: The power gestures of politics are an optical illusion. When the crisis is over, capital will still govern. In the course of the financial market crisis, the international accounting rules were loosened and not reinforced so banks did not have to show their losses but could hide them. Ultimately politics pursues the goal of quickly letting the banks earn enormous money again so their negative capital accounts can be revitalized. By weakening the balancing rules, the legal foundations of the market economy are threatened. We are headed for a “socialism for banks and bankers.” Isn’t the price too high? Is free rein given to an arbitrary treatment of economic aspects?
CORRUPT RATING AGENCIES
European Circle: Are the rating agencies continuing as before?
Otte: That is totally perverse. The functioning of the rating agencies is largely untouched. They should observe transparency rules but may continue to profit from issuing products. Only consultation services should be prohibited. European politics has long neglected establishing a public European rating agency as a counterweight to the private Anglo-Saxon cartel that dominates the market.
European Circle: Are the “grasshoppers” – hedgefunds – put on a short leash?
Otte: That is only appearance. Derivatives and certificates hide considerable risks. In 2003 Warren Buffet described financial derivatives as “financial weapons of mass destruction.” Nevertheless these products were hardly regulated after the financial crisis. In Europe there should be rules for managers of Alternative Investment Funds. Hardly any rigorous rules are planned. The funds should merely be registered and some rules prescribed on risk- and liquidity management. The capital holding rules can only be described as a bad joke. These capital holding rules in no way envision liability toward investors. Rather the lawyers of the fund management receive royalties if the fund runs into problems.
POLITICS IS POWERLESS OR HELPLESS
European Circle: Is politics only saber-rattling?
Otte: Exactly. For a long while, the gestures of politics were really only saber-rattling. The system that led to the crisis continues. So it is only a question of time until the next bubble develops.
European Circle: Can we prevent this?
Otte: Great financial crises have been a regular phenomenon of modern capitalism since the tulip mania from 1635 to 1637. However they are largely ignored by the modern economy. The economy is always political. What are central are conflicts of interest between states, social strata, groups and branches, the question who receives how much of the cake, not whether “the market” or “the state” dominates. That the modern mathematical economy ignores this is reprehensible. In the 1980s, Maneur Olson wrote “The logic of Collective Action” and showed how interest-groups take the largest pieces of the cake in a weak liberal state until the society is immobilized. This was the theme of his other great work “Rise and Fall of Nations.”
European Circle: Can the social market economy survive?
Otte: The concrete organization of market forms and liability rules is always important for a functioning and just market economy. If we form the rules so fast investment banking businesses or “Private Equity” are preferred legally or in accounting over classical banking, we should not be surprised when we have an economy with thriving speculation. If the rules make borrowing preferred over saving, successful managers pull in rewards for their speculation and in the case of failure charge the general public for the costs. We help those who enrich themselves at the expense of solid banks, middle class businesses and citizens.
POLITICS MUST INTERVENE
European Circle: What do you propose?
Otte: If we do not nationalize businesses that must be bailed out by the state, we attack the basic ideas of a liberal market economy. If the business becomes insolvent, one’s capital is wiped out. That is the state. One can privatize the business again later.
European Circle: Should Merkel take over Opel or a bank?
Otte: Opel had to be settled. The state had to take over the bailed out banks, restructure and then privatize them again. Sweden successfully demonstrated this in the 1990s.
European Circle: How do you see 2011 as a gloomy prophet?
Otte: At best mixed, with a small residual risk of total collapse.
RELATED LINKS:
www.attac.de
www.freembtranslations.com
“The Quiet Coup” by Simon Johnson:
www.theatlantic.com/doc/print/200905/imf-advice
“Attac’s Bank Tribunal: The Jury’s Verdict” by Friedhelm Hengsbach:
portland.indymedia.org/en/2010/04/399020.shtml
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