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Commentary :: Economy

The Crisis, Money and Us

"Once we had a coordinated social market economy. This `Rhine' capitalism embodied the insight gained in bitter experiences that totally freed markets are self-destructive. This insight was lost somewhere between Friedman and Hayek, Thatcher and Reagan.. Many banks in Sweden were nationalized and the financial sector restructured.."

By Heiner Ganssmann

[This article published in: Le Monde diplomatique 10/21/2008 is translated from the German on the Internet,]

Once we had a coordinated social market economy. This “Rhine” capitalism embodied the insight gained in bitter experience that totally deregulated markets are self-destructive. This insight was lost somewhere between Friedman and Hayek, Thatcher and Reagan. The social democrats forgot this. The current financial crisis that now breaks in upon Europe’s real economy must engender remembrance work. This cannot happen without reflection on principles.

In the financial crisis, money is obviously the principle. Social institutions seem to function best when no one reflects about them. However this is dangerous because no one knows any more how this money system functions in crisis when this knowledge is most necessary. This is one reason why an enormous amount of “real” wealth was devoured in the crisis.

Theoreticians define money as a social invariance fiction in which everyone believes. What is an invariance fiction? Money is the standard on which we can build, form generally binding prices and calculate business strategies. The value of all purchasable things is represented in money.

Money has a quality that leads to periodic self-destruction. While the real money supply is limited, money opens an unlimited horizon of possibilities of choice and potential appropriation of goods.

This contradiction worries all of us. For the user of money, more money is better than less in any case (except for a few exceptions like mendicant monks). When morally harmless chances for multiplying money open up, we use them because “we are not dumb.” The amoral offers of money and goods press just like that.

That we all find more money better than less is suddenly denounced as greed, the greed of others. The bankers are the wolves and we are the sheep. The greed of bankers has driven all of us into crisis. Why are so many willingly blinded by the tricks of the financial illusionists? Obviously there are irresponsible speculators among bankers who gamble with the money to multiply their own wealth. But that is also true for other branches.

The basic problem is not the greed of the bankers. The problem is our desire for money is not tied to the increase of the things that can be bought with money.

Through credit, one receives more money than one earns in anticipation of a return favor. Whether the return favor will occur is unclear. Everyone hopes and many bet on that by acquiring income claims or securities with borrowed money. However one day someone discovers and then many see: the emperor is naked. No works correspond to the many claims.

We already have the crisis. The vested income claims open to bribery must be adjusted to the actual achievement level. So it was the last time. The crisis is a system problem. As long as we do not turn from the fruits and blessings of finance or the monetary system, we must accept its periodically recurring crises.

This should penetrate into general consciousness and not be repressed. Then an excessive crisis as brewed and concocted for over a year could be avoided. Everyone could distinguish solid businesses and revenue-promises of inflated businesses. In the long term, capitalism grows around 2 percent per year. Revenue claims going beyond this – like Ackermann’s 25 percent profit growth for the Deutsche Bank – can only work when someone else loses.

That can and must happen occasionally in a competitive system. The Darwinian theory of evolution, survival of the fittest, ultimately inspired the market. However the whole crashes against the wall sometime or other when the financial sector enforces its claims and – encouraged by politics (including social democrats) – drives into the sludge with the rest of the economy.

The European financial sector did not operate as excessively as Wall Street but was by no means immune from the temptations of joining in the great business of speculation. On the contrary, Munich Hypo Real Estate used Ireland (Eurozone’s lowest tax country) as a bridgehead to crawl out of Rhine into Atlantic capitalism.

The political enclosure of capitalism common in traditional Rhine capitalism was ended – again with political support. When the state is now invoked as rescuer, statesmen and stateswomen should recall that Rhine capitalism arose out of a painful learning process. Instead of the bank with a guarantee of tax money saying “Carry on” and pointing at the wicked Anglo-Saxons, the bases of transactions should be rewritten from the state side – when if not now – toward a regulated capitalism of the old European style.

The example of Sweden shows that real social democrats can do this. In Sweden many banks were nationalized and the whole financial sector restructured after the grievous financial crisis from 1991 to 1992. “This was better than bridging loan credits, state guarantees or interventions in the currency markets as the US Treasury secretary Henry Paulson proposed,” Wolfgang Munchau said in the Financial Times of Germany on October 1, 2008. In Sweden people decided completely transparently according to rational macro-economic criteria what banks would be bailed out and what banks would not be bailed out. The state gave new capital, not grants, to those bailed out. Thus the shareholders and the managers of the banks were put in the shade.

A very wise economist John Maynard Keynes envisioned the “end of laissez-faire” in a very readable 1926 essay. Political regulation of capitalism was the main lesson after every great crisis.

The collective memory is suspended again and again. Sooner or later everyone dreams again of the blessings of unbounded markets and more money. How dumb! Don’t be fools! Otherwise the next crisis will be even worse.

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