By Michael Sauga
Source: Spiegel International
Six years after the Lehman disaster, the industrialized world is
suffering from Japan Syndrome. Growth is minimal, another crash may be
brewing and the gulf between rich and poor continues to widen. Can the
global economy reinvent itself?
A new buzzword is circulating in the world's convention centers and
auditoriums. It can be heard at the World Economic Forum in Davos,
Switzerland, and at the annual meeting of the International Monetary
Fund. Bankers sprinkle it into the presentations; politicians use it
leave an impression on discussion panels.
The buzzword is "inclusion" and it refers to a trait that Western
industrialized nations seem to be on the verge of losing: the ability to
allow as many layers of society as possible to benefit from economic
advancement and participate in political life.
The term is now even being used at meetings of a more exclusive
character, as was the case in London in May. Some 250 wealthy and
extremely wealthy individuals, from Google Chairman Eric Schmidt to
Unilever CEO Paul Polman, gathered in a venerable castle on the Thames
River to lament the fact that in today's capitalism, there is too little
left over for the lower income classes. Former US President Bill
Clinton found fault with the "uneven distribution of opportunity," while
IMF Managing Director Christine Lagarde was critical of the numerous
financial scandals. The hostess of the meeting, investor and bank heir
Lynn Forester de Rothschild, said she was concerned about social
cohesion, noting that citizens had "lost confidence in their
governments."
It isn't necessary, of course, to attend the London conference on
"inclusive capitalism" to realize that industrialized countries have a
problem. When the Berlin Wall came down 25 years ago, the West's liberal
economic and social order seemed on the verge of an unstoppable march
of triumph. Communism had failed, politicians worldwide were singing the
praises of deregulated markets and US political scientist Francis
Fukuyama was invoking the "end of history."
Today, no one talks anymore about the beneficial effects of unimpeded
capital movement. Today's issue is "secular stagnation," as former US
Treasury Secretary Larry Summers puts it. The American economy isn't
growing even half as quickly as did in the 1990s. Japan has become the
sick man of Asia. And Europe is sinking into a recession that has begun
to slow down the German export machine and threaten prosperity.
Capitalism in the 21st century is a capitalism of uncertainty, as
became evident once again last week. All it took were a few
disappointing US trade figures and suddenly markets plunged worldwide,
from the American bond market to crude oil trading. It seemed only
fitting that the turbulence also affected the bonds of the country that
has long been seen as an indicator of jitters: Greece. The financial
papers called it a "flash crash."
Running Out of Ammunition
Politicians and business leaders everywhere are now calling for new
growth initiatives, but the governments' arsenals are empty. The
billions spent on economic stimulus packages following the financial
crisis have created mountains of debt in most industrialized countries
and they now lack funds for new spending programs.
Central banks are also running out of ammunition. They have pushed
interest rates close to zero and have spent hundreds of billions to buy
government bonds. Yet the vast amounts of money they are pumping into
the financial sector isn't making its way into the economy.
Be it in Japan, Europe or the United States, companies are hardly
investing in new machinery or factories anymore. Instead, prices are
exploding on the global stock, real estate and bond markets, a dangerous
boom driven by cheap money, not by sustainable growth. Experts with the
Bank for International Settlements have already identified "worrisome
signs" of an impending crash in many areas. In addition to creating new
risks, the West's crisis policy is also exacerbating conflicts in the
industrialized nations themselves. While workers' wages are stagnating
and traditional savings accounts are yielding almost nothing, the
wealthier classes -- those that derive most of their income by allowing
their money to work for them -- are profiting handsomely.
According to the latest Global Wealth Report by the Boston Consulting
Group, worldwide private wealth grew by about 15 percent last year,
almost twice as fast as in the 12 months previous.
The data expose a dangerous malfunction in capitalism's engine room.
Banks, mutual funds and investment firms used to ensure that citizens'
savings were transformed into technical advances, growth and new jobs.
Today they organize the redistribution of social wealth from the bottom
to the top. The middle class has also been negatively affected: For
years, many average earners have seen their prosperity shrinking instead
of growing.
Harvard economist Larry Katz rails that US society has come to
resemble a deformed and unstable apartment building: The penthouse at
the top is getting bigger and bigger, the lower levels are overcrowded,
the middle levels are full of empty apartments and the elevator has
stopped working.
'Wider and Wider'
It's no wonder, then, that people can no longer get much out of the
system. According to polls by the Allensbach Institute, only one in five
Germans believes economic conditions in Germany are "fair." Almost 90
percent feel that the gap between rich and poor is "getting wider and
wider."
In this sense, the crisis of capitalism has turned into a crisis of
democracy. Many feel that their countries are no longer being governed
by parliaments and legislatures, but by bank lobbyists, which apply the
logic of suicide bombers to secure their privileges: Either they are
rescued or they drag the entire sector to its death.
It isn't surprising that this situation reinforces the arguments of
leftist economists like distribution critic Thomas Piketty. But even
market liberals have begun using terms like the "one-percent society"
and "plutocracy." The chief commentator of the
Financial Times, Martin Wolf, calls the unleashing of the capital markets a "pact with the devil."
They aren't alone. Even the system's insiders are filled with doubt.
There is the bank analyst in New York who has become exasperated with
banks; the business owner in Switzerland who is calling for higher
taxes; the conservative Washington politician who has lost faith in the
conservatives; and the private banker in Frankfurt who is at odds with
Europe's supreme monetary authority.
They all convey a deep sense of unease, and some even show a touch of rebellion.
If there is a rock star among global bank analysts, it's Mike
Mayo. The wiry financial expert loves loud ties and tightly cut suits,
he can do 35 pull-ups at a time, and he likes it when people call him
the "CEO killer."
The weapons Mayo takes into battle are neatly lined up in his small
office on the 15th floor of a New York skyscraper: number-heavy studies
about the US banking industry, some as thick as a shoebox and often so
revealing that they have enraged industry giants like former Citigroup
CEO Sandy Weill, or Stan O'Neal in his days as the head of Merrill
Lynch. Words of praise from Mayo are met with cheers on the exchanges,
but when he says sell, it can send prices tumbling.
Mayo isn't interested in a particular sector but rather the core of
the Western economic system. Karl Marx called banks "the most artificial
and most developed product turned out by the capitalist mode of
production." For Austrian economist Joseph Schumpeter, they were
guarantors of progress, which he described as "creative destruction."
But financial institutions haven't performed this function in a long
time. Before the financial crisis, they were the drivers of the
untenable expansion of debt that caused the crash. Now, focused as they
are on repairing the damage done, they are inhibiting the recovery. The
amount of credit ought to be "six times faster than it has been," says
Mayo. "Banks now aren't the engines of growth anymore."
Mayo's words reflect the experience of his 25 years in the industry, a
career that sometimes sounds like a plot thought up by John Grisham:
the young hero faces off against a mafia-like system.
He was in his late 20s when he arrived on Wall Street, a place he saw
as symbolic of both the economic and the moral superiority of
capitalism. "I always had this impression," says Mayo, "that the head of
a bank would be the most ethical person and upstanding citizen
possible."
But when Mayo, a lending expert, worked for well-known players like
UBS and Prudential Securities, he quickly learned that the glittering
facades of the American financial industry concealed an abyss of lies
and corruption. Mayo met people who recommended buying shares in
technology companies in which they themselves held stakes. He saw how
top executives diverted funds into their own pockets during mergers. And
he met a bank director who only merged his bank with a lender in
Florida because he liked boating in the Keys.
What bothered Mayo most of all was that his employers penalized him
for doing his job: writing critical analyses of banks. He lost his job
at Lehman Brothers because he had downgraded a financial institution
with which the Lehman investment department wanted to do business.
Credit Suisse fired him because he recommended selling most US bank
stocks.
Only when the real estate bubble burst did the industry remember the
defiant banking analyst, who already saw the approaching disaster even
as then-Deutsche Bank CEO Josef Ackermann issued a yield projection of
25 percent.
Fortune called him "one of eight people who saw the crisis coming." The US Congress called on him to testify about the crisis.
Today Mayo writes his analyses for the Asian brokerage group CLSA and
they still read like reports from a crisis zone. Central banks have
kept lenders alive with low interest rates, and governments have forced
them to take up additional capital and comply with thousands of pages of
new regulations. Nevertheless, Mayo is convinced that "the incentives
that drove the problems … are still in place today."
Top bank executives are once again making as much as they did before
the crisis, even though the government had to bail out a large share of
banks. The biggest major banks did not shrink, as was intended, but
instead have become even larger.
Incalculable Risks
New accounting rules were passed, but financial managers can still
hide the value of their receivables and collateral behind nebulous terms
like "transaction" or "customer order." Bank balance sheets, British
central banker Andrew Haldane said caustically, are still "the blackest
of boxes."
Before the crash, investment banks gambled with derivatives known by
acronyms like CDO and CDS. Today Wall Street institutions try to get the
upper hand with high-frequency trading, with their Dark Pools and
millisecond algorithms. Regulators fear that high-frequency trading,
also known as flash trading, could create incalculable risks for the
global financial system.
When analyst Mayo thinks about the modern banking world, he imagines a
character in the Roman Polanski film "Chinatown," California detective
Jake Gittes. The man solves one corruption case after another, and yet
the crime level in Los Angeles doesn't go down. "Why is that?" he
finally asks another character, who merely replies: "Forget it, Jake.
It's Chinatown."
It's the same with the banking industry, says the analyst. Individual
institutions aren't the problem, he explains. The problem is the
system. "The banks are Chinatown," says Mayo, "and it is still the
situation today."
The little village of Wimmis lies in an area of Switzerland that still looks quintessentially Swiss, the Bernese
Oberland,
or Highlands, where Swiss flags flutter in front yards. The local
tanning salon is called the "Sunne Stübli" (little sun room) and under
"item five" of the latest edition of the town's "Placard Ordinance,"
posted outside the town administration building, organizations must
secure their public notices "with thumbtacks" and "not with staples."
Everything has its place in Wimmis, as it does in Markus Wenger's window
factory. The business owner, with his thinning hair and crafty eyes, is
the embodiment of the old saying, "time is money." He walks briskly
through his production building, the size of a football field, passing
energy-saving transom windows, energy-saving patio doors and
energy-saving skylights, which can be installed between solar panels,
also to save energy, a system Wenger developed. "We constantly have to
think of new things," he says, "otherwise the Czechs will overtake us."
Wenger could pass for a model businessman from the regional chamber
of commerce were it not for his support for a political initiative
that's about as un-Swiss as banning cheese production in the Emmental
region. Wenger advocates raising the inheritance tax.
For decades, Switzerland was based on a unique form of popular
capitalism, which promised small craftsmen as many benefits as those who
worked in high finance. Switzerland was the discreet tax haven for the
world's rich, while simultaneously laying claim to Europe's highest wage
levels -- a Rolex model of the social welfare state.
But the country's established class consensus was shattered by the
excesses of the financial crisis -- the $60 billion bailout of its
biggest bank, UBS, and the millions in golden parachutes paid out to
executives so that they wouldn't go to the competition after being
jettisoned by their companies.
Since then, a hint of class struggle pervades Swiss Alpine valleys. A
series of popular initiatives have been launched, initiatives the
financial newspapers have labeled "anti-business." To begin with, the
Swiss voted on and approved a cap on so-called "rip-off salaries."
Another referendum sought to impose a ceiling on executive compensation,
but it failed. A proposal by Social Democrats, Greens and the socially
conservative EVP, to support government pensions with a new tax on large
inheritances, will be put to a referendum soon.
'The Wealth of Medieval Princes'
Income isn't the problem in Switzerland, where the gap between rich
and poor is no wider than in Germany or France. The problem is assets.
No other country has as many major shareholders, financiers and
investors, and in no country is as much capital concentrated in so few
hands. The assets of the 100 wealthiest Swiss citizens have increased
almost fivefold in the last 25 years. In the Canton of Zürich, the 10
richest residents own as much as the poorest 500,000. When a Swiss
business owner died recently, his two heirs inherited an estate worth as
much as all single-family homes and owner-occupied flats in the Canton
of Appenzell Innerrhoden. Wealth has become so concentrated in
Switzerland, says the former head of the Zürich statistics office, that
it "rivals the wealth of medieval princes."
The government benefits hardly at all from this wealth. The Swiss tax
authorities recently collected all of 864 million Swiss francs (€715
million) in inheritance tax, and this revenue source is unlikely to
increase anytime soon. To attract wealthy individuals, the cantons have
reduced their tax rates to such low levels that even estates worth
billions can be left to the next generation without being subject to any
taxation at all.
In the past, the Swiss were fond of their quirky high society, whose
lives of luxury in places like Lugano were as spectacular as their
bankruptcies. But now, a large share of the super-rich comes from the
financial industry, and even an upright window manufacturer like Markus
Wenger is often unsure what to make of the demands coming from his
high-end customers.
A homeowner recently asked Wenger if he could gold-plate his window
fittings. And when he was standing in an older couple's 500-square-meter
(5,380-square-foot) apartment not long ago, he found himself wondering:
How do they heat this?
A Dangerous Path
Wenger is no revolutionary. He likes the market economy and says:
"Performance must be rewarded." His support for a higher inheritance tax
is not as much the result of his sense of justice, but rather a cost
calculation that he explains as soberly as the installation plan for his
windows.
This is how Wenger's calculation works: Today he pays about €8,000 a
year in social security contributions for a carpenter who makes 65,000
Swiss francs (€54,000). But the Swiss population is aging, so
contributions to pension insurance threaten to increase drastically
soon. Doesn't it make sense, he asks, to exact an additional, small
contribution from those Swiss citizens who hardly pay any taxes at all
today on their rapidly growing fortunes?
For Wenger, the answer is obvious. But he also knows that most of his
fellow business owners see things differently. They are worried about
an "attack by the left" and prefer to support their supposed champion,
Christoph Blocher, the billionaire spiritual head of the Swiss People's
Party. Only recently, Blocher convinced the Swiss to limit immigration
by workers from other European countries. Now Wenger expects Blocher to
launch a new campaign under the motto: "Are you trying to drive our
business owners out of the country?"
There is more at stake than a few million francs for the national
pension fund. The real question is whether wealthy countries like
Switzerland should become playthings for their elites. Wenger sees the
industrialized countries embarking on a dangerous path, the path of
greed and self-indulgence, and he believes Blocher's party is the most
visible expression of that. Blocher is pursuing a "policy for high
finance," says Wenger. "He is fighting on behalf of money."
The entrepreneur from the Bern Highlands has no illusions over his
prospects in the upcoming conflict with the country's great scaremonger.
The Swiss are likely to vote on the inheritance tax initiative next
year. "In the end," Wenger predicts, "the vote will be 60 to 40 against
us."
He was the face of the Reagan revolution, a young man with large,
horn-rimmed glasses and thick hair, wearing a suit that was too big for
him as he sat next to the hero of conservative America. As former
President Ronald Reagan's budget director, David Stockman was the
architect of the biggest tax cut in US history and the propagandist of
the "trickle-down" theory, the Republican tenet whereby profits earned
by the rich eventually benefit the poorer classes.
Thirty years later, Stockman is sitting on a Chesterfield sofa in his
enormous mansion in Greenwich, Connecticut, an affluent suburb of New
York, where the stars of the hedge fund industry conceal their tasteless
mansions behind red brick walls and jeeps owned by private security
companies are parked on every street corner.
Stockman is wearing a green baseball cap and a black T-shirt. It's a
sunny early fall morning, but the mood in the brightly lit rooms is
strangely somber. The rooms are empty, there are boxes stacked in the
corners and a servant is wrapping the silverware in the dining room.
Stockman is moving to New York, into an apartment he has already
rented in Manhattan. But it isn't entirely clear whether he is only
moving to be closer to TV studios and newspaper editors, or if the move
signifies a departure from his previous life. It was a life that took
him through the executive suites of Washington politics and the US
financial industry, a life that has placed Stockman in an almost
unparalleled position to recount the aberrations of American capitalism
in the last three decades. "We have a financialized, central-bank
dominated casino," he says, "that is undermining the fundamentals of a
healthy growing capitalist economy," he says.
Ironically, Stockman was the one who wanted to reshape that society,
back in the 1980s, when Reagan made him the organizer of his shift to
so-called supply-side economics. Like the actor-turned-president from
California, Stockman believed in free markets, low taxes and reducing
the role of government.
The First Mistake
But Stockman also believed in healthy finances, which placed him at
odds with the California contingent on Reagan's team who saw themselves
as lobbyists for industry and the military. When Reagan's chief of
staff, Donald Regan, declared the phrase "tax increase" to be taboo
after the 1984 election, Stockman knew that he had lost. But it was more
than a personal defeat. It was a triumph of irrationality, one that led
Stockman to permanently disassociate himself from his party's fiscal
policies. "The Republican concept of starving the beast is the worst
thing in terms of fiscal rectitude that you can imagine," Stockman says
today. "It's even worse than the Keynesian models of the Democrats."
The debt policy of the Reagan years was the first mistake of
America's conservative revolutionaries, but not the only one. There is
another fallacy, one that Stockman also participated in when he went to
work for the investment bank Salomon Brothers and later the private
equity firm Blackstone after his ouster from the White House.
It was the time when it had become politically fashionable to
unfetter the financial industry; a time when then-Fed Chairman Alan
Greenspan, Stockman's old acquaintance from the Reagan team, was
inventing a new monetary policy: Whenever the economy and the markets
showed signs of weakness, he reduced interest rates, and when a large
financial institution ran into trouble, it was bailed out with the help
of the central bank.
Greenspan's policy of cheap money became a sweet poison for Wall
Street, the chief ingredient of the dangerous debt cocktails brewed up
by the wizards at London and New York investment banks, with Stockman
front and center. The former politician became a virtuoso of the
leveraged buyout, a complex financial deal in which in investor buys
companies with borrowed money, restructures them or carves them up, and
then sells them at a profit.
The deals made Stockman rich, but they also turned him into a junkie.
His projects became increasingly risky and the towers of credit he
constructed became taller and taller. "I was an addict," he says. "I got
caught up in the process."
A Debt Republic
Disaster struck in 2007, when one of his highly leveraged companies
went bankrupt. He was indicted on fraud charges, and the bankruptcy cost
him millions and damaged his reputation. It became his "road to
Damascus experience," as he calls it, when the financial crisis erupted a
short time later. He concluded that the same mistakes that had
destroyed his company also took the United States to the brink of an
abyss: cheap credit, excessively high debt and a false sense of security
that everything would ultimately work out for the best.
Stockman again became the rebel he had been at the beginning of his
career. He gave up his position in the financial industry, started a
blog in which he settled scores with both policymakers in Washington and
the financial oligarchy on Wall Street and he wrote an almost 800-page
analysis of the "Great Deformation" of US capitalism.
The conservative is furious over his country's transformation into a
debt republic of the sort the Western world has never before seen in
times of peace. A republic in which going to college is paid for with
borrowed funds, as is the next military campaign. A country which hasn't
actually dismantled its gigantic pile of debt since the crisis -- $60
trillion -- but has merely redistributed it. While the banks were
allowed to pass on a large share of their bad loans to taxpayers, the
government is in more debt than ever before.
The mountain of debt appears smaller than it is because the Fed keeps
interest rates low. At the same time, though, all this cheap money is
driving the United States into a risky race against time, one in which
no one knows what will happen first: the hoped-for economic boom or the
next crash. Experts, like former Treasury Secretary Robert Rubin,
believe the current rally in the markets is in fact the precursor to the
next crash.
The primary beneficiaries of the market rally seen in recent months
are the 10 percent of top earners who own more than 90 percent of
financial assets. But for average Americans, the policies instituted in
response to the crisis have been poverty inducing. After the crash,
millions of US citizens first lost their homes and then their jobs --
and now the social divide in the country is as big as it was in the
1920s. While wealth has grown at the top of the income scale, the median
household, or the household that lies statistically at the exact middle
of the scale, has become $50,000 poorer since 2007.
In the past, part of the promise of the American dream was that
anyone who worked hard enough could eventually improve his or her
situation. Today the wealthy enjoy most of the fruits of US capitalism
and the most salient feature of the system is the fear of fear. No one
knows what might happen if the Fed raises interest rates next year as
planned. Will pressure from rising costs cause the government deficit to
explode? Will the stock market bubble burst and will financial
institutions collapse? Will the economy crash?
Only one thing is certain: In the seventh year of the financial
crisis, the US economy is still addicted to debt and cheap money. Worst
of all, the withdrawal phase hasn't even begun.
"There is no possibility of a soft landing (with the) markets as
completely distorted and disabled as they are today," Stockman says in
parting. "There will be some great conflagration. It's just the question
of when."
Michael Klaus flips open his mobile phone, which he has been
doing a lot of these days. He taps the screen with his finger to display
the current yields on 10-year German government bonds. "Germany 10
Year: 0.80," the screen reads, using the abbreviated terminology of the
Bloomberg market service. "You see," he says, "yields are down again.
They were at 0.84 yesterday."
It's Wednesday of last week. The Frankfurt banker is walking down
Friedrichstrasse in Berlin on his way to a meeting with fellow members
of the Confederation of German Employers' Associations. The latest labor
agreement is on the agenda, but Klaus is still thinking about the
number on the screen of his mobile phone, yet another reaction to the
most recent plans of Mario Draghi, the president of the European Central
Bank (ECB).
Such rates are almost always a reaction to Draghi, at least they have
been since the euro crisis got going. According to economics textbooks,
security prices are determined by supply and demand. But in the reality
of the monetary union, they usually follow the rates set by the top
monetary watchdog in Frankfurt. In Klaus's assessment of the situation,
"to put it in somewhat exaggerated terms, we live in a
central-bank-administration economy."
For the last quarter of a
century, Klaus, a management expert, has been working for Metzler, a
traditional, private bank based in Frankfurt. He is now a partner and
exudes the self-confident nonchalance of a man who knows that his
customers need to show up with at least €3 million to become his
clients. His biggest asset is reliability. Unlike the large, powerful
banks, his bank would be unable to count on government assistance in a
crisis. It is not big enough to be too big to fail.
Partly for that reason, Klaus is particularly bothered by the ECB's
development in recent years. He sees it as a kind of hedge fund a kind
of ministerial administration. Because Europe's major banks are ailing
and national governments are at odds, the ECB has developed into the
most powerful bureaucracy on the Continent. It controls interest rates
and the money supply, drives prices on the exchanges and financial
markets, supervises financial institutions and audits governments.
According to Klaus, the European Central Bank has all but "replaced" the
European bond market.
It made sense at the time, because it protected the monetary union
from breaking apart. But now emergency aid has turned into long-term
assistance. The effects of ECB measures are subsiding, and financial
experts aren't the only ones to notice that their programs have recently
done more harm than good.
That was the case with Draghi's latest package last month. To
stimulate lending to small and mid-sized companies, the ECB announced
its intention to begin large-scale buying of special debt instruments
known as asset-backed securities, or ABS. The only problem is that far
too few of these securities exist in Europe.
This leads many experts to worry that lenders will simply fill the
gap by transforming bad debt from their portfolios into ABSs and pass
them on to the ECB. The investment effect would be next to nothing.
Draghi's plan to provide long-term funds to banks if they can
demonstrate that they passed it on in the form of loans to companies or
households could also prove harmful. They must only offer proof in 2016,
meaning they could first invest the money in government bonds, a surer
bet these days than corporate bonds.
Achieving the Opposite
Another recent Draghi measure is particularly dangerous: the
"negative deposit interest rate." It means that banks no longer earn
anything when they park their money with the ECB. On the contrary, they
are required to pay for the privilege.
This too is meant to encourage banks to lend. In reality, however,
the measure makes the situation even more difficult for financial
institutions like savings banks and cooperative banks, which are
dependent on customer deposits. Because of the current low interest
rates, these banks already earn almost nothing from the spread between
savings and lending rates. If interest rates are pushed down even
further, profits will continue to decline. "Ironically, this torpedoes
the business model of savings banks and cooperative banks, which have
thus far managed to survive the crisis in relatively good shape," says
Klaus.
Many experts are worried that with measures like these, the ECB is
achieving precisely the opposite of what it wants to achieve. Instead of
being strengthened, the credit sector is weakened. Instead of reducing
risks, new ones are being created. Instead of liquidating ailing banks,
they are kept alive artificially.
The economy has had little experience thus far with the new crisis
capitalism, with its miniature growth, miniature inflation and miniature
interest rates. But economists learned one thing after large credit
bubbles burst in recent years, in Japan and Scandinavia, for example:
After a financial and banking crisis, the first order of business is to
clean up the banks, and to do it quickly and radically. Institutions
that are not viable need to be shut down while the others should be
provided with capital.
'Substantial Turbulence'
In Europe, however, this process has dragged on for years, under
pressure from the financial lobby. The condition of the industry is now
so dismal that experts are using metaphors from the world of horror
films to describe it. "Zombie banks" are those that are being kept alive
artificially with government bailouts and, like the zombies in
Hollywood films, are wreaking havoc throughout Europe. They are too sick
to lend money to the real economy but healthy enough to speculate with
financial investments. Many banks today, says Bonn economist Martin
Hellwig, can only "survive in the market by speculating."
What distinguishes the current situation from the wild years before
the financial crisis is that speculators were once driven by greed but
have since turned into speculators motivated by need.
Private banker Klaus has seen enough on his market app. He closes the
phone with a worried look on his face, and then he utters a sentence in
the typically convoluted idiom of the financial industry: "If Europe
slips into a recession, it could lead to substantial turbulence in the
financial markets."
The man who introduced
the concept of "inclusion" into the
political debate is sitting in his office in Boston. There are mountains
of papers on the round conference table: academic papers, pages of
statistics from the International Monetary Fund, and the latest issue of
the
Anarcho-Syndicalist Review.
Daron Acemoglu is currently considered one of the 10 most influential
economists in the world, but the native of Istanbul doesn't think much
of titles and formalities. He prefers the relaxed look of the web
community: a plaid shirt and jeans, and a Starbucks cup in his hand.
He became famous two years ago when he and colleague James Robinson
published a deeply researched study on the rise of Western industrial
societies. Their central thesis was that the key to their success was
not climate or religion, but the development of social institutions that
included as many citizens as possible: a market economy that encourages
progress and entrepreneurship, and a parliamentary democracy that
serves to balance interests.
The only problem is that such institutions do not arise
automatically. They have to be promoted and defended, especially against
those social classes and interest groups that use power to seal
themselves off from competitors, secure their own benefits and seek to
influence lawmakers accordingly.
Extremely well read, Acemoglu can cite dozens of such cases. One is
14th century Venice, where a small patrician caste monopolized maritime
trade. Another is Egypt under former President Hosni Mubarak, whose
officer friends divided up key economic posts among themselves but were
complete failures as businessmen. These are what Acemoglu calls
"extractive processes," which lead to economic and social decline.
A Process of Extraction?
The question today is: Are Western industrial societies currently undergoing a similar process of extraction?
Acemoglu leans back in his chair. He isn't one to make snap
judgments, and he understands the contradictions of social trends, in
the United States, for example. On the one hand, the US is more
inclusive today than in the 1960s, because it has abolished racial
segregation. On the other hand, says Acemoglu, he has noticed the
growing influence of powerful interest groups: the pharmaceutical
industry, insurance companies and, most of all, Wall Street. "The
problem of money in politics," says Acemoglu, "is particularly acute in
the case of the financial industry."
US politicians spend up to 70 percent of their time raising money for
their campaigns, and Wall Street is one of their most important
sources. Experts have calculated that Bill and Hillary Clinton alone
have garnered at least $300 million in donations from the financial
industry since the early 1990s.
In addition, money is no longer the only factor shaping the
connections between Wall Street and Washington, as Acemoglu demonstrated
in a recent study about former US Treasury Secretary Timothy Geithner.
The stock prices of financial firms, with which he maintained close
relationships, climbed significantly after his nomination. "The fact
that some companies had the ear of the Secretary of the Treasury,"
Acemoglu concludes, "was, at least by the market view, very valuable."
It has nothing to do with bribery, Acemoglu clarifies. Still, the
process highlights the dangerous closeness between the financial
industry and the political world, a phenomenon which can be seen
elsewhere in the world as well. In Germany, for example, Chancellor
Angela Merkel took steps to prevent a Greek insolvency at least partly
out of consideration for German banks invested there. The London
financial industry, to cite another example, was instrumental in
blocking EU plans for the introduction of a financial transaction tax.
In Switzerland, billionaire Blocher finances referendum campaigns via
his political party. "The rich are extremely powerful," Acemoglu says,
"and that is a concern."
Not Enough
Limiting that influence is of the utmost importance, Acemoglu
believes, so that today's upper-class, high-finance capitalism can once
again revert to being a capitalism of the real economy and the societal
center. The necessary economic reforms are not Acemoglu's primary focus,
even if the relevant proposals have existed for a long time: a fiscal
policy that doesn't just benefit the rich; a monetary policy that knows
its limits; a reform of the financial and banking industry that
separates the traditional savings and lending business from risky
investment banking.
That won't be enough, Acemoglu believes. What is needed, he argues,
is a new political alliance that takes a stand against the power of the
financial industry and its lobby. He sees the anti-trust movement from
the beginning of the last century in the United States as a model. It
was a broad coalition from the center of society and finally achieved
its great victory after decades of struggle: the breakup of major
corporations like Standard Oil.
Will something comparable happen with the big international banks?
Acemoglu doesn't know, but he is convinced of one thing: Elitist
conferences, at which bankers and fiscal policy experts hold
sophisticated conversations about "inclusion," will not bring about
change.
The organizers of the World Economic Forum once again sent him an
invitation to Davos recently. But Acemoglu declined, as he has done
several times in the past. "Solutions to the world's problems are not
produced in a meeting between Bill Gates and George Soros," he says.
"Renewal has to come from below."
Translated from the German by Christopher Sultan
