THE TIME IS RIPE: DEMOCRATIC CONTROLS OF THE FINANCIAL MARKETS!

Attac Statement on the Financial Crisis and Democratic Alternatives

Attac Germany, Attac Austria, Attac Denmark, Attac Spain, Attac Finland, Attac Flanders, Attac France, Attac Hungary, Attac Italy, Attac Morocco, Attac Norway, Attac Poland, Attac Sweden, Attac Switzerland

[This position paper published June 2008 is translated from the German on the World Wide Web, http://www.attac.at/6593.html.]




“Disarm the Markets!” This was the first demand of the Attac movement founded in 1998 on the backdrop of the financial crisis in Southeast Asia. In the meantime we have been witnesses to many other crises brought on by the financial markets: the crises in Russia, Brazil, Turkey, Argentina and the bursting of the New Economy bubble in 2001.

Now we are enmeshed in a crisis again. While its end is not in sight, this crisis could be the worst since the Great Depression triggered by the stock market crash in 1929. The enormous increase in subprime mortgages to US households and the packaging through which these credits were resold to financial institutions and households in the US and worldwide is at the heart of the crisis. The cancellation of these credits had and has dramatic consequences for different financial market institutions – hedge funds and banks – and also for the non-financial sector. In retrospect it seems the process of packaging or guaranteeing into “vehicles” plays a central role in the global financial architecture. These mechanisms must be seen as a component in a series of instruments including Leveraged Buyouts (LBOs) and Structured Investment Vehicles (SIV). These developments lead to a gigantic inflation of the financial markets. Their effects were manifest in the dramatic increase of the profits of the financial sector since 2002 and also led to the financial market crisis in which the world economy is now languishing.

One important aspect of the current situation is that the US economy is at the beginning of a recession that could be deeper than other recessions, especially if no proper counter-measures are taken. How the demand can be stimulated given the fact that mortgage credits are no longer an option is unclear. The US recession will have serious repercussions worldwide. A similar recession could also befall the larger European countries. A reduction in economic activity brings higher unemployment and new pressure on employees to increase “the flexibility of the labor market” with the result that purchasing power declines and social security is cut. The demand breakdown of industrialized countries will devastate many developing countries.

The crisis unfortunately confirms the predictions of heterodox experts like Nobel Prize winner Joseph Stiglitz, Attac, the social movements and other critics of the neoliberal project.

Under the pressure of the crisis, the mainstream of the financial world urges reforms. However reforms in such situations are always controversial. Everything depends on whose interests define the reforms. When bankers call for state intervention, they mean socialization of losses while the profits remain in private hands. When bankers speak about reforms, they mean fragmentary (re-) regulation and short-term crisis management – and thus ultimately keeping basic neoliberal rules and returning to “business-as-usual” as soon as possible. Nevertheless a genuine paradigm shift in the interest of the majority of citizens is necessary. The financial markets must contribute to social justice, economic stability and sustainable development. We can not simply return to the status quo ex-ante next year. The crisis cannot be reduced to a result of unfortunate circumstances, errors in the monitoring of rating agencies or the abnormal behavior of individual actors. The crisis has systemic roots. Therefore the mechanisms of the whole system must now be put in question.

Since the financial markets represent the center and driving force of neoliberal globalization, everything that happens on these markets, the good and the bad, has strong repercussions on all other sectors of the economy. This dominance of the financial sector developed after the 1973 introduction of free rates of exchange between the most important currencies, the abolition of capital transaction controls and the ensuring liberalization and deregulation of the financial markets. Since then the financial markets have expanded tremendously; the volumes of financial titles and debts soared. The influence of “financial interests” on the real economy increased enormously. At the beginning of this decade, the growth of the financial markets rapidly accelerated when the US economy recovered from the crisis of the “New Economy.” Both the domestic indebtedness (the heavy debts of US households) and external deficits soared dramatically. The rest of the world made increasing contributions to financing the US economy.

Together these trends have led to the formation of a new economic model, a new form of capitalism sometimes described as globalization, sometimes financial market capitalism and sometimes shareholder capitalism. Regardless of the description of the new phenomenon, one thing is clear. While the financial markets had a subordinate and useful role for the real economy in earlier times, this relation has now reversed. The logic and dynamic of maximum profit on the financial markets penetrates in all the pores of economic and social life. The perfect mobility of capital which is the result of neoliberal policy plays a decisive role in the world economy. This mobility creates global competition between the states (and their social and tax systems) and between employees in different parts of the world, not only between multinational firms. Through the distortion of power relations in favor of owners of capital, this dominance of capital has led to increasing inequality manifest in falling wages and a shift of risks to the burden of employees.

The contradictions of the dominant system were never as blatant as today. The dominant system is completely discredited. Therefore clear lessons must be learned. An historical window of opportunity opens. However whether a real change of course occurs will depend on the pressure of the public.

ANOTHER FINANCIAL SYSTEM IS POSSIBLE

The complexity of the present financial system makes impossible solving the burning problems with a simple instrument. There is no archimedian point. A whole tool box is necessary since a great number of particular measures must be considered in the near future which may all be controversial. Several basic prerequisites should be defined so individual measures bring about emancipative correction.

A. SYSTEMIC CHANGE INSTEAD OF GRADUAL REPAIR

The whole financial system in its neoliberal form has proven to be economically unstable and inefficient and harmful for equality, general welfare and democracy. Therefore systemic changes are imperative. One of our central goals is to tear down the basic neoliberal pillars, above all the worldwide mobility of capital. Individual regulatory measures that aim only at preserving riches and asset-driven development or cosmetic reforms are unacceptable.

B. A NEW BRETTON WOODS INSTEAD OF THE SELF-HEALING POWERS OF THE MARKET

The crisis shows that markets without democratic regulation lead to disastrous results. Therefore democratic controls and international competition must replace the anarchistic competition between nation states. Sustainable development and human rights of all three generations must have precedence in economic decisions.

A suitable institutional framework under UN supervision must be established. The national monitoring and international competition between oversight authorities must be strengthened. The rating business must also become part of public oversight.

Limits must be set to the unhindered flow of goods and capital. The generally accepted openness of streams of goods and finances must be replaced by a new net of agreements between the different countries and regions of the world that are based on mutual respect for the rights of people independent of their class, defense of historical achievements of workers and solidarity with poorer countries.

C. BREAKING THE DOMINANCE OF FINANCIAL MARKETS

The basic orientation for a genuine change must be directed at breaking the dominance of financial markets over the real economy. Several appropriate instruments to this goal are:

• taxation of all kinds of financial transactions (including currency transactions) to reduce speculation, to slow down the speed of financial markets and to reduce the short-term orientation of financial markets;

• Progressive taxation of capital incomes. One of the essential factors for the swelling of financial markets is the increasing concentration of assets. Therefore a substantial redistribution of incomes and assets from top to bottom is just as necessary as reducing incentives for excessive profits to set limits and stabilize the financial markets.

• Privatization of social systems and important public infrastructures – like energy and the railroad system – must be stopped or cancelled.

D. THE CAUSAL AGENT PRINCIPLE

Instability of financial markets is an inherent characteristic of capitalism in general and neoliberal capitalism in particular. Interventions of the state in times of crisis are undoubtedly necessary. The criminal laissez-faire policy of the 1930s may not be repeated. The costs of the interventions should be borne by those responsible for the costs, not by taxpayers. Therefore a special crisis fund should be amassed to cushion the consequences of crisis for the aggregate economy. This fund should be financed by a special tax on capital incomes over 50,000 euro and a one-percent extra tax on corporate profits.

E. REFORMING THE EU

The EU must be given special attention. The financial aspects of the Lisbon treaty and other treaties are suffused with neoliberal dogmas. Article 69 of the Lisbon treaty would prohibit all restrictions on capital flows and thus create the perfect condition for the massive influence of financial markets on society. This must be cancelled. We demand a restriction on freedom of establishment (Article 49) giving capital the freedom to move wherever conditions are most favorable and financial institutions have the possibility of seeking refuge in the city of London or wherever they desire.

The status of the European Central Bank (EZB) must be changed. This bank is at the heart of neoliberal Europe. Its monetary and fiscal policy is based completely on the neoclassical dogmas. The autonomy of the monetarist ideology is just as necessary as the democratic control of this institution whose policy decisively influences the fate of citizens. We criticize the fixation of the EZB on the goal of 2-percent consumer inflation. This is a central pillar of neoliberal policy. Instead the EZB should focus on employment, supporting purchasing power and the stability of the financial markets.

F. REFORMS IN THE HEART OF THE SYSTEM

In view of the crisis, several corner points of the present system demand special attention, for example:

a. Capital resources requirements and rational priorities in the banking sector

Capital resources requirements for banks must be intensified… The worst practices of packaging must be prohibited, for example the CDOs whose goal is reselling subprime credits. Investment banking should be separated from other banking services. The public non-profit world of banking should be strengthened. The public should own at least several key banks to provide stable financing for sustainable and just development. The rating agencies that made serious mistakes in this crisis as in nearly all the crises of the last decades should be put under public control. Rating agencies should in no case be paid by the firms they advise. Instead they should be paid by a fund into which users of the ratings and financial products pay.

b. Institutions with massive leverage

Who needs hedge funds and what is their use for the economy? When Germany’s representatives of the 2007 G-8 summit demanded greater transparency from hedge funds, it was argued that these institutions fulfilled a useful function since no one else was ready to bear the risks they assumed. However these risks are actually risks of speculation in the service of maximum profit. These activities have no benefit for the aggregate economy. On the contrary, they destabilize the system. Through the use of leverage, this risk is extended to the banking system. That is why they should not exist. Explaining hedge funds as an instrument of crisis prevention is like delegating the task of fire prevention to a pyromaniac. Monitoring must keep banks from dealing with hedge funds. No one needs these except rich individuals and institutional investors searching for high-risk maximum profit.

c. Regulation of derivatives

As long as certain risks exist for the real economy in the global economy like the exchange rate risk for example, derivatives could have a positive function of guarding against these risks. For this objective, they should be standardized, examined by a monitoring authority and traded on the exchange.

d. Tax havens

Who needs offshore centers (OFCs) and tax havens? Rich individuals and institutional investors who only want to hide their assets from tax authorities: the Mafia, terrorists, weapons merchants and other criminals intent on washing money. There is a viable economic reason for maintaining the economic status of these territories. Therefore the economic foundation must be taken from these destinations. Since this is not possible because several large industrial countries will not close their own offshore centers and tax havens, others could take unilateral measures. Annulling the banking secrecy of banks in their sovereignty, the directive to close subsidiaries of banks in tax havens and levying a high fee on transactions in tax havens and offshore centers are part of this paradigm shift.