"The investments of businesses are ridiculously low, as low as after the Second World. The reason for this may be the immense indebtedness of private households. The only thing that blossomed in the US in the last years was Wall Street-that is now killing itself.."
“CAPITALISM HAS FAILED”
The crisis is not over. The management expert and best-selling author Fredmund Malik is interviewed on consequences from the financial- and economic crisis and why no one should be lulled into false security
[This interview published in: Handelsblatt 7/13/2010 is translated from the German on the Internet, http://www.handelsblatt.com/finanzen/anlagestrategie/der-kapitalismus-ist-gescheitert;2431526.
Fredmund Malik is a professor at the University of St. Gallen, Switzerland.]
Mr. Malik, banks are again seeking risks and paying themselves enormous bonuses. Have bankers learned nothing from the financial crises or do they have a short memory?
Yes. Conventional methods are unsuited to govern the complexity of the crisis. Short memory is not the only explanation. It is like steering a ship with the help of sextants instead of using modern satellite navigation.
Isn’t the impression that few new ideas occur to heads of state misleading? At the G8 summit they acted astonishingly.
The summit probably diverted us from the general helplessness. The temptation is great to turn to a policy that is popular but completely lacking in ideas or imagination. The past measures were hardly effective.
What is going wrong?
I think for example of the question about the liability of managers and financial measures. In the past the situation was even worsened through lower interests. Low interests jointly caused the crisis.
Around the globe, states invest enormously in relief programs. Is this all wasted?
We repeat those mistakes made by the Japanese in the 1990s. In Japan, 15 massive packages were passed to stimulate the economy. They were all useless. The money did not arrive. This is also clear now. At most five percent of the trillion invested by Americans in economic packages arrives in the economy and less than one percent in Germany.
But there are already signs for a recovery of the economy. Prices are rising on the stock exchange.
Whoever gives an all-clear signal has apparently not studied the crisis of the 1930s. The current recovery in the stock exchange resembles that of the 1930s when a sensational rally in April followed the crash in October 1929. All the pundits at that time gave an all-clear signal. People also believed in the effectiveness of Federal Reserve measures. Then the debacle first began. At the end, the Dow Jones in 1932 stood at 40 points.
What is the situation today?
The present bull market had its origin in the year 1982. At that time the Dow stood at 1000 points.
To what extent is the situation of the 1930s comparable with today’s situation?
One difference lies in the volume which is many times larger today. But the mechanism of the market is comparable. The stock exchange has two driving forces. One is greed or the belief that one can become ever-richer without work. The second is that the stock exchange only rises strongly when debts are incurred.
You don’t think much of the stock exchange.
On the contrary, I have over 30 years experience on the financial markets, the hottest markets. There is not a day when I am not engaged on the stock exchange.
Are you greedy?
I cured myself of that. I had the happiness or bad luck that I made a profit of 160 percent with my first stock transaction. I was 23 years old and “rich” over night. I was also “famous” because I could not shut my mouth. I told everyone and everyone wanted tips from me. That cost me some money but brought me no end of experience.
You have analyzed the causes of the financial crash. Could the crisis have been averted?
The crisis was inevitable but did not have to assume these forms. Alan Greenspan was obviously wrong in claiming a bubble could not be recognized before it burst. This false development could have easily been recognized. There were enough signs.
What were the signs?
The economy of the US is large but has not been robust for a long time. It is decadent in many areas. This can be seen in the foreign trade deficit.
Of course there are a few good firms in the US but most are not competitive. The investments of businesses are ridiculously low, as low as after the Second World War. The reason for this may be the immense indebtedness of private households. The only think that blossomed in the US in the last years was Wall Street – that is now killing itself.
Do the financial markets have a future?
The financial markets are many times greater than the real economy needs for its investments and its commerce. The volumes are so inflated that they must be scaled back, at least a third and probably two-thirds. Many bankers and brokers will have nothing to do. At the moment people do not need bank consultation. One should simply not touch one’s money. Through deflation, it will be worth more every day.
Thus is it completely unrealistic when Deutsche Bank Ackermann makes a capital profit of 25 percent his goal?
If he succeeds, that will be an incredible business achievement. The question is how is this profit realized and what does it initiate? Are its clients served? Proper business leadership begins and ends with customers.
The bank should invest in its own firm and sparingly pay out profits to its shareowners. Unfortunately there is too little thinking about the future in most firms.
Why is that?
The performance of a business is only measured by financial numbers. That is the worst method of evaluating a business. A self-destructive system arises. Making fast profits is only possible when one does not have to pay attention to the future. Spending for innovations, marketing and training is reduced and the stock price explodes. The question what is management doing for the future of the firm is crucial.
How can the system be changed?
All DAX-firms should immediately bid farewell to the German corporate governance code and the idea of shareh8older value. Secondly, the bonus system must be changed, not abolished. Good managers deserve good salaries. Bonuses must be higher for the best managers. But they must be completely uncoupled from financial codes and stock prices.
The real idea of the stock exchange is that everyone can share in capital and the success of a business. Is this idea of joint-determination antiquated?
The classical shareholder does not exist any more; there are only share-turners. Most are professional investors who are not interested in the business. They appear at the general meetings, vote and naturally choose people of their ilk. A few weeks later they sell their securities.
What could be the alternative?
My proposal is a legal holding period. Whoever votes for an oversight board must hold his or her stocks at least for the term of the board. Whoever refuses this should have no influence on the conduct of the business.
What should we learn from this crisis?
Capitalism has failed like socialism. This crisis is the symptom of a fundamental change. There are birth-pangs of a new world. Something like this may never have happened in history. The solutions will not come from the economy or from the governments. People will learn to help each other. I think we will experience a new humanity. The new capital is knowledge while money will lose its significance. The crass egoism of the last years will be socially banned. Meaning for people will be more important.
Academic, quarrelsome unconventional thinker and best-selling author, Fredmund Malik is an expert on management and business leadership. He teaches as a professor at the University of St. Gallen, Switzerland. In addition, the 65-year old has made a name for himself as an advisor and independent entrepreneur. Since 1984 he has been head of the Malik Management Center with around 300 co-workers. Malik comes from Lustenau, Austria. He studied economics and social sciences in Innsbruck and St. Gallen as well as logic and philosophy of science. His study ended with his promotion. He gained a doctorate in business administration. The theme of his doctoral dissertation was “Strategy of Management of Complex Systems.”
Malik is different from the mass of consultants. He has absolutely nothing in common with American management theory. He sharply criticizes the idea of shareh8older value, business management oriented one-sidedly in the interests of shareholders. He sees there one cause for the worldwide financial crisis. He also regards the conventional training of managers in MBA schools as wrong. He sees a basic problem of the economy in the growing complexity of businesses. His approach in analyzing structures is described in the discipline of management cybernetics. Malik is the author of many essays and columns. Early on he pointed to the danger of a threatening financial- and economic crisis.
“The New Economy and its Illusions” by Fredmund Malik, 2002
"The complexity of a modern society, its transparency, the speed of disseminating information and the educational state make it more important than ever that the core systems of the economy and society are robust..If the greatest chance of humanity for peace, freedom and prosperity that ever existed should not be carelessly lost, pseudo-liberalism must be replaced by true liberalism." Fredmund Malik is a professor of economics in Switzerland.
“We are in the Greatest Financial Bubble of all Time” by Steve Keen and Fredmund Malik, 2010
"An old world perishes as a new world arises-pictorially comparable to a caterpillar that dies because the butterfly comes to life. What is called financial crisis is only a superficial symptom.. One of the main causes of the debacle is the totally misguided Americanized corporate governance with its disastrous shareholder value that still dominates." (Fredmund Malik)
Original: "Capitalism has Failed"