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by Ulrich Schaefer
Thursday, Oct. 06, 2011 at 1:44 AM
The crisis began in the US where the government became heavily indebted after September 11, 2001 in the war against terror and where property owners, banks and hedge funds long lived openly on credit. The German government was laughed at when it prohibited short-selling in 2010
LEARNING NOTHING IN 80 YEARS
WORLDWIDE ECONOMIC CRISIS
By Ulrich Schaefer
[This commentary published in: www.sueddeutsche.de 8/13/2011 is translated from the German on the Internet, http://www.sueddeutsche.de/wirtschaft/weltwirtschaftskrise-in-jahren-nichts-gelernt-1.1130942.]
Anxiety has returned on the financial markets. The stock exchanges stagger and the politicians trying desperately to contain the worst state debt crisis in eight decades with them. With short-selling and credit-insurances, banks and hedge funds have unhinged whole states. As a result, we are mired in the second worldwide economic crisis since 1931.
Whoever wants to know how long the economic crisis can drag on (and how bad it could be) should look back eight decades. In 1931 the first worldwide economic crisis was in its second year. As it turned out, less than half of the crisis had passed. Full of optimism, politicians, entrepreneurs and economists claimed the worst was over. The president of General Motors proclaimed: “I see no reason why 1931 should not be an extremely good year.” After the crash of 1929, the Harvard Economic Society had declared the downswing over. The American Secretary of Commerce exclaimed: “The depression is past.”
What an illusion – and what alarming parallels to the current worldwide economic crisis! All industrial regions of the world are seized: the US, Europe and Japan. Until a few weeks ago, this crisis was trivialized and repressed.
Now Europe is plagued with several indebted countries at the periphery, Greece and Portugal. Everything seems to be in the best order after the crash of 2008 and 2009. The world economy – and the export-oriented German economy with it – grew to an extent not seen for years. People rejoiced over the boom, the few unemployed and the German economic miracle. Is there a crisis? Of course not.
In the meantime it may be clear to everyone who has comfortably adjusted that the mood is better than one-and-a-half years ago. That epochal crisis that began in the spring of 2007 with the bursting of the US housing bubble and was first widely recognized in September 2008 with the bankruptcy of Lehman Brothers is not past. As eight decades ago, several crisis waves will follow. Triggered by collapsing banks, bankrupt states, bad ratings and – if the worst comes to the worst – the breakdown of the Euro zone.
Anxiety is back on the financial markets whose activity is seemingly so rational but in truth is often ruled by carelessness and madness. The stock exchanges stagger and with them the politicians who try desperately to contain the worst state debt crisis in eight decades while some reinterpret the history of the crisis.
WHERE BANKS LEVERAGE STATES
The unbridled indebtedness of individual European Union states did not exist at the beginning of the second worldwide economic crisis. With brightened numbers, the Greeks obtained access to the Euro by devious means. Since time immemorial, the Italians hardly eliminated their deficit. This crisis did not begin in 2007 in Greece, Italy, Ireland and Spain. Up to the Lehman crash, Ireland and Spain were rock solid debtors who sometimes posted high surpluses.
The crisis began in the US where the government became indebted uninhibitedly since September 11, 2001 in the war against terror and where property owners, banks and hedge funds long lived openly on credit. Encouraged by the cheap money of the US Federal Reserve in the years before the crisis, the financial industry vastly increased its credits to finance their risky businesses. The financial industry called this speculation on credit leverage. Now banks and hedge funds unhinge whole states with short-selling and credit-insurances.
This is a rather cynical game. In all the mistakes committed in budget policy, the states became immeasurably indebted since the Lehman crash to preserve the world economy and the banks from crash. With the help of state bailouts, the financial industry successfully reduced its debt-burden while the debt burden of Ireland increased four-fold, doubled in Spain and rose one-fifth in Germany. In the struggle against economic collapse, private debts were exchanged for state debts.
MISTAKES OF THE MARKET
States with serious economies have economized. As a result, Greece and Italy are suddenly not the only ones in Europe to have budget problems. Therefore the players on the capital markets turned the tables in 2008 with their mysterious financial instruments driving the world to the edge of the abyss. They criticize those states that are regarded as unstable, first Greece and then Portugal. Others make mistakes after politicians made mistakes again and again under the pressure of the crisis.
One can believe in the theory that the financial markets exist to correct the mistakes of past policy. This may be right in cases like Greece and Italy. Politics has failed miserably there. The resolved reforms – greater capital buffers for banks, better risk systems and stress tests – were correct and necessary but were not enough to direct markets in the right channels.
If the world wants to draw the right lessons from this crisis, the states must not only reduce their debts. The financial markets must be organized so crises become rarer and less dangerous. Crises cannot be entirely prevented. A truly global oversight for the financial markets is necessary, a mechanism that sets clear limits. Prohibiting some financial instruments whose economic purpose can hardly be explained is also imperative.
This is possible despite all doubts about the financial branch. The German government was laughed at when it prohibited short-selling in 2010, speculation with securities that one did not even have. The use of credit insurance with which bets can be placed on the bankruptcy of whole businesses or states is also limited.
When Lehman Brothers collapsed in 2008, it was said politics, central banks and the financial industry had learned from the mistakes of the first worldwide economic crisis. Three years later this can be doubted. As in 1931, everyone passed too quickly to the day’s agenda. Other mistakes were made at that time. Readiness (and common will) to draws the right lessons is lacking.
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