THE BANKS SHOULD SERVE THE REAL ECONOMY
By Rudolf Hickel
[This interview published is translated from the German on the Internet, ]
[The left economic researcher Rudolf Hickel speaks on the power of financial markets, the destructive force of speculation and the responsibility of politics.]
Three years ago the speculative real estate bubble burst in the US and the world cracked in a recession. Economic programs and bank bailouts inflated state indebtedness. The financial markets bailed out by the state lost trust in the solidity of state finances, which led to the Euro crisis. As a result, the power of speculation was broken once and for all, according to economist Rudolf Hickel. “The banks should serve the real economy,” he demands.
Mr. Hickel, what banks are necessary?
Savings banks are necessary. May parents never regarded the mammoth banking houses like Deutsche Bank as attractive.
Savings banks and cooperative banks serve two-thirds of the private customers in Germany. Private banks only serve one-third. Nevertheless the private banks are too large and must be shriveled, you demand. Why?
The banks must be restructured so they serve the real economy and productive enterprises by providing capital for investments. Financial speculation has become increasingly important for the mammoth investment banks. Much money is earned through fraud with high risk securities. A purely speculative financial world uncoupled from the real economy. In 2011 global financial transductions were 75 times greater than the world economic output. This is economic madness.
If “75 times greater” is too much, what would be a proper relation?
No one really knows. The long-term trend is crucial here. Since the 1990s the financial volumes have soured dramatically faster than the world production in goods and services. This is an indication that something has gone wrong in the world economic system. The financial world has uncoupled from its economic value-creation base.
Have you ever speculated?
Yes, I invest in stocks. I bought shares of German Telecom. The Telecom stock price had already soared through speculation. I did not know that at the time. I fell flat on my face.
You regard speculation as bad and solid financial investment as good. Where is the line between the two?
The end distinguishes them. Take currency swap businesses with which firms can protect themselves against enormous currency fluctuations. This financial business is sensible and must always be possible. I criticize speculation that has no relation to the real economy, for example betting on stock indexes. Speculation doesn’t create any wealth, only fictional unreal assets and bubbles that burst sometime or other.
What is the problem when something disappears that wasn’t real anyhow?
The primitive answer is the fictional assets are on the balance sheets at market prices. If the market price falls, the bank registers losses. Measured in real value-creation, speculation is fictional. Banks have a great problem when this becomes visible. This is true for the whole economy and the state far beyond bank customers.
…and then must bail them out.
This is expensive. For a long while, industrial states spend around $1.7 trillion. In addition, the real economy is infected or set on fire. The banks have problems. Awarding credits among the banks breaks down. They don’t give any credits any more. Businesses must postpone investments because they don’t get any money any more.
You have long warned of such a credit-crunch – which never happened.
That was only because of the gigantic state assistance for the banking sector and the liquidity-glut of the European Central Bank. A credit-crunch could not happen. The fraudulent businesses on the financial markets have long shaken trust in the foundations of capitalist economies.
Is that your complaint?
No, I find that good. This shock must be3 taken up productively. The material force of the crisis is the best teacher. Lessons must now be learned. Unfortunately this learning cannot be seen at the moment. An upswing is hardly on the horizon; the elan has already evaporated. The financial sector is pampered again.
What must be done concretely?
Firstly, we need a restriction of the banking business – so the bank only speculates on its own initiative and not on the customers’ commission. Banks indirectly risking customer deposits must become insolvent when speculation doesn’t succeed.
Haven’t the banks already greatly limited their business voluntarily since the financial crisis?
That is only partly true. Aggressive investment banking has intensified again with Deutsche Bank for example. Secondly, the banks increasingly shift risky businesses to an uncontrolled sector, the so-called shadow banks.
What are shadow banks?
These are investment funds and index funds or hedge funds. These were founded in part directly by managers of mammoth banks. These funds are largely unregulated. They speculate on credit and the banks indirectly participate in the financial casino and outsource financial businesses that are either prohibited or made unprofitable by regulation. These shadow banks must be brought back into the regulated sector. Either the shadow banks gain the status of regular banks or they must be simply prohibited.
Should the banks not be shriveled but only their speculative divisions separated out?
They must become decentralized and more democratic. A bank may never become so large and so systemically important that it must be bailed out by taxpayers in case of bankruptcy.
If banks lose their investment business, they lose revenues. They become less profitable, less financially strong and receive fewer credits.
When the banks become less profitable, that is not the end of the world. They must shrivel with the prohibition of fraudulent businesses. Profit goals of 25 percent as with Deutsche Bank drove the institutes into risky transactions.
Deutsche Bank came out very well from the crisis.
That is true. However the state was its godfather or inspiration. Who guarantees that this will be possible in the next financial crisis? Moreover Deutsche Bank operates shady businesses, for example speculation with food that are harmful for others. They gain profits at the expense of third parties. Because of its size, it could influence politics in the financial crisis. All this contradicts the three characteristics on which our banking system should be based: serving, decentralized and democratic.
When banks are already so important and simultaneously so dangerous for the whole system and where financial stability has the status of a public good, why aren’t banks simply nationalized?
That is a conceivable transition to bring the banks in line again and to guide the restructuring of the branch. Afterwards we will not need any nationalized banks any more. Then they will serve, be decentralized and democratic. State influence is not a guarantee for stability, as we see with the regional German banks.
For the financial sector, you urge a prohibition on meaningless products. Would you apply this demand to the real economy?
Absolutely but I would go even further. The prohibition of dangerous toxic financial products is a starting point for a fundamental criticism of the abstract growth pressure that blocks the question what, when and for whom should be produced – and under what conditions.
Rudolf Hickel, 70, is one of Germany’s best-known leftist economists. He studied economics in Tubingen, taught financial management and political economy at the University of Bremen since 1971 and is a member of the Memorandum group that offers expert alternative opinions. Hickel’s latest book is “Smash the Banks. Strip the Financial Markets of their Power.” Hickel is also director of the Institute of Labor and Economy at the University of Bremen.
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