Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.

Saving Capitalism from Itself

by DoDo Fri Oct 10th, 2008 at 07:36:12 AM EST

German federal finance minister Peer Steinbrück has a plan. On Wednesday, he published an eight-point plan (see in German, and in English as pdf), to be presented at the G7 meeting of finance ministers in Washington today. No word about nationalisation, but definitely about new regulation. Condensed summary:

  1. Obligation to keep innovative financial instruments on the balance sheet, and they must be supported with sufficient equity.
  2. Bank liquidity cushions must be increased, and a minimum size must be set for them.
  3. International standards should be created for greater personal liability for the financial market participants accountable (to prevent golden parachutes).
  4. Incentive and remuneration schemes should be adjusted in the financial sector (Steinbrück links those to the insane push for high profit margins).
  5. Closer coordination between FSF and IMF.
  6. Detrimental short-selling should be temporarily banned by international agreement.
  7. A ban on the securitization of 100% of lending risk (to make lenders aware of risk).
  8. Enhance cooperation between national regulators.


Just two weeks ago, Steinbrück, who is from the German Social Democrats (SPD), was all over the global media by declaring the end of US hegemony (as reported by Fran in the 26 September Salon):

FT.com / World - US ‘will lose financial superpower status’

The US will lose its role as a global financial “superpower” in the wake of the financial crisis, Peer Steinbrück, the German finance minister, said on Thursday, blaming Washington for failing to take the regulatory steps that might have averted the crisis.

“The US will lose its status as the superpower of the world financial system. This world will become multi­polar” with the emergence of stronger, better capitalised centres in Asia and Europe, Mr Steinbrück told the German parliament. “The world will never be the same again.”

However, Steinbrück is no flaming leftie.

The fun thing about the person doing the proposal is that Steinbrück was a top advocate of market 'reforms' within the SPD. In 2003, back when he was PM of the German state of Northrhine-Westphalia, he co-authored a position paper advocating various 'subvention-reducing' reforms with the (now outgoing) PM of Hessen, the infamous Roland Koch (CDU). The Koch-Steinbrück-Papier is cited by 'reform' advocates as model ever since.

On the other hand, Steinbrück long advocated stronger international oversight. Remember when Merkel scolded the US thusly?

Merkel Slams US, Britain for Blocking Tighter Financial Controls | Germany | Deutsche Welle | 20.09.2008

Speaking in Austria on Saturday, Sept 20, Merkel said her government had tried in vain to win G8 support last year for tighter regulation of hedge funds and financial oversight of capital markets, hinting that she felt vindicated in her stance as a financial disaster unfolded on Wall Street in recent days.

 

"It was said for a long time 'Let the markets take care of themselves' and that there is 'no need for more transparency'," Merkel said at a rally in Linz, where she was campaigning on behalf of the Austrian conservative People's Party (OeVP).

 

"Today we are a step further because even America and Britain are saying 'Yes, we need more transparency, we need better standards for the ratings agencies'," Merkel said.

Those attempts by Merkel's government at the G8 were pushed by Steinbrück.


Now, more to the point: do you think these steps suffice to at least prevent another similar crisis?

Display:
I'll repeat a question I've asked elsewhere, which is 'have they really learnt their lesson?'

Or will they get things stable again and then be lured back into the old free market way driven by greed, with the arrogant pretence that they won't make the same mistakes again?

by In Wales (inwales aaat eurotrib.com) on Fri Oct 10th, 2008 at 07:41:48 AM EST
My answer is, "Greed springs eternal."

Having said that, I think we are on the cusp of a new regulatory regime that will last until we all of us are in our graves.

Just like the last regulatory regime persisted until the Great Depression passed out of living memory.

The fact is that what we're experiencing right now is a top-down disaster. -Paul Krugman

by dvx (dvx.clt ät gmail dotcom) on Fri Oct 10th, 2008 at 07:49:17 AM EST
[ Parent ]
Well, if we manage to fend off a depression I don't think the regulatory regime will have that much longevity unless we do something very clever.
by Colman (colman at eurotrib.com) on Fri Oct 10th, 2008 at 07:51:48 AM EST
[ Parent ]
A liberal Shock Doctrine approach.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Fri Oct 10th, 2008 at 08:13:57 AM EST
[ Parent ]
That's it, but that requires commitment to fundamentally alter the prevailing economic ideas that are the superstructure of the global economy.

You have to be willing to accept that nationalization rather than being verboten may be the answer. You have to recognize that markets are not self-regulating, they require state intervention in order to ensure that they don't destroy the means by which societies provide for their material needs. It means accepting the proposition that the concentration of wealth is detrimental to the economic health of societies, and arguing for income redistribution as a means to attack wealth inequality in the long term.  It means recognizing that decision making rules that constitute the electorate as a function of ((individual * wealth) +(individual * wealth)) rather than individual + individual are fundamentally flawed and in contradiction to democratic principles.

This is a tall order.  I really doubt that either of the current US presidential candidates can pull it off.  Historical sequence matters, and the consequences of sequencing are drastic.

Consider the Great Depression in the United States and the 1928 election.

Al Smith vs Herbert Hoover.  The parallels are striking.  Al Smith was a "historic" candidate, the first Catholic who might become president of the United States.  Herbert Hoover was a "moderate" Republican often at odds with his own party.  Both believed that the use of popular government as a means to battle the excesses of big business was nothing less than communism.  

Smith would later become a bitter rival of FDR, supporting an attempted military coup attempt against him in the 1930s and the presidential candidacies of Republican candidates in 1936 and 1940.

Now consider a counterfactual.  What if Smith had won in 1928?  The ability of the party of the center left to move to the left evaporates.  The inability to move left within the existing party system means no Democratic New Deal, reform must occur outside of the system rather than within it.  Social liberalism must yield to one of two worlds: 1) Social Democracy, 2) Fascism.

Social Democracy arising from outside of the system means that conservative reactionaries are able to attack policies promoted by the working class to protect themselves as communist revolution against the "natural" order.  If in opposition action by the Left is crushed following the example of the Asturian revolt of 1934 in Spain.  If in power, the presence of party originating from outside of the system leads economic elites to conservative revolution to restore the order they prefer, i.e. conservative military uprising.  Civil war. Death, destruction, etc.

All this because there was no way to make the needed change in the system, requiring a change of the system.

If Obama wins this election and is "Smith-like", the change of the system must occur, because change in the system has been excluded as a possibility.

As for the possibility of reactionary revolution in America, consider that this possibility is more plausible now than it was at any time in the 1930s.  Because in the 1930s, military power was the preserve of the state.  When the coup leaders approached Gen. Smedley Butler, he turned the tables on them.

If latter day coupsters approach Blackwater's Erik Prince, will we be so lucky?

Sleep on that one, if you can.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Fri Oct 10th, 2008 at 04:20:04 PM EST
[ Parent ]
Dare you post that as diary on dKos?...

Even if not, methinks you should diarise it on Booman at least.

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Fri Oct 10th, 2008 at 05:29:11 PM EST
[ Parent ]
I do plan to diary on it at Economic Populist, where I spend most of my time on this side of the Atlantic.

I guarantee you that posting this on Kos would get me banned.

They don't get it.  They never will, until it happens.  And the biggest problem is that they all think that the current system is sustainable.  Ecologically and socially.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Fri Oct 10th, 2008 at 05:42:28 PM EST
[ Parent ]
I guarantee you that posting this on Kos would get me banned.

Uh... why?

Daily Kos is not a republican web page is it?

<confused>

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Fri Oct 10th, 2008 at 05:50:25 PM EST
[ Parent ]
reread my earlier post.  I'm suggesting that it would be better for the right to rule than for real solutions to be pushed straight out of the political system because the Left won with policies that will do no good.  And will deny the opportunity for the call for real state intervention to come from a party of the Left inside the system.

In short I'm suggesting that in the long term it may be  more preferable that McCain win than that Obama and his followers get their victory.  That is what would get me banned from Daily Kos.

Because  Kos is political site, not a policy site.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Fri Oct 10th, 2008 at 05:59:16 PM EST
[ Parent ]
I had no idea that dailykos is such a homogeneous group that nobody "gets it" over there.

Other than that ... beware of the people who save capitalism for itself.

by mimi on Sat Oct 11th, 2008 at 08:07:41 PM EST
[ Parent ]
Colman:
Well, if we manage to fend off a depression

That's a big if. The current system is against the wall. And even if it manages to come back (which we'll know by Monday), the point that it is fucked up has been made abundantly clear to even the most vested insider:

U.S. Stocks Gyrate After Global Selloff - NYTimes.com

"This is atrocious," said Howard Silverblatt, senior index analyst at Standard & Poor's. "People are scared. Nobody believes what is coming out of the mouths of politicians, chief executives."

Consequently, I think the chances for a New Deal moment are higher than I've ever seen them in my adult lifetime.

The fact is that what we're experiencing right now is a top-down disaster. -Paul Krugman

by dvx (dvx.clt ät gmail dotcom) on Fri Oct 10th, 2008 at 10:31:11 AM EST
[ Parent ]
that we are on the cusp of more than just a new regulatory regime.  The ultra-wealthy hold all the cards; what is their next move?  Bet it's not going to make life easier for the rest of us.

Let's make a note to revisit these pages in the archive 1 year from now.  The overall differences (assuming we can even  communicate in this fashion) will be striking, my prediction.

They tried to assimilate me. They failed.

by THE Twank (yatta blah blah @ blah.com) on Fri Oct 10th, 2008 at 07:57:17 AM EST
[ Parent ]
From the preface of JK Galbraith's The Great Crash 1929:
As a protection against financial illusion or insanity, memory is far better than law. When the memory of the 1929 disaster faded, law and regulation no longer sufficed. For protecting people from the cupidity of others and their own, history is highly utilitarian. It sustains memory and memory serves the same purpose as the SEC and, on the record, is far more effective
This preface was written after a 1970 market crash. 50 years after 1929 Thatcher and Reagan came into office and the rest is, as they say, history.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Fri Oct 10th, 2008 at 07:54:43 AM EST
[ Parent ]
have been full of "reverse schadenfreude" backlash of the

"oh, we saw you had a good time with your comments about AngloSaxon capitaism, but you're hit as badly as we are (hehe, your banks are just as stupid as ours), or even worse (remember, your labor markets are not flexible, so you'll suffer more), and your moment of fun is officially over"

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Fri Oct 10th, 2008 at 08:04:42 AM EST
[ Parent ]
[Europe.Is.Still.Doomed™]

If anything it's the system which is doomed. We will get nowhere until Wall St becomes Main St's poodle, and not vice versa, and all of the metrics, news stories, economic theories and debate circle around that.

Non-participatory economies always seem to end in disaster. Cranking up the bubble machine for another round, even one delayed by a few more decades, will not solve the problem.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Sat Oct 11th, 2008 at 07:10:50 AM EST
[ Parent ]
Enhance cooperation between national regulators.

A global regulator, please.
by Colman (colman at eurotrib.com) on Fri Oct 10th, 2008 at 07:52:32 AM EST
Certainly a  global regulatory framework, incorporating agreed standards of integrity and behaviour is necessary.

But a monolithic "Global Regulator" is IMHO neither feasible nor desirable.

Like the SEC, CFTC and FSA it would simply become a Single Point of (Regulatory) Failure.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Fri Oct 10th, 2008 at 08:16:52 AM EST
[ Parent ]
Nah, that's pie in the sky stuff.

Cooperation between nations is one thing, but a global regulator? Who's going to volunteer to regulate everybody else? And whose army is going to enforce the regulations?



--
$E(X_t|F_s) = X_s,\quad t > s$

by martingale on Fri Oct 10th, 2008 at 08:19:29 AM EST
[ Parent ]
Um, it's a new Bretton Woods and a UN with teeth.

We might yet have WWIII, so don't discount  a half decent post-war arrangement.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith

by Migeru (migeru at eurotrib dot com) on Fri Oct 10th, 2008 at 08:28:45 AM EST
[ Parent ]
[Migeru's Crystal Ball of Doom™ Technology]

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Fri Oct 10th, 2008 at 08:28:58 AM EST
[ Parent ]
The world is nothing like post WWII today, though. Half the world doesn't need reconstructing like it did then, and there hasn't been large scale depression and misery yet either, at least in the "developed world".

If you're arguing for a system where cooperation arises spontaneously out of self interest (Nash equilibrium), then that's something else.

--
$E(X_t|F_s) = X_s,\quad t > s$

by martingale on Fri Oct 10th, 2008 at 08:47:46 AM EST
[ Parent ]
No, I'm saying the world has been looking like the 1930's since 2001... Looking like post-WWII might come soon enough.


A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Fri Oct 10th, 2008 at 08:51:53 AM EST
[ Parent ]
Ok, gotcha. I tend to agree with you.

--
$E(X_t|F_s) = X_s,\quad t > s$
by martingale on Fri Oct 10th, 2008 at 08:55:18 AM EST
[ Parent ]
Provincial infrastructure (like bridges over Mississippi) does need much recovery.  

Cooperation will arise out of sheer terror.

by das monde on Fri Oct 10th, 2008 at 09:07:48 AM EST
[ Parent ]
Cooperation will arise out of sheer terror.
There was a lot of terror and cooperation right after 9/11, how long did that last?

--
$E(X_t|F_s) = X_s,\quad t > s$
by martingale on Fri Oct 10th, 2008 at 09:19:00 AM EST
[ Parent ]
I don't know if this is relevant but the Market in the US  is about to open and the DOW futures are down 400 pts.  Just another day in paradise.

They tried to assimilate me. They failed.
by THE Twank (yatta blah blah @ blah.com) on Fri Oct 10th, 2008 at 09:27:29 AM EST
[ Parent ]
Why do you care about the Dow?

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Fri Oct 10th, 2008 at 09:27:50 AM EST
[ Parent ]
Howdy Migy.

Watching CNBC.  LOL.  DOW just opened and its down close to 500 pts already.  Will type more.  Let me enter this.

Just broke 8000.

They tried to assimilate me. They failed.

by THE Twank (yatta blah blah @ blah.com) on Fri Oct 10th, 2008 at 09:37:30 AM EST
[ Parent ]
Can the DOW go below ZERO?  Is there such a thing as a negative DOW?

They tried to assimilate me. They failed.
by THE Twank (yatta blah blah @ blah.com) on Fri Oct 10th, 2008 at 09:40:15 AM EST
[ Parent ]
Nope. Limited liability and all that.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Fri Oct 10th, 2008 at 09:50:22 AM EST
[ Parent ]
Looks like the DOW fun is over for now; well above 8000.

I've seen this shit before.  Will go for my morning walk, take a nap, and then get up to ... WHAT?

Lest we forget, Georgie the Decider will be speaking soon.  Wonder when he'll declare himself ULTIMATE DICTATOR!  We don't need no stinking Constitution or Bill of Rights!

They tried to assimilate me. They failed.

by THE Twank (yatta blah blah @ blah.com) on Fri Oct 10th, 2008 at 09:51:14 AM EST
[ Parent ]
nah, as the DOW is negative in itself, a negative DOW is a double negative and therefore something positive.
by mimi on Sat Oct 11th, 2008 at 08:13:21 PM EST
[ Parent ]
In the area of mutual cooperation between states to inspect and control their citizens movements, I would say that the increasing trend that started around that date is still holding.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se
by A swedish kind of death on Fri Oct 10th, 2008 at 12:54:54 PM EST
[ Parent ]
Mutual cooperation is not the same as a global regulator. All I'm saying is that we're not likely to see nations agreeing to subordinate themselves to a global decision making body any time soon. After WWII, it only happened because nearly all the players were spent and destroyed.

The best we can (and should) hope for is the kind of cooperation which depends on and is sustained by self interest.

The increased policing cooperation is a case in point: nations do it because they uniformly gain by controlling their own citizens better, not because they are being told to do it, and not because they are working towards a common worldwide goal to catch criminals.

The international finance problems have to be viewed in this light, too.

--
$E(X_t|F_s) = X_s,\quad t > s$

by martingale on Fri Oct 10th, 2008 at 08:33:31 PM EST
[ Parent ]
The basic rules of banking, as per Santander's boss:


  1. if you don't fully understand a product, don't buy it
  2. if you wouldn't buy a product for yourself, don't sell it
  3. if you don't know your customers very well, don't lend them any money

Only item 2 can be enforced by regulation, and it certainly should. 1) and 3) in Steinbrück's plan would go towards that.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Fri Oct 10th, 2008 at 07:55:15 AM EST
A 'sound' banker, alas, is not one who forsees danger and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way along with his fellows, so that no one can really blame him.

John Maynard Keynes

by das monde on Fri Oct 10th, 2008 at 09:03:39 AM EST
[ Parent ]
Well, we could do like China, and ban complex derivatives and similar financial instruments altogether. Though Steinbrück doesn't go as far.

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Fri Oct 10th, 2008 at 01:05:25 PM EST
[ Parent ]
Botin is teh representation of power in Spain.. he is our ford... our banker with ruthless force controlling all what is basically needed to control int he country....

and besdies that.. a generally good banker which will basically buy anythig he wants now that the Spanish Treasury has bought all the risk that a economic meltdown could force on him.

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Fri Oct 10th, 2008 at 05:19:39 PM EST
[ Parent ]
  1. yes, and easy to implement - ust have a narrow and enforceable definition of "traditional instruments", and ut everything else into "innovative.

  2. yes. impose rules on a risk-weighted basis and on a simple balance sheet basis. Impose standard rules for all (ie don't let banks make up their own rules). Forbid entities that are no so regulated from holding any 'traditional instruments'

  3. yes. Board members and Credit Committee members come to mind.

  4. That will never work. This has to be solved by increasing marginal tax rates.

  5. Bah. Whatever for?

  6. No, bad idea.

  7. covered under 1 above.

  8. bah. Not gonna happen.


In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Fri Oct 10th, 2008 at 08:00:44 AM EST
6. No, bad idea.

Could you elaborate on that? Not because I disagree, but because I haven't made up my mind. (For example, re what happened to Hungarian bank OTP yesterday, could short-selling not be used manipulatively to get good companies on the cheap in bad times?)

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Fri Oct 10th, 2008 at 01:09:55 PM EST
[ Parent ]
The focus is too narrow - the world does not stop at the western financial markets.

There is still a large amount of under regulated money floating around in Russia, the petro-states, China and parts of South America. Even though their stock markets have been hit as well, their economies are not as dependent on financial manipulation.

What will happen is that the west will tighten up regulation (a bit) and banks and other financial institutions will be less inviting to these outside investors, so they will gamble elsewhere.

As long as huge amounts of money are pouring into these states because of the sale of their, increasingly scarce, natural resources they will have an incentive to continue to take on risky ventures.

In addition the fundamental institutions that could control things remain toothless - WTO, IMF, WB, UN, etc. Without some sort of world governance there can be no real reform. The financial black holes like Switzerland, the Channel Islands and elsewhere continue to service this sector as well.

It's not just greed, this only leads to excesses, it is the fundamental defect of capitalism that causes cycles of boom and bust. This has been true since the private stock firm was first invented and there is nothing in the basic organization of such economic systems to prevent it from continuing in the future.

The forces are: market growth, monopoly power, overproduction, collusion and buying government influence.

Finally many multi-national and state-sponsored (or owned) enterprises are now bigger than the countries where they do business. Right now Shell can push Nigeria around, but it appears that a combine of international actors is now able to push the US Federal Reserve around as well. There is much talk of Fannie Mae and Freddie Mac being nationalized to protect the investments by the Chinese government. So who is the customer and who is the producer? Who pulls the strings?

Policies not Politics
---- Daily Landscape

by rdf (robert.feinman@gmail.com) on Fri Oct 10th, 2008 at 11:55:23 AM EST
Germany Steps up Pressure for Bank Regulation

As Germany Friday, Oct. 10 stepped up diplomatic pressure to regulate financial markets under an eight-point plan, Berlin denied it had plans to nationalize commercial banks.

However, Berlin may inject equity into troubled German banks, its two top financial officials signaled as they arrived in Washington for Group of Seven (G7) talks.

Seems they are really troubled about the large commercial banks if they now think about equity injections.

I suspect there would be a lot more unrest in Germany if we didn´t still have all those local thrifts and credit unions. National news and local news both report that thrifts and credit unions show a growth in the number of deposits and money in deposits.

by Detlef (Detlef1961_at_yahoo_dot_de) on Fri Oct 10th, 2008 at 01:50:39 PM EST
What I think people are still missing in all this is that crises of these sorts are not a bug, but a feature, of the system.

If you listen closely to the rhetoric in the US coming from the Republican side, you can hear this. It's why certain politicians are saying the reason for the crisis is too much regulation, not too little. Y'know, let the market find it's floor, don't do anything, let the institutions go tits up, it's all part of god's....er...the market's plan, divine right of Capital dontcha know? 25% unemploymeny? Homeless families? That's what charity is for!

Thing is, some of the social democratic types still think you can play patty-cake with the clowns that brought you this crisis. Rubin, Clinton, Blair, even here certain unnamed members of the PS.

You can't. It's not a black and white thing, but the shading is not liberalism with regulation, the typical "third way" formulation we all hear about those of us on the left who are plugged into the financial world.

No, that really won't do. What is needed is not liberalism with oversight, but socialism with transparency and a reasonable measure of competition.

And it's possible, I'm convinced of it. We had socialism in the financial sector in the 1980's here in France. Mostly nationalised. Just not enough transparency, to which Jerome's bank can attest the downsides. But....while losses and corruption can happen...you don't get this bullshit, crashes threatening entire economies, when the people own the institution and the investments made need to be accountable not to shareholders but to...the people.

So, Jerome is right this week, the theme is, Nationalise!

But....and this is important... let's keep it that way.  

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Fri Oct 10th, 2008 at 06:08:53 PM EST


Display:
Go to: [ European Tribune Homepage : Top of page : Top of comments ]