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International | U.S. | Global Justice and Anti-Capitalism

Creative Destruction
by Rudolf Hickel
Monday May 20th, 2013 4:26 AM
The exodus from the casino capitalism producing ever faster and ever deeper crises cannot succeed without a broad and powerful democratic base. Parliamentary democracy is urged to finally take up the struggle around the primacy of politics against the financial markets. Financial markets have nothing to do with the idylle of market competition. Dethroning the financial markets means reducing the speculation businesses. Speculation shopping represents 80% of the world economy while their business models are not accessible to regulatory control.
CREATIVE DESTRUCTION


Why Deutsche Bank & Co Must be Shattered


by Rudolf Hickel


[This article published in March 2012 is translated abridged from the German on the Internet, http://www.blaetter.de/archiv/jahrgaenge/2012/maerz/schoepferische-zerstoerung. Rudolf Hickel's new book is “Smash the Banks – Dethrone the Financial Markets” (2012).]


The latest financial market crisis is hardly over and the next collapse of the world financial markets is already looming in the course of the Euro crisis. Whether the state can leap into the breach as a rescuer is doubtful for lack of financial power and fading public acceptance. On the other side, the continuing crisis is obviously not enough to finally initiate the necessary radical reform of banks and financial institutes.


Since the end of the 1980s businesses on the financial markets have increasingly freed themselves from businesses of the real production economy and become independent. The volume of all financial transactions is 75-times as high as the total world production. Assets managed by hedge funds, the worldwide capital warehouse, exploded from 1.8 times world production in 1999 to 30.4 times in 2010. Financial markets have nothing to do with the idyll of market competition. The rules of price formation from supply and demand of many small market actors do not play any role. On the contrary, a net of sheer omnipotent suppliers and customers dominates here.


According to a recent study from Switzerland [1], 50 influential mega-corporations within the group of 147 corporations control the world markets. “The circle of the most powerful 50 corporations is a nearly exclusive club of banks, funds and insurance companies” [2]. The contradiction is provocative: “speculation shopping” rules 80 percent of the world economy while their business models are not really accessible to regulatory control. The mega-banks play a central role in this net. At the G20 summit in November 2011, 29 mega-banks were described as system-relevant or too big to fail. In the case of their collapse, the state must leap in the breach to prevent a domino effect on account of the dreaded collateral damages in the total economy.


Their powerful investment banking divisions are at the heart of the criticism of the mega-banks. Measured by their machinations and intrigues, the term investment bank is much too serious. The term speculation bank is more appropriate... In the United States of America in May 2010, 95 percent of the derivative trade concentrated on only five top banks with the lion's share going to J. P. Morgan at 34 percent. In 2009 Goldman Sachs derived the greatest economic benefits from the derivative trade. With its US branch , Deutsche Bank realized 22 percent of its profits. This shows the importance of these “fraud businesses” for banks rated as system relevant.


Dethroning the crisis-prone self-destructive financial markets means reducing the speculation businesses on the financial markets. For example, businesses in the future should have the possibility of ensuring themselves against exchange rate risks arising in production. Bets on future changes of exchange rates should be prohibited... The acute dependence of the state on the interests of the financial markets would be reduced significantly.


BANK CRISIS AS GRAVITATION CENTER


The permanent financing of the productive economy and its protection against risks was no longer central for these banks. Rather the creation of speculative securities separated from real production is at the heart of their activity. Without customers' orders (and knowledge), billions are realized in profits or billions are lost in bets. The running time of these transactions is less than 60 days. Alongside the official speculation divisions and investment banks, there are shadow banks and hedge funds outside of regulation and controls that bet on high speculative profits.


All of a sudden the financial market crisis underscores the necessity of a fundamental reorganization of the banking system. The bank crisis turned out to be the gravitation center of the general economic crisis. The crash of the financial markets was not limited to the offender banks. The other serious banks that really have nothing to do with investment banking were affected as in an extensive fire. Therefore great mistrust prevails today among the banks. The short-term lending of money between the banks, the inter-bank market, has broken down. This massive loss of trust among the banks repeatedly forced the European Central Bank to supply unconventional liquidity. In December 2011 the greatest money injection occurred with 500 billion Euros to counteract the banks' failure to award credit to the economy.


The writing off of the financial institutes transported the speculation crisis to the real economy. Businesses that depend on foreign financing must pay higher interests or cannot obtain any credits any more. This so-called credit crunch threatens entrepreneurial readiness for investment, economic growth and jobs. A fatal extortioner situation arises to avoid the total economic fall. The impacted states see themselves forced to rescue those banks that caused this crisis.


A clear market failure is presented here. Therefore a radical change on the financial markets is indispensable. However hardly anything of that can be seen today. The announcements of national and international politics have hardly any effect. Political failure follows market failure. The foundations of the banking system and of the western capitalist economic model are threatened. This vicious circle can only be removed by shattering the dominant banking system. Shattering means creating a way into a future-friendly banking system. “Creative destruction” is the creation of new out of old structures [3]. Banks serving the economy and society over against the threatening speculative businesses must be the goal. Therefore the necessary shattering has to concentrate on the mega-banks with their investment segments. They stand at the top of the hierarchy of the bank system and form the center of crisis production.


THE PERPETRATORS OF THE CRISIS


The mammoth financial institutes with their speculative divisions actually do not deserve the title banks any more. The causes, driving forces and interests behind the financial market crisis are known today; the main culprits and perpetrators of the crisis can be named. A commission of the US Senate meticulously analyzed this in a 650-page report with 2849 footnotes after a hearing with over 150 witnesses. The greatest failure of financial market history was illumined under the title “Wall Street and the Financial Crisis: Anatomy of a Financial Collapse.” [4]


The chairperson of this sub-commission of the US Senate, Carl Levin, reached a bitter conclusion after his exhaustive work in penetrating the Wild West of financial markets. “In our investigations, we have come upon a snake pit full of greed, conflicts of interest and misdeeds.” As the main culprit, the report names the banks Goldman Sachs and Washington Mutual, the rating agencies Moody's and Standard & Poors as well as the US bank monitoring OTS. Those politicians with responsibility for the regulatory failure were among the direct perpetrators who carried out their businesses legally but often beyond the limits of law and justice.


In the Hall of Shame are found: Bill Clinton who began a deregulation of the US financial markets with the abolition of the 1932 Glass-Steagal Act, George Bush, Henry Paulsen who moved from Goldman Sachs into the Treasury Department, Lloyd Blankfein, later head of Goldman Sachs, the hardly known but influential hedge fund manager Ralf Cioffi, the chairman of the board of Lehman Brothers Richard Fuld, the mega-speculator Warren Buffet and many others.


The totally overrated chairman of the Federal Reserve Alan Greenspan celebrated for years as a guru should be counted among the perpetrators. He was the one who flooded the markets with the instruments of the American Federal Reserve after the fall of the New Economy and the terrorist attacks on the US on September 11, 2001. From a macro-economic perspective, this was necessary to contain the fall of the economy. However the arising liquidity was virtually lost on the deregulated financial markets. Greenspan preached the terribly naive dogma of the efficient and optimal financial markets. On the other hand, the right combination would be the macro-economic flooding of the markets with fresh money along with simultaneous regulation of the financial markets.


GLOBAL FRAUDSTER DEUTSCHE BANK


Deutsche Bank fulfilled its claim as a global player on Wall Street. A chapter is devoted to Deutsche Bank in the final report of the US Senate subcommittee. “The bank sold inferior bonds.”...


In criminal history, Charles Ponzi (1882-1949) was regarded as the discovered of the snowball system. The promised customer profits were actually realized through the constant creation of new highly speculative “products.”


The classic example for the dubious businesses of Deutsche Bank on Wall Street is the artificial product Gemstone 7. 115 RMBS-loans were bundled [5]. Residential Mortgage-Backed Securities (RMBS) involved a segment of the securities market...


ONLY PROFIT COUNTS...


DEUTSCHE BANK IN THE “HALL OF SHAME”...


“TOO BIG TO FAIL”: HOW DO WE COME OUT OF THE CRISIS?


At the end is the question whether and how a possible new bank crisis can be stopped. Many instruments and measures to strip the financial markets of power and tame the global players are offered by the unvarnished analysis of the US Senate subcommittee on “Anatomy of the Financial Market Collapse.” The profit potential from the shriveled gambling business would be decisively reduced if the worst speculative products and over-the-counter trade would be prohibited for banks. Exorbitant profit rates would not be realized any more; the system-endangering causal agents of the financial market crisis would be stopped. This dethronement of the international mega-banks would be an important contribution to regaining the primacy of democratic power. A considerable stripping of power of the chief executives would be a direct result of this scaling down. The interest in advice of no longer system-relevant bankers would fade; the economic power-base would be taken away from lobby work. This liberating blow can only strengthen democratic politics. Up to now we were still far from that – internationally and nationally.


To really break the power of speculative banks, the banking functions must be screened from all businesses in the realm of investment banking. Commercial banks should be uncoupled from the potential dangers of speculation banks. All derivative businesses must be handled through a registered and controlled trading platform. Commercial customers should never be burdened again with the costs of burst speculative businesses. The deregulation of financial markets carried out in the last 30 years made speculation profits first explode and must be revoked unconditionally.


This has not happened. On the contrary, the power of banks and financial investors has even increased, not decreased, owing to the latest financial market crisis. Despite the promises of politics at the G20 summits, the omnipotence on the financial markets was even extended and intensified. In a March 2011 study, a group of researchers from the International Monetary Fund described the increased power of the financial markets over the economy and politics as follows: On one hand, the increased potential crisis can lead quickly into a new crash. On the other hand, state financing of bailout measures cannot be expected any more since the states completely burnt out with the last bailout. The chief economist of the IMF Oliver Blanchard wrote to the G20: “Many of the structural characteristics that contributed to the genesis of systemic risks are still present” [11]. The first regulations to limit speculative businesses of the mega-banks led to evasive actions. Dangerous shadow banks were created with hedge funds at their center. These shadow banks must be dissolved immediately through regulations. This vicious circle in which the perpetrators of the financial market crises could count on their political rescue – if the state rescuers were still strong enough – to continue their high-risk businesses must be finally broken.


SWEDEN AS A MODEL


Sweden could be an example. This country is regarded as a model for a successful bank bailout. When important banks could no longer survive by their own strength at the beginning of the 1990s, the Swedish government created institutes comparable to a Bad Bank. They could buy troubled securities to relieve the balance sheets of the financial institutes. For a while, money houses were completely taken over in state ownership to be restructured and later sold again. To the surprise of many, the bank crisis was overcome in Sweden much faster than originally expected. The bad banks granted 15 years to resell the financial market securities could be broken up after four years. Clear political rules helped greatly. The institutes also cooperated with external advisers who blocked the new chase for risky business fields.


The Swedish bank bailout at the beginning of the 1990s was carried out in a more positive environment than in today's global financial market crisis. Nevertheless three crucial lessons can be drawn for a successful bank bailout: temporary nationalization, strict regulation and restriction to the core business.


That kind of conclusion is not in sight in Germany. There were several temporary glimmers of hope. For a brief phase, the German government facing the material force of the 2008 crisis did almost everything right. The neoliberal dogmatic was at least temporarily canceled with the change to an economic policy that shortly before had been taboo. A fast end to the economic crash and the turn to an upswing followed. That employees were available for the upswing can be ascribed to the social alliance and its short-time worker rule. A change to a mixture of the neoliberal upswing dogmatic and muddling through looms on the horizon. A new overpowering potential crisis grows on account of deficient courage for a decisive policy of dethroning the financial markets.


THE STICKING POINT


Trade without customer orders and knowledge in which banks lose all relation to customers is very dangerous. In this way, an enormous risk of the banks is produced that burdens customers with liability in case of crisis and forces the state to bailout actions without further appeal. Only in a radical reorganization can the real economy and financial management be brought into a healthy relation to each other.


The devaluation of the production economy by financial market capitalism today is clear by comparing it with the “Rhine capitalism” of the Bonn Republic. In this capitalism variant, the realized profit of the deployed capital was defined by the conditions of the production enterprise. The claims for the pay of employees, the working conditions and the investments and innovations for safeguarding the location were considered. However the funds dominant in financial capitalism try for excessive profit rates in the interest of their investors. If a business was successful in the past with a profit of five percent, the funds in the financial markets sought 15 or 20 percent for their engagement – only for the prosperity of the fund investors. Since many businesses of the production economy depend on the money-capital of the financial markets, they see themselves forced to radical cost-savings – at the expense of employees and customers.


FOR THE PRIMACY OF POLITICS – AND THE REAL ECONOMY


The dethronement of the financial markets serves the goal of regaining the rule of the production economy over profit realization and gaining economic value creation. Only limiting the financial markets to their serving function can correct the hierarchy of the markets. Financial management defeats the real economy. Investment decisions on the financial markets now dominate the commodity- and labor markets. With the dethronement of the financial markets, these would finally be subordinated to entrepreneurial investment decisions.


The will to tame the financial markets and the shattering of speculation banks provoke massive resistance by the lobbyists of the financial oligarchy. The struggle against the Volcker initiative and David Cameron's opposition to regulation plans in the European Union are examples. Barack Obama's well-intentioned plan for a fundamental reform of the banking system was long upended by his adversaries. The exodus from the casino capitalism producing ever faster and ever deeper crises cannot succeed without a broad and powerful democratic base.


This is also true for Germany. Parliamentary democracy together with its assailed parties is urged to finally take up the struggle around the primacy of politics against the financial markets. Parliamentary democracy urgently needs support from broad circles of the population, from unions, churches, associations and new social movements like Occupy. Only in this way can the necessary critical mass gather to really break the power of the financial markets in favor of democratic reforms.


NOTES


[1] Stefania Vitali, James B. Glattgelder, Stefano Battiston, The network of global corporate contol, in: „arXIv preprint“, 19.9.2011.
[2] Daniel Baumann und Jakob Schlandt, 147 Firmen kontrollieren die Welt, in: „Berliner Zeitung“, S. 9.
[3] Joseph Alois Schumpeter, Kapitalismus, Sozialismus und Demokratie, München 1980, S. 137 f.
[4] United States Senate, Permanent Subcommittee of Investigations, Wallstreet and the Financial Crises. Anatomy of a Financial Collapse. Majority and Minority Staff Report, 13.4.2011.
[5] Vgl. die gute Beschreibung dieser ansonsten sehr schwer zugänglichen Geschäfte von Marc Pitzke, US-Bericht zur Finanzkrise. Ohrfeige für die Deutsche Raffgierbank, in: „Spiegel Online“, 15.4.2011.
[6] Vgl. den Beitrag von Joachim Zimmermann, Resiliente Geschäftsmodelle für die Kreditwirtschaft – ein Weg jenseits von Basel III und mehr Regulierung“, in: „ifo Schnelldienst“, 22/2011.
[7] Vgl. Harald Schumann, Das Brot an den Börsen: Wetten auf Hunger, in: „Blätter“, 12/2011, S. 65-77; ders. Die Hungermacher, in: „Blätter“, 2/2012, S. 101-110.
[8] Interview mit Simon Johnson, „Ackermann ist gefährlich“, in: „die tageszeitung“, 13.4.2011.
[9] Verunsicherung der bürgerlichen Mitte, Rede von Josef Ackermann, in: „Handelsblatt“, 8.9.2011. 
[10] Deutsche Bank prophezeit niedrigere Renditen, in: „Spiegel Online“, 5.12.2011.
[11] Dietmar Neuerer, Schließung bei Schieflage: Ruf nach deutlich schärferer Bankenregulierung, in: „Handelsblatt“, 11.3.2011; zu den Grundlagen vgl. Stijn Claessens u.a., Crisis Management and Resolution. Early Lessons from the Financial Crises, in: „IMF-Staff Discussion Notes“, 11/05, 9.3.2011.
[12] Auch Verbrauchervertreter kritisieren die vielen, kaum mehr durchschaubaren Details.
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RELATED LINKS AND NOTES:

THE DIABOLICAL HAND – JOSEPH VOGL ON THE DEMYSTIFICATION OF THE MARKET

Despite all the crises that have shaken the world economy and financial system, the idea still appears to be widespread that the market is not only a place of rational adjustment but also of self-stabilizing forces. Large parts of economics and finance are based on this assumption. In his essay “Das Gespenst des Kapitals” (The Spectre of Capital), Joseph Vogl analyses our knowledge of the economy and asks, how in the face of the crises of the market can we speak of the economic world as a sensible and rational system?
The capitalist economic system is based on the idea that the market economy is self-regulative and develops self-stabilizing forces. According to the theory, supply and demand are adjusted to one another by the price and goods are efficiently and justly distributed. The state should intervene only in the case of so-called market failure, as for example with cultural institutions. Apart from these exceptions, the market economy is regarded as the most efficient form of the organization of exchange relations. Crises are explained not by causes within the system itself, but by market-external factors such as mistaken economic policy.
http://www.goethe.de/ges/soz/wsc/en8109960.htm


MANIFESTO FOR A PLURALISTIC TEACHING IN ECONOMICS!

http://www.paecon.net/PAEReview/wholeissues/issue5.htm

http://www.paecon.net/PAEReview/

http://www.booksandideas.net/IMG/pdf/20120710_bessisen.pdf

http://www.adbusters.org

“Political Economy of Bubbles,” Edward Fullbrook
http://www.paecon.net/PAEReview/issue59/Fullbrook59.pdf

“Manifesto of the appalled economists,” 2010
http://www.paecon.net/PAEReview/issue54/Manifesto54.pdf



FREE INTERNET BOOK: “THE SYSTEMIC CRISIS OF THE EURO – TRUE CAUSES AND EFFECTIVE THERAPIES,” by Heiner Flassbeck and Costas Lapavitsas, Rosa Luxemburg Foundation, 44 pp, May 2013

The European Economic and Monetary Union (EMU) is in deep crisis, and an increasing number of observers question the ability of EMU to survive this crisis. What has gone wrong? Are the diagnoses commonly offered valid? Why do the medicines that have been prescribed not work? Could it really be possible that European politics at the highest level fails to understand the cause of the crisis and to address it with a consistent plan?
In order to find persuasive answers to these questions it is necessary to go back to the origins of monetary union and to identify the constructional defects that have burdened its existence from the very beginning up to the point of make or break that it reached after the big financial crisis and the great recession of 2008 and 2009
http://www.rosalux.de/fileadmin/rls_uploads/pdfs/Studien/Studien_The_systemic_crisis_web.pdf