As a clear indication that the global financial system is on the verge of another major crisis or even collapse, the financial leaders of the world’s top economies were involved in a blame game at a meeting in Poland this past weekend. In the mea time a debate on what a future dispensation should look like has also started.
European finance ministers gathered in Poland on Friday were given a dressing down by United States treasury secretary Tim Geithner, who said: “Politicians and central banks need to take out the catastrophic risk to markets … they have to definitively remove the threat of … cascading defaults [and avoid] loose talk about dismantling the institutions of the euro.”
Later he told reporters: “What is very damaging from the outside is to see not just the divisiveness [in Europe] in the broader debate about strategy, but the ongoing conflict between the governments and the central bank. You need both to work together to do what is essential for the resolution of any crisis,” AFP reported.
Hitting back Didier Reynders, the Belgian finance minister, told Reuters: “I’d like to hear how the US will reduce its deficits … and its debts.”
In the meantime the Institute for International Finance, which represents 440 of the world’s largest banks, said it had formed a plan whereby the Brics emerging economies – Brazil, Russia, India, China and South Africa – could help boost a bond buy-back programme to reduce Greek debt. The proposals, which will be discussed at a meeting alongside the International Monetary Fund (IMF) this week, is designed to double existing international proposals for a €20bn bond buy-back.
Geithner, who had made an unprecedented trip to Poland to speed up resolution plans, was the first American to attend a meeting of European finance ministers and urged them to increase the size of the €440bn European Financial Stability Facility (EFSF) via a complex plan involving backing by the European Central Bank (ECB).
While trade unions in Europe prepared a mass protest against European austerity measures, ECB chief Jean-Claude Trichet described the euro zone’s medium-term prospects as “quite encouraging compared with other major advanced economies.”
Wolfgang Schaeuble, the German finance minister, also argued that expanding the EFSF would put too much of a burden on taxpayers. Austria’s delegate, Maria Fekter, said that Minister Schaeuble had called for the US to participate in the bail-out fund too, which Secretary Geithner “ruled out emphatically”.
Geithner’s call to bolster the rescue fund for troubled member states, was also instantly rebuffed by Germany.
Berlin instead demanded Washington drop its opposition to a global financial transactions tax, but this was also strongly resisted by Geithner.
Europeans have sought to implement either a tax on profits or turnover from the financial sector since governments were forced to bail out banks caught up in the 2008 credit crunch that started in the United States.
Both Schaeuble and Belgian Finance Minister Didier Reynders had highlighted the United States as carrying the world’s heaviest debt burden going into the discussions.
“Yes it’s better to organise something on financial transactions on the worldwide level, but it’s impossible,” Reynders said.
“We will do that within the European Union and maybe also, if it’s impossibe for the entire EU, in the euro zone,” he added.
Britain’s George Osborne, speaking at The Daily Telegraph Festival of Business before flying to Poland, said the need for action is getting more urgent. Euro zone leaders need to send “a clear signal that they truly recognise the gravity of the situation and that they are dealing with it,” he said, adding: “Time is short.”
Debating the future
Meanwhile Roger Scruton triggered a fascinating debate on a future of financial and economic dispensation on the websiteopenDemocracy with an article headed the Unreal Estate. He argues that “…the endless economic crisis suggests that it is time for a return to a moral understanding of the underpinnings of the financial fictions.”
After quoting from the Quran verses that are interpreted to forbid interest, insurance and the trade in debts, he states that the desire for a moral economy is by no means confined to Islam.
“In the post-war world in which I was raised economic life was equally circumscribed by moral edicts. For a long time following the Second World War, something called ‘capitalism’ was regarded with great suspicion by European elites, and also by large sections of the people,” he writes.
“Then came the Thatcherite revolution. We lived through what was, in retrospect, a radical transformation in the world of ideas and also in day-to-day politics. Quite suddenly the system that had been condemned as capitalism was being praised as the market. Economics, we were told, was not about profit and exploitation but about freedom.”
He argues it liberated both good things and bad, and never faced up to “the truth that had dawned on Muhammad – the truth that, in an economy of fictions, nobody can be called to account. Whether bubbles of the kind we have recently seen are a necessary part of the trade in unreal estate I do not know. I suspect that they are, and that the search for regulations that would prevent them is a futile use of public funds and political energy. Nobody can enjoy the sight of people becoming stinking rich by trashing the scant savings of others.”
All the present-day analysis of the financial crisis should not blind us to the moral truth that if you borrow money “you are obliged to repay it. And you should repay it by earning the sum required, and not by borrowing again, and then again, and then again. For some reason, when it comes to the state and its clients, those elementary moral truths are forgotten.”
He concludes that “we are seeing, in both Europe and America … a demoralisation of the economic life. Debts are no longer regarded as obligations to be met, but as assets to be traded. And the cost of them is being passed to future generations, in other words to our children, to whom we owe protection and who will rightly despise us for stealing what is theirs.”
A response
In response to Scruton’s article Tony Curzo writes: “It is important to remember money’s fictional and social function, especially today when the social function has so broken down: if the financial system is not working, there ought to be no absolute constraints, no natural laws that constrain how we reset or redefine the game of money.”
He argues that there is no simple return “to a society in which the economy is understood in terms of moral foundations: it is telling that Roger goes back to the Quran for an example of the moralised economy. He could just as well have gone to Deuteronomy or Confucius or any number of traditional social codes to find the same sort of understanding. The development in law of the “moral person”, separate from the physical but with legal agency; the invention of limited liability, debt and fractional reserve banking … they have all of them allowed not only economic growth and all the human flourishing that has allowed, but also a great levelling of economic opportunities. The status quo ante is not only unattainable, it is unattractive.”
It is his opinion that the solution is not to return to that older order, but to make sure that we make a full transition away from it – not the half transition that has been so damaging and so unfair.
“The main point of understanding these social fictions is that the argument should not consider that any financial options are out of the question because of the nature of money or the financial system: we decide that. Nevertheless, my view is that we should judge courses of action on the basis of whether they are more likely to point us towards saner fictions,” he writes.
In Yet another response Michael Bullen writes: “Financial regulation in the wake of the credit crisis is a simpler matter than the re-moralising advocated by Roger Scruton. Simply return to the regulatory environment pre-1999 and press on with transparency in markets.”
To him the spectre is nothing new. “There is a long and ignoble tradition of states reneging on debt obligations long before British statism or Thatcherism and perhaps even before the Prophet. What does seem to be a new experience is that so many countries have such high debt levels all at the same time.”
In his view key components to the credit and banking crises in the US and UK were the repeal of the Glass Steagall Act by President Clinton in 1999 and the enactment of the Financial Services and Markets Act in 2000, leading to the introduction of “light touch” regulation in the UK.
This allowed Lehman Brothers to rack up leverage of 30.7 times (probably heavily window-dressed) in its last annual financial statements; and enabled commercial banks to take high-risk trading positions in mortgage bond portfolios that would not have been permitted prior to the repeal of Glass Steagall and leading to the failure and near-failure of numerous banks.
Countries that did not follow the trend towards reduced regulation and where banks were still regulated under more traditional regimes, such as Australia and Canada, did not encounter housing bubbles or banking industry collapses.
“The second measure must be to maintain levels of market transparency and to make improvements where possible. In particular, it is vitally important that sovereign debt should be openly traded,” he writes.
He cites Greece as an example: “Greece is not on the verge of national bankruptcy because investors in Greek bonds sold or hedged their exposures, Greece is in that position because a political culture of lies and deception developed over a period of a number of years. The international government bond market helped to expose that culture.
“As an aside, current calls within the EU from Messrs Papandreou and Barroso, among others, for Euro zone bonds to be backed by all nations that are members of the euro can only lead to reduced transparency of national accounting and indebtedness and must be rejected if the Euro zone economy is not to be further compromised by the type of political deceptions that led to the current crisis.”
In conclusion
There are mounting signs that the global financial system as it developed in the post-gold standard world and the free market bingethat accompanied the reigns of Margret Thatcher in Britain and Ronald Reagan in the US has become unsustainable.
It would seem that the only thing that remains unclear at this point is whether there will be a relatively orderly managed transition of if a new dispensation will emerge from a messy collapse of the present system.
And, then there is of course also the still big unanswered question of what the new financial regime will look like.
Piet Coetzer
Courtesy of Blue Chip Journal that shared this piece of information with us through email.
