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Volker Wörl

The Financial Crisis and Its Victims

 

From: Christ in der Gegenwart, 42/2008, P. 473 f.
webmaster's own, not authorized translation

 

    First banks and enterprises are affected by the consequences of the international financial crisis. But the effects will be felt in all sectors of society.

 

There are dates that will be in the history books. The year 2008 will be such a year. The reason is not only the global financial crisis, of which we currently do not even know whether its peak is already passed. More important, and with it inextricably linked is a geopolitical change, namely the decline of power and prestige of the United States. The crisis will end. The decline of America brings to an end an epoch.

"The balance of power is changing. The era of American leadership is irrevocably past", John Gray, professor emeritus at the London "School of Economics", wrote in the "Süddeutsche Zeitung". And further, "You recognize that by the mere fact how the USA's power is undermined in its own backyard. Venezuela's President Hugo Chavez can tease and ridicule the super power as much as he wants; he is not punished for it. America's weakness becomes even more obvious at the global level. The United States itself has destroyed its creed of free markets by nationalizing key parts of the financial system. An entire form of government together with its economy has collapsed. The consequences will be as far-reaching as with the fall of the Soviet Union."

After the decline of communism and the controlled economy America and Britain have dogmatized the indisputably useful market. It can do everything, it is omnipotent and omniscient. And in Europe, especially in Germany, one let oneself fascinate by the mostly higher American growth rates. Politicians, but also journalists, particularly business journalists fascinated stared at that policy and demanded it as standard of all economic action.

 

China Lends America Dollars

At the same time two things were overlooked, even ignored. First, private individuals and the government in the United States have for years lived beyond their means: Consuming, getting into debts, money is cheap, the future is rosy, growth will continue forever! For years the USA has been saddled with huge deficits in the state budget and balance of payments. The money needed they borrow all over the world. China, ideologically and soon also economically the most important competitor, is world-wide the greatest dollar creditor. America's huge armament and the war in Iraq have been and are to a large extent financed with borrowed money. Cheap money has ruined millions of house-owners and heated up the speculation. The former Fed chief Alan Greenspan, formerly praised as a financial genius, is now by many people regarded as the person mainly responsible for the current crisis.

The second mistake is the belief that free markets put everything in order in the best possible way. It is assumed that the players on the market, i.e. people as private individuals or entrepreneurs always act absolutely rationally. The "Homo oeconomicus" is a theoretical construction. De facto, human action is moved by a whole set of emotional impulses: joy of ownership and wealth, desire for new things, greed, envy, meanness, imitative instinct, pride, fear.

The burst stock market bubble is ultimately due to the fact that with the constantly rising (dollar) rates one ran after the other - also the "ordinary people", who simply wanted to participate in the growth of prosperity without a performance of their own. Security considerations when investing money and capital became less and less important, because everything had gone well for several years. The banks strongly contributed to it, always invented new investment constructions, the functioning of which even many investors did not understand - and they, the banks, made splendid profits with it. The target of a capital yield of 25 percent by Josef Ackermann, the chief of Deutsche Bank, is well remembered. Which investor reaches that? And with what can - could - that yield be earned? With risky investments and with the naivety of millions of customers who really should have known that the banks don't give anything away for nothing. Hardly anyone has kept to the healthy principle to do only that business which one also understands. And already now can be predicted - that will remain so.

The churches, up to the pope, have repeatedly warned against an "idolizing of the market". It was to serve society, and not only to give colossal profits to a minority. It was to take care of security and justice. The late German President Johannes Rau was until the end a passionate critic of an unrestrained faith in the market. And one should even remember Ludwig Erhard and his appeals to exercise moderation.

Now the paradox comes: For decades the U.S. government and with it the International Monetary Fund have urged developing countries just to keep to the liberal market rules. Otherwise there would be no help. Now, under the constraint of the situation and the awareness that a devastating global economic crisis is threatening America has abruptly said farewell to the dogma of free markets. U.S. government and central bank drew up and the Congress approved, albeit with considerable concern, an emergency program amounting to 700 billion U.S. dollars - that are about 200 billion more than the huge arms expenditure. Under this law the government is allowed to buy doubtful securities from the banks. The risk is so transferred to the whole of the taxpayers. An old reproach of the Socialists is confirmed: profits are privatized and losses socialized. Mortal sins against the free market economy are at present committed. But everything suggests - it must be!

Long since the American debacle has spread to Europe, particularly to Germany. In a first step fifty billion euros had to be provided to rescue the real estate financier "Hypo Real Estate" which is suffering want. Nobody knows what is still coming, whether or not more banks get into life-threatening problems. And nobody knows whether government guarantees will not become lost subsidies.

The crisis in this country meets a society in which the ditches have deepened. They run between top earners who earn five hundred times more than those who assist them, between health-plan patients and private patients, between prosperous seniors in noble "residences" and pensioners in often very poor old age homes inadequately staffed. We have long since a three-class society. In recent years this division of society has admittedly been taken up by the media, has been brought round by the churches as guilt and criticized by some politicians, but nothing has changed because things were looking up. The Agenda 2010 caused pain but was successful. This can be seen best from the drop in the unemployment figures of two million.

 

Liberals Call for the State

And nothing has changed for the simple reason that the wire-pullers were not affected. Top managers annually earn two- or three-figure sums of millions, often with relatively low basic salaries, which were improved by high bonuses. According to the information of the "Süddeutsche Zeitung" the American Lloyd Blankfein, chief of the syndicate Goldman Sachs last year got a basic salary of 220 000 and a performance bonus of 53 million U.S. dollars. That happens also in Germany. The Porsche chief Wendelin Wiedeking's annual salary of 60 million euros was never denied.

The fall in prices has cost countless small shareholders in this country a lot of money. But in the United States for instance the long-standing leader of the world's largest insurance company AIG, Maurice Greenberg "suffered" by the collapse of his securities a financial loss from 1.25 billion U.S. dollars (January 2007) to 50 million U.S. dollars (September 2008). In Germany, since top earners are often paid in shares of their own house, there may have been losses in orders of magnitude which the ordinary citizen cannot imagine. In the legal proceeding in connection with the Mannesmann / Vodafone affair bank chief Ackermann estimated his property at about 100 million.

Fire on one's own roof, fears of a "global economy at the precipice" and widely spread also genuinely felt worries make us now consider how we are to go on. The most passionate liberal market economists suddenly call for the state. But what is a fairer and better equipped against crises society to look like? It must now be about finding rules and controls which are worldwide effective against mad speculations and chaotic financial practices.

 


474

Does that mean to prohibit highly speculative hedge funds? To introduce a so-called Tobin tax - named after its inventor -, which charges with one part per thousand the trafficking to and fro of investment millions in a flash? To close tax havens? The investment bankers, who themselves have become very rich by high-risk, non-transparent transactions and have basically caused the crisis, deserve more attention and surveillance. And when the government intervenes with money and saves the life of weakened banks, then it must also be able to influence the salaries of top people. All that is so complicated, the range of possibilities is so wide that only true experts can decide what makes sense, is effective and not harmful at the end. In any case, you are to be careful in using self-assertive expressions.

The financial crisis hits, as we've seen, the rich and immensely rich too. But it does of course not jeopardize their existence, even if, as you could read, at the financial centre of London 50.000 bankers and brokers could lose their splendidly-paid positions. And the still many who keep their jobs may perhaps no longer be able to buy with their annual bonus the Porsche or Ferrari.

The really poor remain poor and their number will increase, although this year - this is the most positive date of the social balance - unemployment has fallen. But next year it could look differently. Here it is about a social class that runs into millions, for which one - because the word "underclass" was to be avoided - invented the term "precarious workers". They are unemployed, unskilled people who have been thrown off the course in the competition, who do not reach the subsistence level with their wage, and who are dependent on state aid in order to survive. According to the recent poverty report of the federal government about fifteen percent of all children live below the poverty threshold. In the EU countries a household is regarded as poor when less than sixty percent of the average net income are at its disposal. In a comment of the two doctors Elke Schäfer of the Charite in Berlin and Eva Landmann of the Justus Liebig University in Giessen we read: "In Germany it is for a large proportion of children no longer about the question of whether they learn to play the violin or to dance ballet but whether they in the morning go hungry to school or sit as Fourteen-year-old after school with the beer bottle in their hand in the S-bahn". The problems in the lower third of society will get worse if the downward trend leads into a prolonged recession. But we know these problems. They are - as barbaric as it sounds - familiar to society and politics.

In the centre of the three-class society that has come into being the great middle class lives. That is the majority of the population: skilled workers, clerks, civil servants, self-employed persons - people who are not poor, often with a home of their own, with car, adequate wages and salaries. They are well situated but at the same time to a large extent lacking in influence. At regular intervals they are allowed to elect a new parliament. What government results from it is no longer in their grip. The recent elections - especially, but not only in Bavaria - have shown that those people no longer approve of the political practice. They are no homogeneous stratum; they think that their interests are represented best by different parties and groupings. They do not rise up in rebellion; they do not strike - apart from some exceptions. They do not go hungry and needn't do that in future but they will change their way of life. And that will have consequences, starting with the retail trade up to the art scene.

 

The Two "Middle Classes"

But when the "Federal Association of Industry" speaks of the middle class, a different category is meant than the just mentioned one. To the "middle-class" commerce and industry also belong family companies with five hundred or a thousand employees which annually turn over high three-figure millions. They are often particularly inventive; fill with great success niches on the world market and make three quarters of their business abroad. They are the core substance of our economy.

One therefore means very different people and livelihoods when one speaks of the middle class. Considering that, you can nonetheless say: The German middle class is particularly important for social cohesion, for the checking of radical movements far left and far right, for a broad foundation of prosperity, for a sufficient financial potential in social policy, for culture and education in our polity. Above all people from that broad class feed the universities; they are interested in values and institutions without which a society loses its identity; they are the pillars of the theatrical and musical life. When you become aware of that it does not mean that you overlook the plight of the poor and neglect their social position - on the contrary: a polity that is sound in its core becomes more permeable from bottom to top. When this free interchange up to now is still too low, then it only confirms the continuing need for reform.

Those many millions of people in Germany would be particularly hard hit by a long-lasting, serious economic crisis. And for their part they would particularly badly shape the length and intensity of the crisis. For materially they are important demanders of goods and services. They often have a little money or modest share depots, which have been decimated or are threatened to be decimated. They are important customers of banks and insurance companies. They ask for loans for the purchase of housing and consumer durables. As tradesmen or shopkeepers they serve the daily needs of people. They work as clerks and officials in public institutions and have influence on the well-being and mood of the whole society, which we must not underestimate. They are as judges and prosecutors guardians of the state founded on the rule of law. They very decisively mould the public opinion as "consumers" of word, picture and sound. And not so few people from that circle make public opinion as editors and publicists. The artists who are needed by a country in order to present itself are mainly recruited from their circles. One may assume that the elites of a society essentially come from the middle-class milieu. And for its spiritual and economic development society needs elites in the correctly understood sense, and that just also in the international competition that becomes more and more rigorous.

The development in Russia, in the countries of the former Soviet Union or also in the Balkans shows how important a solid middle class is. Eighteen years after the fall of the Iron Curtain only a relatively small group has quickly become very rich there. They are people with talent - and often also with strong elbows. But millions of people in these countries, often the majority, are materially worse off than in the days of state socialism. In China and India a middle class has meanwhile developed which pushes ahead the growth. These are also millions of people, but measured by the total population a small minority. It is true though, experts who know the scene report that also there the prosperity of relatively few people grows on the backs of many destitute people.

 

Still Corpses in the Cellars?

The crisis is still nowhere near finished. Always new fuel for conflict lets it blaze up. In early summer some economists, politicians and business leaders thought the peak was probably passed. Then perhaps the desire played an important role to improve the psychological climate. Meanwhile the crisis is above all a crisis of confidence. Banks think the colleagues had still 'corpses in the cellar." Their customers remain distrustful, because the chiefs have dreadfully presented themselves. And the mistrust spreads from top to bottom. The sociologist Richard Sennett said in an interview: "People lose not only their jobs but also their house; they are no longer able to afford the usual level of consumption. This has a profound meaning: The Americans thought they were victors in capitalism. This self-confidence disappears and is replaced by a feeling of decline." In America the FBI has already intervened in order to clarify dubious facts. In this country the prosecutors have not yet taken action.

In the business section of some newspapers we read of the great benefit also of exaggerated speculation. It contributed to a realistic price trend. It helped to change behaviour - for example in energy consumption. It gave resourceful entrepreneurs signals what the market desires. Some of it may be true. But more convincing is a biblical statement: By their fruits you shall know them.

 

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