Fear is back in the financial markets: The stock markets are reeling — and with them the politicians, who are trying desperately to contain the worst government debt crisis in eight decades. Yet banks and hedge funds unhinge entire nations with short sales and credit insurance. The result: After 1931 we are stuck in the middle of the second world economic crisis.

Whoever wants to know how long the economic crisis can still drag (and how bad it could still get) should look back eight decades. In 1931, the first world economic crisis was in its second year, and, as it turned out later, not even the half of the crisis was over. However, politicians, businessmen and economists asserted predictions, full of optimism, that the worst was over. The president of General Motors announced cheerfully, “I see no reason why 1931 should not be an extremely good year.” The Harvard Eonomic Society stated that the downturn after the crash of 1929 was past. And the American assistant secretary of Commerce boasted, “The depression has ended.”

What an illusion — and what alarming parallels to the present-day crisis, to the second world economic crisis, as one must call it by now. It has hit all industrialized regions of the world at the same time: the U.S., Europe and Japan. Up to a few weeks ago, this crisis was played down and repressed.

Well, Europe was worried about some highly indebted countries on the periphery, Greece and Portugal. But otherwise everything seemed to be in the best order after the crash of 2008 and 2009: The world economy — and with it the exporting German economy — grew to an extent that one hadn’t seen in years. One was glad about the boom, about less unemployment, about the German economic miracle. A crisis? Nonsense!

However, in the meantime, it must be clear to all who had set themselves up comfortably in recent times, that the mood in the past year and a half was far better than the situation. And that the epochal crisis that began in the spring of 2007 when the U.S. real estate bubble burst, which first resulted in global awareness with the bankruptcy of Lehman Brothers, was far from over. Like 80 years ago, a number of other waves of crisis will follow, caused by collaborating banks, bankrupt nations, worsened ratings or — in the worst case — the breakup of the Eurozone.

In the financial markets — where things supposedly run so rationally, though in truth, however, they are often dominated by recklessness and lunacy — the fear is back. The stock markets are reeling — and with them the politicians, who try desperately to contain the worst government debt crisis in eight decades, while some try to change the meaning of the crisis.

When Banks Leverage Countries

The unbridled debt of individual EU countries was, however, not evident at the onset of the second world economic crisis. Certainly, the Greeks had fraudulently met the requirements for changeover to the euro with sugar-coated numbers and the Italians had not been concerned about their deficit. But the crisis in 2007 did not begin in Greece, not in Italy and not even in Ireland or Spain. Until the Lehman crash, Ireland and Spain were two rock solid debtors who, in part, even achieved high surpluses.

No, the crisis had its beginning in the U.S., where the government took on unrestrained debt in the war against terror since Sept. 11, 2001, and where homeowners, banks and hedge funds lived cavalierly on credit. Even the finance industry — encouraged by the inexpensive money of the Federal Reserve — increased their credit sky high in the years preceding the crisis to finance their venture deals. The finance industry called this speculation on credit leverage. Now banks and hedge funds unhinge entire nations with short sales and credit insurance.

This is a rather cynical game. In spite of all the mistakes they made in budget policy, the countries have increasingly gone into debt since the Lehman crash, because they wanted to save the world economy and banks from a downturn. With the help of government rescuers the finance industry has succeeded in reducing its burden of debt, while Ireland’s burden of debt quadrupled, Spain’s doubled and Germany’s rose one-fifth. In simplified terms, in the fight against an economic collapse, private debt was exchanged for government debt.

Mistakes of the Markets

As a consequence, not just Greece and Italy have a problem, but also countries that managed their economy more seriously. Therefore, the players turned the tables on the capital markets, whose ludicrous financial instruments had driven the world to the edge of the abyss in 2008. They first gave a talking to to nations that were already considered unsound: first Greece, then Portugal. And now, after the politicians made mistake after mistake under pressure of the crisis, many others.

One can espouse the theory that financial markets are there to correct the mistakes of politics. And in cases like Greece or Italy this may be correct. One can also come to the realization that it is even more urgent to correct the mistakes of the financial markets as that is where politics have failed miserably. The reforms that were enacted: bigger capital buffers for banks, better risk systems and stress tests were right and needed. But they are not enough to steer the markets back onto the right track.

If the world wants to draw the right conclusions from this crisis, nations must not just reduce their debts. It is also essential to construct financial markets in a way that crises will become rarer and less dangerous (though crises can never be completely avoided). To this end, it is necessary to create a global oversight mechanism for the financial markets, a set of regulations that sets clear limits. It is also necessary to forbid the practice of some financial instruments, whose economic sense defy explanation.

This is possible, in spite of all the doubts of the financial sector. The federal government [of Germany] was ridiculed when, a year ago, it forbade short sales, which is the speculation with securities that one doesn’t own. Other European countries followed this step Friday. The use of credit default swap, with which one speculates on the bankruptcy of whole companies or countries, deserves to be limited as well.

When Lehman Brothers collapsed in 2008, it was said that politics, issue banks and the finance industry had learned from the mistakes of the first world economic crisis. Three years later one may doubt that. Like 1931 all quickly went over to the order of the day; like then, mistakes are being made, even if they are different ones. Above all, the readiness (and the common will) to learn the right lesson is missing.