Obama is Finally Doing the Right Thing
Published in Sueddeutsche Zeitung
(Germany) on 22 January 2010
by Martin Hesse (link to original)
(Germany) on 22 January 2010
by Martin Hesse (link to original)
Translated from
by Christiane Thieme.
Edited by Jessica Boesl.
Barack Obama has declared war on Wall Street. Driven by the fury of the population and the Democrats' election defeat in Massachusetts, the American president pushes his plans to regulate the banks more than ever before. He wants to limit the size of the banks and dam the risky proprietary trading of securities.
It is a good thing Obama is finally addressing the fundamental problems that ignited the crisis and could cause new financial catastrophes. In contrast to that, the plans for penalty taxes for banks are mere Valium for the already excited public.
In their multiple attempts to make new rules for the financial world, American as well as European politicians often make one specific mistake: They mix the wish to punish banks for committed wrongs with the objective of preventing future crises.
It is quite natural that anger arises now that banks like Goldman Sachs are reporting profits in the double digit billions again and giving out almost as much in bonuses while the rest of the world is still groaning with the problems the financial institutions have caused. However, all attempts to punish them with taxes or to engage them in the costs of the crisis are problematic.
The policies should strictly distinguish between punishment and crisis prevention. They should leave it to the justice system and bank owners to bring those managers who are responsible for the crisis to book.
To properly process the mistakes of the bankers, it is therefore necessary and right to extend the limitation period for those cases, as the German Federal Minister of Justice Sabine Leutheusser-Schnarrenberger (FDP) demanded. The proposals for bailout fees on banks, on the other hand, would only create more problems.
Obama’s earlier suggestion, for example, to tax the net worth of banks is dangerous. This tax is said to be raised over the next ten years for the fifty largest financial institutions in the United States. That would mean that the corporations would have to pay hundreds of millions of dollars even if they incurred losses.
This strategy could backfire during the next crisis, which will happen during the next ten years for sure. The German federal government, which right now is fancying such a tax, should keep this in mind. It is sensible, however, to ask banks to put a certain amount of their profits into an emergency fund on a regular basis, so that they can contribute more to the rescue of financial institutions during future crises.
The financial transactions tax that Chancellor Angela Merkel has thus far preferred is problematic as well because it would most likely impact the trade of stocks and bonds, which was not even the cause of the crisis. The true problem is the gigantic trade of complex financial products, because this trade is not transparent and because these products contributed to the excessive debt of the banks. It was these products especially that banks gambled and lost with – and with which they now make billion dollar profits once again.
Obama’s most recent proposal to limit trade at its own expense and for its own advantage is therefore a good start. Banks have to decide whether they want to be service providers for companies, states and citizens, or risk investors like hedge funds.
However, it is not enough to keep banks from those risky businesses. Even if trade is switched over to hedge funds and other unregulated banks, the risks remain in the system. That is why even unregulated banks should be strictly controlled and derivative activities only be executed through regulated exchanges.
What remains is the problem of size. If corporations like J.P. Morgan or Deutsche Bank topple over, it would threaten the entire system. The asset stripping of banks must not be a taboo for reasons of market power. It would probably already help if all banks secured their transactions with significantly more capital. This would lower risks and break the obsession with size at the same time.
It is a good thing Obama is finally addressing the fundamental problems that ignited the crisis and could cause new financial catastrophes. In contrast to that, the plans for penalty taxes for banks are mere Valium for the already excited public.
In their multiple attempts to make new rules for the financial world, American as well as European politicians often make one specific mistake: They mix the wish to punish banks for committed wrongs with the objective of preventing future crises.
It is quite natural that anger arises now that banks like Goldman Sachs are reporting profits in the double digit billions again and giving out almost as much in bonuses while the rest of the world is still groaning with the problems the financial institutions have caused. However, all attempts to punish them with taxes or to engage them in the costs of the crisis are problematic.
The policies should strictly distinguish between punishment and crisis prevention. They should leave it to the justice system and bank owners to bring those managers who are responsible for the crisis to book.
To properly process the mistakes of the bankers, it is therefore necessary and right to extend the limitation period for those cases, as the German Federal Minister of Justice Sabine Leutheusser-Schnarrenberger (FDP) demanded. The proposals for bailout fees on banks, on the other hand, would only create more problems.
Obama’s earlier suggestion, for example, to tax the net worth of banks is dangerous. This tax is said to be raised over the next ten years for the fifty largest financial institutions in the United States. That would mean that the corporations would have to pay hundreds of millions of dollars even if they incurred losses.
This strategy could backfire during the next crisis, which will happen during the next ten years for sure. The German federal government, which right now is fancying such a tax, should keep this in mind. It is sensible, however, to ask banks to put a certain amount of their profits into an emergency fund on a regular basis, so that they can contribute more to the rescue of financial institutions during future crises.
The financial transactions tax that Chancellor Angela Merkel has thus far preferred is problematic as well because it would most likely impact the trade of stocks and bonds, which was not even the cause of the crisis. The true problem is the gigantic trade of complex financial products, because this trade is not transparent and because these products contributed to the excessive debt of the banks. It was these products especially that banks gambled and lost with – and with which they now make billion dollar profits once again.
Obama’s most recent proposal to limit trade at its own expense and for its own advantage is therefore a good start. Banks have to decide whether they want to be service providers for companies, states and citizens, or risk investors like hedge funds.
However, it is not enough to keep banks from those risky businesses. Even if trade is switched over to hedge funds and other unregulated banks, the risks remain in the system. That is why even unregulated banks should be strictly controlled and derivative activities only be executed through regulated exchanges.
What remains is the problem of size. If corporations like J.P. Morgan or Deutsche Bank topple over, it would threaten the entire system. The asset stripping of banks must not be a taboo for reasons of market power. It would probably already help if all banks secured their transactions with significantly more capital. This would lower risks and break the obsession with size at the same time.