The Courage to Regulate

Jean-Claude Juncker is right: should the United States block important new regulations at the upcoming G20 meeting, Europe must act unilaterally. Juncker is Luxemburg’s Prime Minister and currently also serves as the finance minister for the European Union.

Of the utmost importance is that lessons are learned from the current financial crisis while the damage is still visible; otherwise the pressure for policy reform will lessen, which will contribute to another – and even worse – crisis in the future.

To assume that bankers have “learned their lesson” is dangerous in the extreme. The only thing they have learned is to keep a daily watch on the financial markets: they serve as snapshots to show how to best shovel in the money before regulations are enacted.

The most significant thing about Juncker’s pronouncements is that they are new. Up to now, the mantra has been that the only way to get stricter new controls in place was via global coordination lest those countries with stricter regulations be put at a competitive disadvantage as their industries emigrated elsewhere. This logic still applies; that is why it is sensible to push for global regulations.

But worse than going it alone and risking the migration of their banking businesses to other countries would be doing nothing. The bottom line is that everything centers on reining in capitalism à la Wall Street, financial capitalism; better still, abandoning it altogether.

The European Union began life based on a different economic model than the United States, even if it has tended more and more toward that model in recent years. Chancellor Angela Merkel preaches a social market economy and the European Union itself has universally taken up the cause of social economics.

It is necessary that a new capitalism be created in Pittsburgh that finds its future salvation in the real economy, in innovation and investment rather than in gambling and insane attempts to make money by speculating with more money. Europe’s good fortune is that it has a solid currency and is by far the strongest economic power in the world.

But government leaders have to realize what is worth fighting for; limiting bonuses is not the real problem by a long shot. The real goal should be requiring banks to have far more reserve equity capital.

As soon as future profits for banks are limited, the speculation game comes to a halt. The banks themselves would be unable to pay out insane bonuses because the money to do so would not be there.

The second central area is the financial market. All paper to be traded should first of all be approved, traded only on regulated exchanges and finally carry a financial transaction tax. That is the only way to reduce the high-yield requirements resulting from speculation; that would benefit investment as well as jobs.

What are the ramifications for Europe’s financial sector if America decides not to cooperate? As happened in Germany at the end of the nineteenth century, when the catastrophic collapse of the wheat market was caused by futures trading being totally banned, the financial industry refocused on London. Germany, on the other hand, focused on industry, technology and patents and became a global market leader in many sectors. Germany is still profiting from that decision today.