Liberation From Slavery

Obama’s plan to rein in the banks is bad news for big money institutions. At the same time, it’s an important step towards a more equitable financial system that others must follow.

U.S. President Barack Obama is planning the most spectacular hostage rescue mission in modern financial history designed to end Wall Street’s imprisonment of American taxpayers. Bad news for the hostage takers: Goldman Sachs, JP Morgan, Chase, Citigroup and others could soon be in for it.

Obama wants to break up the financial conglomerates and strictly regulate the doors to their gambling halls. If he’s successful, history might repeat itself. Obama will be following in the footsteps of Franklin Delano Roosevelt, who learned some basic lessons from the crash of 1929. The reform policies of his New Deal put Wall Street in chains; the Glass-Steagall Law, the Securities and Exchange Law and similar lovely innovations made life hell for the gamblers. Financial institutions had to relearn how to serve the real economy.

The outcry from the financial world was just as loud then as it is now. Markets crashed, but that shouldn’t intimidate policy. There are no alternatives. The baby has to be thrown out with the bathwater.

Wall Street, London and Frankfurt have again shown the world that they’re incapable of learning anything. The banks refuse to voluntarily distance themselves from their risky business models. As government aid pours in for banks, they’re already playing with fire again. The scandal of huge bonuses paid to bankers is just the popular tip of the iceberg. Profits for large banks are once again at record levels despite the crisis. The six largest U.S. banks alone posted net profits of more than $28 billion for 2009. Return on equity again surpassed 20 percent. As usual, these profits come from the investment banking sector that deals with risky currency exchange rates and interest rate wagers as well as bond sales. If they do business with their own money, the only consideration is maximum profit. There’s an abundance of liquidity. Banks can place their wagers using cheap Federal Reserve money and large injections of taxpayer dollars.

The concept of liability is abandoned

The gambler takes little or no risk. If he loses his bet, taxpayers pick up his losses. It’s time to put an end to that; investment banks should not be allowed at the roulette table. The president’s suggestion that proprietary trading by banks be curbed is absolutely correct. Banks with large cash reserves and active credit programs lose nothing in volatile capital markets. If commercial banks don’t engage in proprietary trading or make risky investments, the safety of customer deposits is increased.

That’s not enough. Some financial institutions are considered “too big to fail.” That nullifies a basic principle of the market economy, namely, the concept of liability. There are two ways of getting a grip on that problem: large banks must either be shrunk back to health or they should be nationalized. Fans of competition favor the shrink-to-health approach. A great deal has to be done there. In the 19 European Union nations, the five largest banks have a market share exceeding 50 percent. In the United States, the “Big Five” banks control 43 percent of the market. German Federal Minister for Economics Rainer Brüderle has already introduced divestiture legislation, but Josef Ackermann* is more likely to be voted head of the Left Party before Ludwig Erhard’s** heirs decide to do battle against the financial industry.

Liberated from captivity

Detrimental system relevance of individual banks can be dealt with by increased equity rules. The larger the balance sheet, the more equity an individual institution would have to put up. In brief, consistent regulatory policies would improve the liability situation. Any damages then occurring could be covered by a European rescue fund administered by private banks.

Naturally, in a liberal society, the casino would have to remain open, but not just anyone should be allowed at the gambling tables. It also shouldn’t just be “anything goes.” When it looks like the hotshots are in danger of drowning in the Hudson, the Thames or the Main, there shouldn’t be a cashier standing by, ready to throw them a life preserver.

Those who caused this crisis are still the ones profiting from it. The financial houses must also help pay for the costs of the crisis. Barack Obama wants to put a punitive tax on the 50 largest American banks. Over the next ten years, he wants them to put $117 billion back into the U.S. Treasury. Here in Germany, financial institutions pay a healthy interest on government bailout money and state-backed loans. The Special Fund for Financial Market Stabilization has earned a profit of around a half million euros up to now, but that’s peanuts compared to the enormous amount of money given out. The short-term costs are already nearly 14 million euros, so a special levy on bank profits is long overdue.

Beyond that, we need a European or international tax on financial transactions. Until there is agreement on that, a national tax on market transactions has to fill the gap. Such distribution policy intervention directly treats the causes of the crisis. The increase in financial speculation is a direct result of the growing concentration of income and wealth. As long as this economic imbalance grows, the demand for gambling money will increase.

Since the collapse of the financial markets, the banks have taken the government hostage. Taxpayers have had to rescue the glittering glass palaces and now they’ve been handed the bill. It’s no wonder that workers, retirees and the unemployed are boiling with anger. The policies are coming under pressure, so there’s still a chance of learning something from this disaster.

*Translator’s Note: Josef Ackermann is a Swiss banker and current CEO of Deutsche Bank.

**Editor’s Note: Ludwig Erhard was Chancellor of West Germany from 1963 until 1966 and was instrumental in the country’s postwar economic reform and recovery.