"Too Many Rules against Democracy, Not Enough against Wall Street"

You went to support the “outraged” Wall Street protesters last week.

Yes. And I have an anecdote to share about it. When I visited the Occupy Wall Street movement, I wanted to speak. However, because it was a Sunday and no one lives there, the police forbade me from using a megaphone! There is too much regulation against democracy, but not enough against Wall Street.

So you feel that the measures taken since 2008 to tame the financial sector were insufficient?

In the U.S., we passed the Dodd-Frank Act to better regulate finance. But there is still no transparency in a huge chunk of finance, credit derivatives, including those traded under negotiated contracts. What exactly this market is covering up remains unclear. This lack of transparency has done a lot to increase market volatility because we still do not know the true exposure of banks in this field — what they owe each other. I also want to point out that the two largest U.S. banks have grown since 2008.

Do you believe that we aren’t being demanding enough with banks?

We must differentiate, in my opinion, between Europe and the United States. Here, since we transferred a lot of money to our banks, we should have asked for something in return. Their bonuses should have been done away with, forcing them to lend more to individuals and businesses. Certain activities should have been prohibited while encouraging more ethical practices regarding home loans. Since none of this was done, past practices have continued. This has generated an anger, of which “Occupy Wall Street” is the most visible expression. By accepting “robot-signers” for foreclosures, illegal actions were covered up. It should be understood that the net contribution from Wall Street to American society is negative. This has created a very strong sense of injustice.

Do you think that President Obama was not tough enough with the financial sector?

It is in fact one of his major failures. In order to come out of the crisis, President Obama appointed people responsible for the deregulation of the financial industry and, as such, played an active role in creating the crisis. It was therefore natural that they underestimated the magnitude of the problem. They did not understand that the economy was sick long before 2007. And the bursting of the financial bubble has brought the state of the U.S. economy to light.

How can the U.S. economy be healed?

First, I think not having done the right thing for too long has made things worse. To come out of the current crisis we must stimulate the economy through long-term investments. This way, we’ll fix weaknesses in the short term while preparing for the future. And then, we must require banks to fulfill their basic mission, that is to say, support economic activity. Lending activity in the United States still hasn’t returned to its pre-crisis state. Banks were allowed to take too many risks and take advantage of leverage. We must bring them back to reason. This may involve a separation of commercial and investment banking. I think it’s time to build an airtight wall between the two activities, as was the case in the United States after the Glass-Steagall Act and as proposed in the Vickers report in Britain today.

Is it necessary to recapitalize European banks?

I do not believe that the main problem is the recapitalization of banks. That could be clearly seen after the Lehman Brothers bankruptcy. It’s not about knowing which banks have a solvency problem, but which banks have a liquidity problem. The proof is that the Franco-Belgian Dexia and Irish banks passed the “stress tests” conducted in Europe. In my opinion, the real problem, as I said earlier, is the lack of transparency in the banks’ accounts. We do not know enough about their access to dangerous financial instruments such as credit default swaps.

Can Europe escape the sovereign debt crisis?

Europe has the resources to deal with the Greek situation, which represents a tiny fraction of its GDP. Most political leaders are committed to it, but the procedures are complicated. The European Stability Fund (EFSF) is likely to become a key institution, but its implementation is far from being finalized. … But my biggest concern is that austerity policies will make things worse. This is likely to keep unemployment steady, to restrain demand and to anchor all current problems. I am rather pessimistic actually. The crisis has lasted four years now — that’s a long time. There is the risk that companies have used up most of their resources and that households are losing hope. We must do everything possible to change current momentum and boost growth. Europe has tools such as the European Investment Bank, which must be used and made to work by everyone. It is urgent to set up a transfer union. Without solidarity, Europe will not survive. Political leaders are convinced, but some people are not.

Jean-Claude Trichet will soon leave the European Central Bank (ECB). What is your assessment of his actions?

There is a famous saying by Zhou Enlai, who replied, “Too early to say,” when asked if the French Revolution was a success. There are certainly critical issues that haven’t been addressed by the ECB. By simply monitoring inflation, it didn’t see the bubbles swell and did not promote growth. Trichet should have recognized that and changed things. He made a mistake by raising interest rates in July 2008. This is the problem of many central bankers, who maintain an ideological position. He’ll certainly answer that he has remained independent, has ensured financial stability and was the last man standing in the storm.

Was that not the role assigned to him?

A central banker cannot only be responsible to the financial markets. He must also be accountable to democracies. Paul Volcker, former Fed chairman, had recognized this in his time, saying that he should also be a politician. Moreover, when Jean-Claude Trichet says that we must make the European labor market more flexible, that seems to be a completely mistaken diagnosis. The U.S. labor market is more flexible than the German one. Does that make it more efficient? No, obviously not.

In France, there has been debate in recent months on de-globalization, an issue that you mentioned in several books.

Yes. Many people feel that economic difficulties come from globalization. That is understandable. But globalization is not a bad thing in itself. They do not see the opportunities and benefits it creates. Living standards generally increase. Most Americans are richer today than 30 years ago. The real problem is that globalization has accentuated inequality within developed economies. It has become the symbol of the excesses of modern capitalism. We must ensure a better distribution of the fruits of globalization, including that between developed and emerging countries. Rising energy prices and raw materials, for example, have transferred purchasing power from the United States and Europe to oil-exporting countries. And some emerging markets have accumulated reserves.

You were in Paris last week for a conference on sovereign wealth funds. How can their rise in power be understood?

The emergence of SWFs changes everything. For over three years, our attention has been diverted by the financial “Titanic.” All our resources are being monopolized to deal with short term problems related to the financial crisis, all the while long-term problems, that is to say climate change, food security or development, remain fallow even though they are already relevant. The emergence of SWFs is not only the arrival of new players with very deep pockets. It is a change in capitalism. They have significant funds, take the long term into consideration and have a social responsibility because they are controlled by the people. My motivation is to better understand and facilitate the development of sovereign wealth funds. We must recognize that the 19th century model of capitalism was an individual who owns his firm. In the 20th century, things have changed; we separated shareholdings and management, and investors started investing on behalf of investors. Now we are thinking about what capitalism could be in the 21st century.

What model could it be?

Sovereign wealth funds are owned by the people. We need future investors to be interested in real long-term problems. It should be recognized that the financial market, especially in the United States, did not efficiently allocate available capital for years. There is not a problem concerning the use of capital. Worldwide, there are needs for investment in many things related to infrastructure, climate change and so on. But the failure comes from financial markets having channeled savings toward useless projects. We can do better than that. And sovereign wealth funds, accountable to the people and socially responsible, can do better than that. These people want their money to go into areas that are useful and long-term.

But SWFs themselves may represent states that are not democratic.

It’s true. But we must define the problem, what we fear and the rules of what is acceptable. We must focus on what we want and what we need. We need to define rules on predatory or competitive behavior, for example. You still have to remember that hedge funds have recently attacked countries. …

Interview by William Maujean and François Vidal.