Finance After Armageddon (Wiley Global Finance Executive Select)

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In explaining where we have gone wrong Lewitt pulls few punches in criticizing some of the counterproductive forces that have led to the death of capital—including Wall Street practices such as private equity and derivatives trading—which he views both as economically unproductive and morally misguided. Page by informative page, this timely guide:.

Financial reform is needed to make sure capital does not die again. These disastrous trends, described here as financialization, The Death of Capital: In The Death of Capital , respected portfolio manager and longtime investment professional Michael Lewitt looks at how the U. These disastrous trends, described here as financialization, ignore the fact that capital itself is a highly unstable process rather than a fixed object or category.

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As a result of our failure to understand the true nature of capital, we have developed a financial and regulatory system that does exactly the opposite of what it should be doing—favoring obscurity over transparency and fomenting instability rather than growth. Page by informative page, this timely guide: Self-indulgence up to the very limits imposed by hygiene and economics.

Otherwise the wheels stop turning. TOC 31 January ; 9: The Future of the EU: Even if they do not surpass their forefathers, this great heritage allows them to look farther into the distance, bringing them closer to the problems of today. They can and must continue to update their knowledge. This book attempts such an update, using the teachings of three Grand Masters of the economic guild as a basis: For it is the questionable progress and innovations of financial engineering that have triggered this crisis.

Capitalism would commit suicide if it allowed these so-called innovations to remain unattended to. When two authors write a book, they agree on the core statements, but not in every detail. Therefore, there are overlaps here and there, translated by the other author, and small differences in individual formulations. But these change nothing in terms of the content and common message delivered by both authors. The German author, as former Director of Money and Credit in the German government, president of a bank, and international consultant for central banks throughout the world, contributes fresh perspectives on money and credit and the European debt crisis, while the American author, an international political economist and comparative management specialist on the United States and Europe, provides collective learning and entrepreneurial and public policy insights on job creation, pensions, and sovereign debt dilemmas.

Once again, the issue of how to maintain a moderate dose of national inflation for the sake of economic growth has become the priority of developed Western economies. Meanwhile, the world economy is undergoing a revolutionary sea change—away from the West and toward the emerging economies. The country cannot simultaneously be a modern social welfare state and a world banker. On the old continent, the euro crisis has initiated a cold war over the progress of European integration. France and Germany see a unique opportunity to transform the European Union of states into one federal state that they would dominate.

The European currency zone, now a centrally planned economic, financial, and transfer union with national characteristics and limited codetermination rights for small and ultimately dependent heavily indebted member countries, would be expanded into a FrancoGerman condominium. The European Commission is deeply divided on the issue: It affirms the goal, but struggles against the Franco-German claim to power.

As a result of the conflict, the European Union is apt to emerge as a toothless tiger. Whatever the outcome, the leadership crisis in the West will once again transform the face of the world economy. The very viability of the social welfare state is at stake, illustrated by the underfunding of pensions, training for employment, and national budgets. This book relates how the ambiguities of globalization, regional integration, and insufficient reforms in the financial sector undermine the capacities of nation-states to act to foster domestic prosperity and full employment.

Otherwise, the next global financial crisis is inevitable, the dollar and the euro are likely to plummet, the necessary rebalancing between rich and emerging economies will FPREF 31 January ; 9: Then we turn to the stories of the greatest financial credit fraud we have yet experienced, of the Great Bluff of American policy-makers, of the giant with feet of clay in Europe, and of the BRICs and other developing nations that may yet save the rich from their self-imposed speculative extravagances.

And it is far from over. Many of the questionable rescue strategies of crisis managers give the impression that they want to stabilize the crisis rather than to eliminate its causes. The crisis has already changed the face and centers of influence in the global economy today and will show lasting effects in the future. One example is the failure of Obama to transform the United States into a modern social welfare state due to conservative opposition and to perceived 1 intro 31 January ; 9: The world economy of the past three or four centuries, dominated first by European powers, their interests and currencies, and then by the United States, is dead.

However, the new global economy has not yet come into being. In this manifesto we summarize the steps on this difficult path and some of the major obstacles we need to overcome on the way. Modern capitalism is not laissez-faire. It follows rules—ancient, unwritten, recast anew—whether from market players or from the state, who both share responsibility for the welfare of its citizens. Rules must be adapted to changing conditions. In the long history of the symbiosis between state and society, reforming the rules has rarely been as urgent as it is today.

In the past, nation-states, and particularly their leaders, usually lived quite well from the profits of creative merchants and entrepreneurs. They drew on the resources of these producers for their purposes, the affairs of state, whatever these might be wars, luxuries, extending power, or the welfare state.

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Globalization has turned this harmonious symbiosis on its head. In this crisis, banks operating and speculating globally have to be reformed and their extended global markets need to be stabilized with state help. Otherwise capitalism could perish, the same way that communism did some 20 years ago.

This applies to countries as well as to banks. Capitalism does not die from the heads of venomous snakes which it has chopped off, but of its own negligence in removing heads from the bodies of snakes in the first place. Rescue the Right to Work in Aging Societies The current financial disruption looks much like its predecessors. Yet it is an entirely different type of crisis, for systemic reasons.

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In previous crises, the financial sector served the real economy as an engine of progress. Any entrepreneur or innovator who was ready to take a risk could find a banker to sponsor his endeavor. The current crisis has other reasons as well. This time, the curves of progress of the financial and real sectors of the economy are no longer in sync. Financial progress targets globalization as a goal; economic and technological progress, in turn, aim to reduce the labor required and the cost of labor per unit of product.

The target is the substitution of human capital with capital. With globalization the financial sector is gradually moving away from national sites of production and workplaces. The result is a deep rift within the real producing, investing, and job-creating economy. Large, global market and export-oriented corporations have nearly become banks; they have turned into financially self-sufficient entities that draw largely from their own sources intro 31 January ; 9: These smaller firms bear the brunt of producing most of the national tax revenue, but remain largely excluded from raising cheap capital through the stock market.

Finance After Armageddon - Michael E. Lewitt - Google Книги

Their sources of capital are banks, which, exactly when businesses are dependent on them such as during the present crisis , raise their prices on bank credit and borrowing. In the middle-sized companies—the backbone of the industrial world and culture—the world of work has been placed under severe pressure. Small and medium-sized businesses are the largest employers and vocational schools of the nation. These firms represent up to two-thirds of all workers and four-fifths of all trainees in the United States, Germany, and other Western industrialized countries.

They are not nomads, nor do they belong to the world-language-speaking i. Globalization makes those locally bound into victims of techno-economic progress; their social ties and cultural roots constrain their life plans. Instead of achieving social advancement, they are threatened with being downgraded into the class of the working poor. It is increasingly difficult to keep up with the technical skills and know-how of younger generations.

One has to intro 31 January ; 9: Not only must the industrialized nations of the West help their financial sector out of the difficulties it threw itself into, they must also cope with the consequences of the crisis resulting from the financial excesses: The welfare state could hardly have selected a worse historical moment to confront these challenges. Due to escalating costs of social systems and to an excess of concentrated public debt, its financial maneuverability has, in effect, been eliminated.

New tasks and expenditures can hardly be funded from new taxes or loans because in both cases the loads have hit the limit, if not exceeded it. A turning of the screw threatens the danger that the successes of private ownership, entrepreneurial freedom, and initiative thanks to capitalism will fall victim to an all-paralyzing fiscal socialism. The state debt, a problem that the EU and the United States have to resolve together, threatens not only to undermine their credit, but to rob people of this and the next generation of their future prospects.

The United States and the EU countries are facing a generational conflict. It depends on the intro 31 January ; 9: The financial world needs to find its way back to its true mission, namely to be at the service of the real economy. Its function is to transform the real capital of the saver into loans for productive and innovative investors. It is this financial engine that makes capitalism a welfare machine and opens society to innovators and social climbers.

Banks have turned into trading houses or casinos that speculate on securities and financial assets morphing into investment banks and hedge funds. With their innovative but fictitious products fictitious in the sense of having little to do with the real world , such as derivatives, bank guarantees, and risky bets, one may be able to earn huge sums of money, but this liquidity fails to create real national wealth, that is, tangible assets and jobs.

On the contrary, this kind of business is a case of misdirecting and wasting capital, because this sort of speculation does not go into real investment and job creation but into the private wealth of a few rather than the social welfare of all. This is what distracts capitalism from its dynamic growth potential and creates social conflict in society, where harmony reigned before.

The productivity gains of high technology the replacement of human labor power and performance through computer hardware and intro 31 January ; 9: The new leisure can—and must—be used productively. Where this fails, it happens anyway, spontaneously. Human beings, who are made for work and enjoy challenges, do not accept a life sentence of involuntary unemployment.

The tertiary service sector has long created an informal quaternary, the informal service sector. It is unjustly defamed and penalized by institutions. In fact, this kind of work closes the ever-widening gap between the increase of age and working life and the decrease of regulated working hours in the formal working world. Manifest in this type of work is the human right to work and the utilitarian opportunity to use personal skills and resources unique to every human being.

Such a black market economy allows individuals to work independently as entrepreneurs who labor on their own account and at their own risk, thereby creating real value; the individual becomes a self-sufficient enterprise, a solo business. He or she who wants to work should be intro 31 January ; 9: It relieves the welfare state by helping individuals to help themselves and contributes to the acceleration and continuity of the economic growth process; it is a privately financed long-term stimulus package.

The state does not miss out on a cent of this value creation if it adjusts its tax system to meet the demands of this new growth sector—by the conversion of income taxation into increased taxes on consumption indirect taxes. Defuse the Ticking Time Bombs of the Welfare State Two of the greatest challenges facing the nations of the Western world in the first half of the twenty-first century are the financing of social old age security and the public debt mortgage.

These two dilemmas could cause the welfare state to fail, and it is, after all, the great achievement of the West, if one excludes democracy and the rule of law. The paradox of the modern welfare state is that only the transition to the financial economy brought it about; for when old people retire from the working world, they can no longer, as in ancient times, be expected to return moneyless to the bosom of their tribe, their family home, to be taken in and cared for. They need their own retirement income. This can be shown in a simple calculation: If the supply of sums needed to supply millions of older people with Social Security in the United States, or state social insurance systems, as in most European countries, were combined, this fund would grow to become the greatest owner of capital stock in the economy.

But the alternative of providing for oneself individually supposing every person could do so also reaches limits; it ends in the vagaries of the stock market and capital market. Whoever carries over his savings into retirement faces an uncertain future and takes on high risk. For when the time comes for this pensioner to sell her assets, she needs a third party to buy them, who then determines the price.

You need to be almost as rich as Warren Buffett to look forward to a secure retirement in the future, given the risk of not knowing what your assets will eventually sell for. Tens of billions of dollars in private pension accounts were lost in the present financial crisis. For what counts for the government-insured social pensioners is not the vagaries of the stock market, the volatility of their own accounts, and the risks of invested capital, but only that enough people are paying into the social insurance and that these citizens are fully employed and not without work or income.

For then what they pay in, the social security insurance can also pay out. State social security raises the age-old moral principle that for the effort parents put in to prepare their children for independent living, the children must not give up trying to succeed but give back to their parents that same time and effort later on.

Modern society continues to apply the old generational contract, even when young and old are not related. If a society terminates this agreement, it would fall back into the Stone Age. Who retires and when is not determined by God, and only in exceptional cases is it ordered by the doctor; it is set by social legislation.

This social security law determines when the retirement age begins, and who is subject to social insurance and who is not. Two examples should give these social legislators pause for consideration. In Germany, Otto von Bismarck baptized the first social security system — , which is still solvent and reliable to this day: Today, given greater life expectancy, there are over 20 years of retirement that need to be financed. And instead of 10 percent of the population, there are 90 percent to insure, and the pension burden cost for active workers contributing has increased to over 20 percent of income.

In view of the widening demographic gap between growth of the elderly population and the same number, or fewer, paying into the pension fund, by the percentage of income that needs to be paid into the insurance by active workers is expected to rise to 30 percent. In short, the young must sacrifice one-third of their income for the old. However, the problem could be solved with two steps of reform. The first is to require not 90 percent but percent of the population to enroll in the social insurance system; for the missing 10 percent are the millionaires of the economy; since they take in 35 to 40 percent of the national income, if they all paid into the system, the burden on the young would fall.

There this proposal is in effect. The rich are contented with a symbolic pension, greatly below the equivalent of what they paid in; however, they have no intro 31 January ; 9: At the age of 20, the burden upon the young of payment for pensions lies at under 10 percent of income. The second step in reform is to raise the retirement age. As an example, although the legal retirement age begins in Germany at age 65, the mass of older workers retire and take an early pension at age Meanwhile, in the United States, the average age of retirement is 62 with an estimated 18 years of retirement to go with about of 11 percent of annual income paid into Social Security and pension accounts.

The trend among the rich is increasingly not to retire they are nicknamed Nevertirees ; over half of those polled globally never intend to retire with this number rising much higher in Saudi Arabia and the United Arab Emirates, but dropping much lower in Switzerland and Japan. Raising the retirement age in Germany to plus years and requiring the full adoption of earlyretirement costs by companies would theoretically reduce the cost of pension provisions to the level of the Bismarck era.

However, the welfare state does not have to go this far. Even a half-step in this direction would relieve the burden, not only on society but also on all those who want to work longer. The answer to the other ticking time bomb of the welfare state is not so simple to grasp.

But not a single problem has been solved by either the state or central bank financed bailout program in the United States for troubled banks, or the rescue in the EU for the risk of insolvency of states in the PIIGS group. The debt burden was not rescued but merely shifted over to the government account, postponing the crisis, not resolving it. Now the states of the West are confronted with the question of whether they want to live permanently in crisis, or to free themselves from the manacles of debt in order to be able to act politically once more.

The democratic welfare state of the West can win back its freedom only by a radical reduction of every tenable standard insolvency. This is more difficult than 80 years ago. After all, in the contemporary world economic crisis, there is no inflationary boom that could accelerate the ascent from the floor of the valley and devalue much of the debt.

On the contrary, the upturn, when it comes, will get stuck halfway up. Thus, this time, the depressive-deflationary effects are predominant. The overliquidity stemming from the bailout financing is but a momentary snapshot. The elimination of the debt from the world of Western states can succeed only if the risks posed by their added deflationary effects are neutralized by a positive policy of employment.

Government creditors, that is, mainly banks and institutional investors, must maintain the flow of billions of dollars previously skimmed off intro 31 January ; 9: Therefore, the reduction of public debt must go hand in hand with a counterbalancing program of domestic investment and infrastructural renewal.

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The funds should be drawn from the beneficiaries of debt reduction: Moreover, state investment and development banks which have existed in the EU since the Marshall Plan era could be used to mobilize additional resources in the capital market and insert them into the program. Look for New Answers to Old Problems The world economy of tomorrow cannot dispense with either globalization or the welfare state. Both are milestones on the road of capitalism toward greater efficiency and its indispensable humanization.

But the crisis demonstrates that both systems do not function without safety valves, both preventive and those that kick in automatically in times of emergency. The First Safety Valve: End Global Laissez-Faire One of the preventive safety valves is to end global laissez-faire. This safety valve has to be installed on two levels, namely on that of central bank cooperation as well as that of banks and the supervision of institutions on the financial market.

The global monetary cooperation requires an international monetary law. The Bretton Woods system attempted to pave a way in that direction; its demise in depicted the precipices that follow when such a long-standing political institution collapses. The Bretton Woods system of had been a fresh start after the rigid, mechanical rules of the gold standard during the Depression of the s had failed. They had to get rid of this bond, and they succeeded. The new beginning after was a huge success.

It was the United States, with its insistence on the dollar as the accounting unit inside money of the system that preprogrammed its collapse. In spring , it was not the system that was terminated, but rather the unstable value of the U. A globally acceptable international monetary system could be composed of the following elements and based on the following principles: This means that member states reserve the option of combating both internal and external imbalances with their national interest and exchange rate policies. Both intro 31 January ; 9: In this system, the IMF takes on the role of monetary police and guardian of the financial system.

It warns of looming dangers and calls on players who foul against the rules with the threat of the withdrawal of credit. A new world monetary system makes the exceptional European euro subsystem unnecessary. The integration of the eurozone into the new Bretton Woods system would allow the return of euro-based countries to their old, traditional currencies in order to improve their chances of combating their domestic crises on their own and relaxing the tensions between the EU states in a manner that can be sustained.

The prerequisites for conflictfree progress on integration could thereby be fulfilled. The domestic demand and savings of the emerging economies permitted the dominant and strong-export Western countries to solve their domestic problems faster than expected. The Western world must count on increased competition from intro 31 January ; 9: On the other hand, thanks to the crisis these nations see how heavily they are still dependent upon the West. They lose both important export markets and the import of capital and know-how when declines occur in Western industrialized countries.

It has become clear that the world economy of the post-colonial era is different from that of the nineteenth and early twentieth centuries. It is no longer the old machine for exploitation of raw materials of backward countries, but rather permits a win-win situation for all participating actors. This is the reason why the plans for a brave new world economy and a new Bretton Woods grow on more fertile soil in the Third World than in the First World of the Western industrialized countries. In the former developing countries the political influence of the financial world does not play the same dominant role that it does in the West.

There it is not so easy for the banking world and its lobby to block politically desired reforms. On the other hand, the local financial sector there has become strong enough to speed up the internal development process of these countries more self-sufficiently than ever before.

It is already apparent today that the new world economy after the crisis will have a better balance between North and South, and West and East, than it has had in the past. The Second Safety Valve: Bank Supervision and Financial Stabilization The creation or, more precisely, printing of money is under dual control by the national central banks and by government supervisory agencies that monitor compliance with the law.

However, the Ephor is not above the law, but merely guarantees that others abide by the law. What kind of laws do we need for the financial world in its new form? The investment risks, particularly the off-balance-sheet risks that have caused this crisis, must be fully transparent to any investor. The limits and proportions between credit and securities businesses must be continuously maintained and guaranteed.

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Glass-Steagall Act, which allows access to cheap credit from the central bank. There is no reason or justification for the socialization of banking losses. Instead, the protection of the deposits of savers should be strengthened and expanded. No bank customer should be harmed by the irresponsible errors of bank managers. Banks themselves are not nature conservancies: Like a privately owned company, the owners and managers are responsible for their losses. The central bank is the last guarantor of liquidity to maintain the intro 31 January ; 9: Banks should prevent the misallocation of capital.

As a principle, it is more important to let banks go bankrupt than to save them. Subsidize Start-Ups in Disadvantaged Regions Like all previous crises, this one will be a proving ground for a combination of learning experiments and engines of progress. Afterward, the world will be politically wiser and economically more stable.

Collective learning is a social process that makes it possible to initiate new legitimate patterns to cope with economic and political change. It is about understanding transformations in the social environment and adapting to them without jeopardizing cultural integrity. Every nation must prepare the conditions to make collective learning possible. The emphasis should be placed upon maximizing national as well as regional benefits, that is, competitiveness, in which entrepreneurs are motivated to apply new methods, to become competitive, to raise the value of work achieved, and to provide jobs.

Start-ups for young people are the elixir of the creation of new income and livelihoods. The middle class is the sector that suffers the most structurally from the financial crisis, and yet which contributes most to providing the training for the next generation of workers. The personally managed businesses of the bourgeoisie typically have no access to an open, cheap, soft capital market; for this group, access is denied to credit granted to the issuer by the bank by underwriting the issue. In Germany, for example, barely over 1 percent of all companies are registered on the stock exchange.

Promotion of SMEs through improved intro 31 January ; 9: It counteracts the deindustrialization in disadvantaged regions as well as the migration of workers into overcrowded areas. This requires the creation of local and regional stock exchanges with free access for noncorporations, publicly funded start-up programs, and the establishment of cooperative credit-and-guarantee communities by the sector itself as a collective act of self-help.

Only collective learning can resolve the conflict between the increasing demands for know-how and job security. This may include learning and training programs in society and business, changes in social and labor legislation, and a new social understanding of unions. The aim should be to deregulate the labor market to such an extent that any worker, if he wants, could become his own employer.

Brave New World Economy: Global Finance Threatens Our Future

What is required is the liberation of work from official as well as union constraints: This made sense as long as armies of dispossessed and nonskilled people were dependent upon mechanical factory labor and were exposed to exploitation. In the postindustrial society these structural constraints disappear.

It permits us to pay out the social dividend from the higher productivity from machines and technology in free time, such as in voluntary self-employment: Stability, Reliability, Prosperity The nation-state is not about to be replaced by anything else, even in the age of globalization—neither by markets nor by processes intro 31 January ; 9: But this domestic constitution must comply with the requirements of the times, or be brought up to par.

It is a question of the material basis of human dignity: None of these goods can be obtained in isolation from others or reached by separate paths. While this protects the citizen from the danger of the all-powerful state, the individual is vulnerable on another front: The shared form of government is weak, surrendering to the influence of powerful interest groups in society big business, banks, trade unions. Out of laissez-faire comes stalemate. The basis of every instance of national prosperity is the currency. In a capitalist society the currency cannot be stable and reliable enough.

As guardian of the monetary constitution, the central bank is of paramount importance. Ultimately it depends on the central bank whether it is possible to keep the value of money stable, to avoid levels of unemployment that are too high, and to allow the barely tolerable inflation rate that boosts economic growth so that incomes rise faster than prices. Every country is dependent on its material resources and has a duty to ensure that its citizens have enough work opportunities and that income can be generated. In a capitalist society, this demands not central economic and social planning, but rather a high level of transparency.

Markets are efficient only if they can respond to accurate information—what intro 31 January ; 9: The state has the task of organizing institutional networks of collective learning: For the root and key to success in a society is its work productivity. It generates much higher economic growth and far more secure protection against unemployment than overpackaged employment programs and a focus upon abstract targets and goals of the overall economy—a mistake that doomed communism.

Government investment or development banks are an important instrument of public investment guidance and policy. They guarantee that private savings get to where they should to create public and not just private benefits—in infrastructure, business start-ups, and security, or the means for incentives for border regions remote from markets, which, without this help, would wither in an economic desert.

The prosperous society cannot rely only on the resources of private savings to finance legitimate government functions. Still, the development bank is not only an intermediary. It is an institutionalized capital market for long-term future state tasks such as the advancement of youth, families, or science, for which revenues coming in only much later permit credit financing over a long period. On top of that, in times of crisis the development bank is an extremely effective instrument to counter the dangers of oversaving hoarding.

What must be actively confronted is the general ignorance of people in matters of economics and finance. Although individual destiny and the progress of each individual are dependent on these variables, they remain unknowns for the broad masses. Children cannot learn too early about economics, the role of money and of the financial industry, and how social ethics relates to these—that intro 31 January ; 9: How else will a market and money society protect itself from financial, investment, and pension fraud?

Knowledge of nature and the importance of environmental protection must be provided early in the educational process. This applies not only for products that exist or are grown naturally, but also to those that are industrially processed. And one needs knowledge of the existing natural and mineral resources in the region and society and their uses. Vocational education and counseling are an essential element of the working world and the welfare state.

Young people succumb to the seduction of fashionable professions and the lure of quick money. It must be made clear where society truly offers them a future. Old people can demonstrate their capacities even after their retirement by volunteering in the community. There is no time or age limit for work. As long as a human being lives and can work and wants to work, he or she must be permitted to do so. Human beings have a fundamental right to work. An important aspect of the priorities of nations and economic sectors lies in protection from unfair competition both domestically and from abroad.

The protection of agriculture not only serves the national interest in terms of food security, but is also of increasing importance ecologically. The same applies to the energy needs of the society, its military security, or its young, growing industries such as solar or wind energy or newly patented methods of production. Friedrich List, a world-renowned German-American economist, made it clear years ago that the government and the economy form a unity.

The state creates the conditions for the use of potential national productivity; the economy turns it to account intro 31 January ; 9: The state creates a social system of citizen-friendly services at a distance: In social welfare states such as Sweden, Denmark, Finland, Austria, Switzerland, France, and Germany among others this includes pensions, welfare and health practices, protection against hardship due to disability, and care for the elderly. In the case of Germany, the welfare state survived a whole series of crises and disasters: It is not too much to say that it was not the welfare state that survived, but the people, thanks to the state.

It gives the citizens security from ever-threatening risks. A stable social order helps the economy; it can plan more securely, invest, and expand. Democratic constitutions humanize life in society. They protect minorities, promote the peaceful coexistence of ethnic groups in the same country, and secure a more equitable society. Crisis is preprogrammed if politics, the zeitgeist, or circumstances interfere with the monetary authorities in performing these tasks. Now it is a question of networking the economy, states, and currencies so that confidence in capitalism returns—and so that it can survive this crisis as it has before, in the thousand years past.

The question is raised once more: Will it survive, and if so, will it be restored to its former self or be totally transformed? The answer depends on whether the revived system continues to contain the basic faults that brought about the latest crisis, or if this time serious efforts are made to eliminate these defects. It is a matter of the separation of the control of money and its influential surrogate, credit. Since the credit economy has been expanded continually and invariably into globalization, there is no longer any way to get around correcting these structural deficiencies.

An expanded and 25 CH 31 January ; 9: Credit fraud is identical with financial innovation born in and through capitalism: It is immanent in the system. The old perspective that money derives its value from gold was always based on an error. Even under the gold standard it was not the raw material of gold that provided money with its value as an end product, but rather the demand for gold for the purpose of monetization.

The reason for the loss of the advantage of the gold standard as a basis for money and credit lay in its limited quantity: Banks produce credit within their own regime. CH 31 January ; 9: Since the existence of a market economy, foreign trade, and savings for retirement and the future, money has been pivotal to all three: Evidently independently of one another, small communities and highly developed cultures around the globe shared in the discovery of this medium of exchange.

In recent times, where capitalist practices were missing or inadequately developed, as in communist countries or some Third World nations, local companies operated well below their potential. Even if the people labored for 12 hours or more a day, they could afford only a fraction of the goods and services that could be purchased by the same amount of work in the First World nations. Eventually these countries begin to ask, Why does it have to stay this way?

Monetary and credit innovations arose first in Europe and thereafter in the nations of the New World: People of all nations want to share in the blessings of capitalism, particularly those who have up to this point not been able to. However, the attraction of capitalism as a social model has already been dented by the first global economic crisis, beginning with the Wall Street Crash of and lasting until the outbreak of World War II in the democratic countries of the West: The financial crisis beginning in onward has exposed CH 31 January ; 9: The inner fragility of the system, exacerbated by the disastrous lack of conscience on the part of many of its actors, is now out in the open.

The formerly trusting saver and investor now observes that he can no longer depend upon either his bank or its recommendations. Those dependent upon credit in the economy, particularly small to medium-sized businesses, have learned how little they can rely upon their local banks for a continuous supply of credit at reasonable interest rates. The present crisis made clear that the financial sector itself was a serious defect and deficiency in the engine of the economy and social progress: However, this is nothing new. Banks have always done this.

They lend out money that they do not, in fact, have. Did this constitute progress in the money system, or transparent credit fraud? Even Jesus was tormented by this question. The practices of the money changers disturbed him. Why else would he have expelled them from the temple? Perhaps he had heard the story that Herodotus, the father of history, passed down to posterity, a mythical tale concerning the King of the Lydians, Midas, who lived in the seventh century before Christ. He was the richest ruler of his time, and was granted the wish that whatever he touched he transformed into gold.

Unfortunately this included the water in the glass from which he wanted to drink. Midas had discovered that from a limited supply of metal coins, one could produce many more coins if one drastically reduced the metal content of each coin. With this process he liberated the money supply from its arbitrary limitation by a dead substance available monetary raw materials and at the same CH 31 January ; 9: If the market needed funds, it could get them. Since the era of Midas no natural financial bottlenecks have slowed down the increasing prosperity in the free-market economy.

From that time on, the technical progress of money new forms of financing and money fraud the proliferation and devaluation of money have made their appearances as Siamese twins. But, despite the interest in currency stability, their separation has not occurred up to the present day. Inspite of the common community interest in currency stability, they have yet to be separated.

Just the opposite has happened: The more open and unregulated the economy, like the private household going from cash payments to loan payments to billing via bank accounts, credit cards, and bank cards, the more blurred the boundary between money progress and fraud. Even Midas could not prevent shrewd money dealers from transforming his coins—which could no longer be weighed, but just counted—into credit, for which interest was paid. The demand for the money increased his profits. Ever since the era of Midas, money itself has remained a public good, under all regimes, for no prince or state has wanted to CH 31 January ; 9: The same principle applies today for modern nation-states and the United States, which—despite its deficits—makes close to 70 percent of its dollar circulation available to the rest of the world as savings or nest eggs.

Whoever has the privilege of making money cashes in on the premium of being able to declare it as the legal tender—provided that this money continues to be accepted by the public. Since the rise of the modern credit economy, the state has ceded the same rights to the private banking sector. And the state through its central banks permitted this devaluation of its currency through credit proliferation to go on for far too long. Because the state has benefited from the increase in its standard of living through inflationary financing. The state has always been an accomplice to those offering credit.

It remains so today. Why slaughter the hen when it continues to lay golden eggs? Nevertheless, in the world economic crisis of the s, the first partial operation took place on the Siamese twins—if only at the national level. The German credit law of —, together with the banking police supervising the credit, worked on this CH 31 January ; 9: These became guidelines for similar regulations in Europe and the rest of the Western world.

This also holds true for the measures and regulations simultaneously introduced in the United States: Unfortunately, President Bill Clinton supported the repeal of this important antispeculation law in , preparing the way for the current financial crisis. President Barack Obama continues to push for resurrecting Glass-Steagall again fully, and not only partially, as has been the case to date. Since the International Monetary Fund IMF was stripped of power in spring , the financial markets are dominated by the pre-state Midas freedom of private money creation. No controller monitors or interferes with this banking idyll, or at least none did so until recently.

The banking world had created its own inexhaustible supply of money. Yes, even the real economy itself became dispensable as a secure client of credit and producer of profits. Money could be borrowed and investments settled outside of the actual world of savers, investors, and the use of state control—and all of this could bring in fabulous profits.

The financial sector had reached an entirely new stage of its development: It lived from and with itself.

Reward Yourself

It created its own world beyond the real one that it had served for so long and had once been dependent upon. Now the building of capital and capital fraud became identical. Midas had to guarantee a minimum of precious metal in his coins. The loan money from banks before the globalization era still contained a substantial residual factor of real capital, or savings.

To this extent it represented a transfer of purchasing power rather than the creation of purchasing power out of nothing. In this sense, the credit was inflation-neutral. This was not adequate for the new and globalized bank credit, which came from a double credit creation: Did the slowly but steadily growing world economy need so much new money, that is, credit? Was it possible to apply the incredible overproductivity of the deregulated global financial sector immediately to real sectors of the economy, accommodating the extent and growth of their gross domestic products GDPs?

Going into the crisis, Figure 1. Less than 2 percent of this amount would have been sufficient to satisfy the financial needs of the real world economy! And for what purpose was the other 98 percent needed? More CH 31 January ; 9: The sheer volume of these new derivatives at the end of amounted to 10 times the real world GPD, or, as Figure 1. The global financial industry does not need the real economy anymore.

It divorced itself from the real economy and made transactions with itself: Alone in the United States, the Holy Land of global financial capitalism, its value rose from 2 percent of the national GDP in the s to 8 percent in , just before the crisis. This financial sector has quadrupled in size in the past CH 31 January ; 9: The financial industry and its hangers-on, ranging from economists and experts to politicians and leading commentators from the media, praised the borderless and unrestrained expansion of the sector and its products which in reality dealt with the escalation of bank debts and credits without substance as proof of its strength and superiority: The growth was seen as a dynamic not as dynamite!

The state was granted oversight of the local neighborhood market, but not of the global financial market. It was assumed that the public should be protected from contaminated food but not from rotten credit and the effects of its unregulated growth on jobs and savings. The old reactionary schools of economics came to life to criticize excessive state deficits and liabilities. Furthermore, overextended credit was not perceived as a heavy future mortgage being levied on children and grandchildren—as if their education and training as well as a comfortable infrastructure would be self-financing, for any financing for their well-being from the tax system was vigorously rejected.

Leading social politicians and their advisors openly recommended that people invest in the global casino as a secure pension fund for their old age; unregulated funds were presented to be ostensibly as reliable and as profitable as the state social system based upon the law and development of income. The fact that profitability, particularly in pensions based on capital investments, is only another term for high risk was kept quiet.

Now everyone is aware of it. But which state is responsible for the rescue of global and stateless capitalism? Everyone is responsible for himself. It is unjust to pardon a notorious and long-since-transformed assassin of the general good of the people, their democratic rights and social welfare state, and their social not neoliberal market economy. For the private credit and financial industry is only fighting for the preservation of its age-old privilege: Questions concerning the risks arising from these transactions were countered by the unproven assertion that the collateral damage resulting from the bankruptcy of banks would be still higher: But this has to stop.

For only when the credit money of the banks is under the same credit regulations for limits, amounts, and quality control imposed on the state banks regulated by the central bank is there a chance to break through the devilish cycle of inflation and crisis, of money devaluation, of the wresting of wealth from the savers, and the loss of jobs. Only then can the market economy become calculable and immune to crises and freed from the immorality of moneylenders.

The present world financial crisis finally gives government leaders the chance to realize this vision. This brings us back to Black Tuesday and the Great Depression 80 years ago. At that time the first systematic bank regulator and control came into existence, simultaneously in the United States and Germany, both states having been heavily traumatized by the crash.

It prohibited investment banks, which were purely speculative banks and had no savings deposits to protect, from recourse to central bank money and aid. So-called investment banks then had to operate their speculative stock market and investment business at their own risk. Just in time for the current crisis, President Clinton signed legislation repealing this law in As a result, the U.

Deposit insurance was created for the banks that took savings deposits and managed them; this is still the backbone of the U. In Germany, the Kreditwesengesetz KWG , the Banking Act, came into force in and became a model for most countries in the world, including the present European Union. For three-quarters of a century the new systems met expectations. However, they could not prevent spectacular bank failures such CH 31 January ; 9: But there was no global economic breakdown such as the one that occurred after Even larger financial crises could be held within regional limits and controlled—as when the first oil shock broke out in Latin America, or smoldering fires were put out in the old protectorates of the Soviet Union after its collapse.

Despite the escalation of credit and debt, the Western system of financial capitalism seemed to be more reliable in its operation than ever. This picture changed dramatically overnight. From Washington to London, to Brussels, to Paris, to Tokyo, to Beijing, and to Berlin, the governments of the large industrial and trading states, the socalled G-8, no longer discounted the unthinkable. The global financial system suddenly faced its greatest threat; its meltdown could lead to a dangerous chain reaction of bankrupt firms of which there are plenty , with socially explosive mass layoffs and black holes in the accounts of the social systems and state budgets as a consequence.

Therefore, the financial system had to be helped, even if it cost a lot of money. Experts feared that further incalculable sums could follow. One does not know what is more frightening: The amounts already constituted the largest public financing in peacetime. The rationale given to the people for this, the most adventurous action ever undertaken by democratically elected governments, would result in the creation of government debts of such vast sums that they could lead to the destruction of state credits, and to the printing of money in amounts that threatened to lead to hyperinflation after the crisis was resolved.

The CH 31 January ; 9: The financial world still assumes that no state can afford to allow its largest financial firms to fail. Nations are learning in this crisis something they did not realize from the previous one—that single actors who are too big, powerful, and influential can extort them and show little reluctance to do so.

Only by keeping these financial dinosaurs from failing can a society avoid becoming their prey. Thus we must consider why the control and warning systems erected since have failed us so miserably.

Finance After Armageddon (Wiley Global Finance Executive Select) Finance After Armageddon (Wiley Global Finance Executive Select)
Finance After Armageddon (Wiley Global Finance Executive Select) Finance After Armageddon (Wiley Global Finance Executive Select)
Finance After Armageddon (Wiley Global Finance Executive Select) Finance After Armageddon (Wiley Global Finance Executive Select)
Finance After Armageddon (Wiley Global Finance Executive Select) Finance After Armageddon (Wiley Global Finance Executive Select)
Finance After Armageddon (Wiley Global Finance Executive Select) Finance After Armageddon (Wiley Global Finance Executive Select)
Finance After Armageddon (Wiley Global Finance Executive Select) Finance After Armageddon (Wiley Global Finance Executive Select)

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