Democracy in Danger – Has Anybody Learned Anything?

by Thorben Albrecht 

Yet again banks have to be rescued because financial markets have gone wild. And because still no effective rules and regulations have been introduced to make banks pay for the high risks they are taking. It feels like “Groundhog Day”: Everything starts all over again, nobody seems to remember anything. Has anybody learned anything?

After the 2008 banking crash at least citizens – especially as tax payers – learned the hard way and paid dearly. But governments throughout Europe and the G20 have hesitated and faltered when it came to effectively regulating financial markets.

What needs to be done has been known for long enough: The idea of a financial transaction tax was introduced by James Tobin in 1971 and is widely supported today. Its revenue could be used to stimulate growth in economies with huge public debt but more importantly the tax would slow down financial markets at least to a degree.

There is a simple but fundamental aim of financial market regulation: Financial markets should be servants to the economy and no longer masters of the universe. We need them to finance real economic activities and loans for citizens. No less but no more either. Financial products for other purposes should not be accepted.

The question is, whether financial markets rule over our economies and societies – or whether economies serve our societies and use financial markets as an effective instrument to fulfil this task. Over the last years growing return on investment has been the benchmark for nearly everything. Not even growing added value but value and gain from financial transactions; not to talk about the well-being of people and decent work for all, but income of the super-rich and bonuses in the City and in Frankfurt. Former German chancellor Helmut Schmidt called it “predator-capitalism”.

Faith in the rationality and effectiveness of free markets has been fundamentally undermined, but also trust in politics is damaged. Thus fighting the crisis is about no less than defending and strengthening democracy against a form of unleashed capitalism that seems to be absolute and penetrates all areas of society. This predator-capitalism “creates a world after its own image” as Marx and Engels put it in their “Communist Manifesto” as early as 163 years ago.

The results do not only include the crises of financial markets, of the economy and the environment – but also growing inequality, worsening working conditions and finally a crisis of democracy.

We urgently need a new blueprint for our world. One that is not derived from a predator-logic, but from ideas of a Good Society. We need new benchmarks: The quality of life of all citizens. Sound economic growth and social justice belong together in this new blueprint – one without the other is impossible.

Revenues from savings and assets must follow sustainable and realistic economic growth-rates. And banks should no longer promise otherwise. Banks need a new business culture admitting that the time of expecting quick big money is over.

A good approach would be the separation of retail banking and investment banking in European banks. The distinction might not always be easy to make, especially if we want to make sure that loans for small and medium size enterprises are not endangered. But it is not impossible. The Independent Commission on Banking in the UK addresses these problems and still comes to the conclusion that retail ring-fencing is possible. And this commission is by no way a left-wing think tank.

More and more people – including those inside the financial sector – start to understand that greed is not the best advisor. But for several banks that finding comes too late as they are already in limbo – again. Citizens are not willing, though, to rescue banks again and again if this only includes restoring high-risk investment banks and if it does not include strict new rules and regulations, especially for those banks that need public money. Euro area member states that need financial assistance have to fulfil tough conditions. Why shouldn’t banks that need recapitalisation also face tougher conditions?

And is it impossible for the banking sector to set up emergency-funds itself? In Germany an approach was made, but the government – to go easy on the banks – set the contributions so low and slow that the fund would be up to a reasonable level only in 80 years. But we are currently experiencing Groundhog Day after only three years.

We have to exclude mere investment banking from recapitalisation and we need strong regulation of financial products. We have to develop sound financial markets serving the real economy and not speculation. And we have to do all of this quickly – or our groundhog will be knocking on our door again tomorrow asking for taxpayer’s money.

Thorben Albrecht is Head of the Strategy and Policy Department in the Willy-Brandt-Haus, the SPD party headquarter in Berlin.

Thorben Albrecht writes in a personal capacity

Social Europe Journal