Next financial crisis just a matter of time

Next financial crisis just a matter of time

US Treasury Secretary Tim Geithner’s rejection of the European request for regulation of bank executives’ bonuses has given rise to various interpretations: some cite President Barack Obama’s need to avoid more confrontations with the American right wing, others point to the influence of the historical bond between the US and the UK, the only European country to defend financial corporations.
The reality is more dire and lies in the primacy of financial capital over productive capital since the fall of the Berlin Wall.

The winning side assumed not only that the rival political system had collapsed but also that capitalism was the only system possible and proceeded to strip it of all existing controls and regulations.

There thus emerged a capitalism that was finally ‘free’, and at the same time self-destructive. While in the 1960s the financial sector comprised just over three per cent of the US GDP, by the mid 2000s this figure had more than doubled to eight per cent. The protagonists of the current economic world, with the exception of Bill Gates, come from the word of finance, from Warren Buffett and George Soros to Bernard Madoff.

In the past they were industrial giants like Rockefeller, Ford, or Hilton, none of these whom would have dreamed of receiving a bonus of 500 million dollars like that the president of Blackwater investment group awarded himself in the middle of the financial crisis.

Bank lobby

With few exceptions, both the political and technical ranks of the government come from the world of finance. Geithner was President of the New York Federal Reserve Bank. Lawrence Summers, Obama’s chief economic advisor, is a protegee of Robert Rubin, the treasury secretary under President Bill Clinton who was the master of the defenders of the free market. It is no coincidence that many of the economic leaders of Europe, like the central bank governor of Italy or France’s economic minister, come from American banks.

At the beginning of this recession, which has increased the number of poor in the world  and raised unemployment to eight per cent globally, many saw it as a crisis that would cleanse the system. As Rahm Emanuel, Obama’s chief of staff, said, “Never allow a crisis to go to waste”.

There was talk of another Bretton Woods, the 1944 conference that created the current economic architecture. Last March Geithner requested that the government be allowed to take control of ailing institutions, like Lehman Brothers, to prevent their collapse from infecting the financial system. Nothing has been done thus far.
The theme of the government’s role in controlling financial abuses, central to the administration of Franklin Delano Roosevelt, president during the Great Depression of the 1930s, does not appear on Obama’s agenda. How else could it be when a significant number of the American people think that Obama was born in Kenya, not Hawaii, that he is a communist, and that he wants to Europeanise the US with his healthcare reform plan, which may involve state intervention to extend health insurance to the 40 million Americans now without it.

But would a radical reform of the financial system have been possible? In recent years, the US has changed its beliefs and tendencies so profoundly that the idea of another Bretton Woods is more dream than reality.

The truth is that Bretton Woods was driven by the idea that the Great Depression was the midwife of nazi-fascism, since Adolph Hitler and Benito Mussolini were brought to power in the social and economic crisis caused by uncontrolled speculation, which culminated in World War II.

Keynes famously likened financial speculation to gambling: “When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done”.

Roosevelt was equally clear: “There must be strict supervision of all banking and credits and investments. There must be an end to speculation with other people’s money”. In his first inaugural speech he had denounced “the practices of the unscrupulous money changers” who “stand indicted in the court of public opinion, rejected by the hearts and minds of men”.

Today would such Biblical language and a true reform of private financial institutions be possible? According to the latest figures, the latter have received 75 per cent of the resources dedicated by governments for financial recovery. If nothing fundamental changes, how long will it be before the next crisis?

The thunderous condemnations of bankers for their irresponsibility — Obama as well- mean little or nothing even if made in good faith. The fact is that the measures taken or planned by governments and central banks at the national and international level are far from constituting the profound and systematic reform that is so necessary.