When Will the Crisis Be Over?

Media, politicians and bankers now together form the more euphoric element of assessing the state of the global economy: “green shoots”, “the worst is over”, “the crisis is bottoming out”, “our profits are again at record level” – are among the recent publicly voiced messages. The motives are different: media are sick and tired of the “perennial crisis talk” and want something new and optimistic, politicians aim to generate a positive mood among consumers, investors and entrepreneurs, hoping for the German soccer championship effect of 2006, and bankers – awash with cheap money from taxpayers and national banks trade in government bonds, corporate bonds, raw materials, carbon certificates, etc. and “earn” their obscene bonuses not in their traditional field of lending to the real economy, but once more in fees and speculative activities.

At the same time commercial banks struggle to put together their balance sheets, moaning under an ever growing burden of non-performing loans and worthless collateral; unemployment rates go up after short-term work subsidy schemes are expiring and one-off effects like automobile scrappage schemes run their course, poverty rates go up everywhere, non-financial enterprises complain about scarce and very expensive loan conditions, and public budget deficits explode, while global imbalances, though smaller because of the crisis effects, still continue unchecked. Countries with large financial sectors (especially UK and US, Ireland and Iceland) suffer especially high deficits which will burden their citizens for decades to come. Talk about “too big to fail” never to happen again, is being perverted, since the demise of a number of financial institutions has left the remaining ones larger and with less competition. The same is true of e.g. steel companies, car companies, etc. The crisis has left fewer competitors. Warnings about “moral hazard” following the bailing-out of banks and other enterprises is widely ignored: the “Lehman shock” seems to have convinced governments that no financial firm must fail again – giving the remaining ones the assurance that no matter how much risk they pile up, how much leverage they take, how opaque the financial products they invent – they will be bailed out. Is this the basis for well-founded optimism?

While the financial packages and national bank instruments were valiant attempts to overcome the crisis – and arguably have prevented a meltdown of the global economy, they have sown the seeds of the next crisis. Governments have re-capitalized banks with sums hitherto unknown, they have provided liquidity to jumpstart the interbank markets – but all these efforts have failed to unlock credit flows. Banks are trying to meet stiffer equity requirements, rebuilding their balance sheets and deleveraging – but not lending. Not even banks which were taken over by governments continue to lend: taxpayers have poured money into the wide end of a funnel – where it is used for banks’ own purposes (including large salary payouts), but not to the benefit of the economy: it just trickles from the narrow end. Governments are loath to “interfere with bank business”, hoping that lavishing money on banks would increase credit flows, but that hope proves unfulfilled.

What could have been done? Certainly a more direct interference into the businesses of the banks which were supplied taxpayer money could have led banks to increase their lending. Fully nationalized banks, or existing banks in government ownership – or lacking also those – the creation of new lending banks could have put the public good “keeping the credit flow up” into reality. (The Russian prime minister recently announced such as scheme using the Postbank). It is clear that existing private banks would not have liked this – and would have started public relations campaigns against “heavy-handed government intervention”, but recovery of the real economy would have been faster and more persistent. Other, less direct, methods would have been stronger regulations – but their effectiveness is doubtful, since they have to rely on banks’ own information willingness. A strong “moral suasion” approach, where the major bankers are called together by the prime minister and exhorted to follow not only their narrow business interests, but also fulfil their role as providers of capital, could have resulted in “supervised self-control and self-commitment” whereby banks commit to certain credit flow targets (and other objectives) and are monitored for compliance by the supervisory authorities. With strong participation by and information of the public this might have worked.

The well-documented “collusion” between the financial sector and the political realm – which is responsible for deregulation of finance during the previous decade – poses the question, whether the crisis has maintained or loosened this band. There are signs in both directions: the strong stance of the UK government against European hedgefund regulation and a more centralized European supervisory authority shows that these ties still exist. On the other hand, recent UK legislation taxing bonus payments, followed by France, or the refusal of the US authorities to let Citibank shed government influence by paying back governments funds, show that a more arms-length relationship exists. But on balance, so far two years of deep crisis have not (yet?) resulted in a deeper understanding that the previous financial sector model needs radical changes, if a next, even more severe crisis is to be prevented.

The recent downgrading of Greece and Spain, the “unholy Euro-PIGS group (Portugal, Ireland, Greece, Spain)”, the near-collapse of Iceland, the pressure which the double-digit deficits of the US and the UK and many smaller countries exert on bond markets, the recent events around Bayrische Landesbank, Hypo Group Alpe-Adria and others, the near-default of Dubai – all these show that the crisis is far from over. While there are clear signs that the situation has stabilized for the time being, many risks are still around: many European banks have not yet written off all their bad loans (or rolled them over), many enterprises have lost their markets, especially in exports. The fall in GDP has created sustained welfare losses for many citizens and the need to consolidate exorbitant budget deficits will lead to significant reductions in future public investments, both in material infrastructure, and – more importantly – in immaterial infrastructure, such as education, health systems, innovation.

It is high time that our elected politicians tell their citizens how grave the situation is. The incoming New Year is an excellent opportunity. Building on such a common understanding of the situation, they need to draw up visions of how to marry long-term fiscal rectitude with unrelenting investment into our societies’ future. The current discussions about the necessary investments into climate change prevention, both at home and abroad, show that we have additional factors towards which policy must be directed. The until now unsolved problems of ageing societies, both in terms of pensions, long-term care, but also lower productivity also need to be addressed urgently. It is necessary to devise a future-oriented innovation policy, and investment policy, an environmental policy, a social policy. We all, as citizens, will have to bear the costs, not only financially with higher taxes and reduced public services, but also with behavioural changes: 0ur primarily growth-oriented lifestyle has proven not to be sustainable. Politicians will not win standing ovations for leading this challenge. Especially confronted with simplifying demagogues they will need to show leadership and substance. Solutions need to be developed by inclusive processes, involving large parts of the population. The citizens understand how serious the situation is. They want to contribute and are willing to sacrifice, if they assess that this is necessary and that burden-sharing is fair. It does not need to be a “blood, tears and sweat” speech like Churchills, it does not need to be a “I cannot give you window-glass” speech like the Austrian Chancellor Figl’s at Christmas 1945- but we need blunt and honest assessments of the gravity of the situation and the need to pull all forces of society together, both nationally and internationally, to master the deepest economic, social and political crisis since the second world war.