The unravelling that started with the Freddie and Fannie conservatorship has exacted a toll not just on dollar-denominated paper but on financial assets around the world. As they have fallen, so too has the standing of the US, which zealously promoted liberalized capital markets and saw US firms establish dominant positions when those rules were adopted.
America already had few friends thanks to our prosecution of the war in Iraq, and our reputataion is testing new lows. From the Telegraph:
In a remarkable outburst at the German parliament, Mr Steinbrück said the world would never be the same after “Black September”. He demanded a sweeping code of regulations to “civilise the financial markets” and clamp down on speculators.
Mr Steinbrück announced a swingeing eight-point plan to reorder the global markets – which will heighten fears in the City of London of interference by the European Commission.
“The US will lose its superpower status in the global financial system,” he said, predicting a new multi-polar order where power is spread across the globe.
“The financial crisis is above all an American problem. The other G7 financial ministers in continental Europe share this opinion,” he said, a pointed turn of phrase that excludes Britain’s Alistair Darling.
“This inadequately regulated system is now collapsing, with far-reaching consequences for the US financial market and contagion effects for the rest of the world,” he said….
Senior politicians in France and Germany have in recent weeks called for a radical shake-up of the market system. A powerful EU faction that has always been hostile to the City of London – which is known in Brussels as “the casino” – see this crisis as a rare chance to ram through irreversible changes.
“They want to regulate the capital levels of every firm and partnership, limit takeovers and regulate asset stripping. In short, they want to regulate the Anglo-Saxon version of capitalism out of existence,” said John Whittacker, MEP and UKIP’s economic spokesman.
Mr Steinbrück said the deft response of the world leaders in recent days had averted catastrophe. “Crisis management worked. We did not have a collapse of the international financial system,” he said.
Mr Steinbrück said the drive for short-term profit and huge bonuses in the Anglo-Saxon world was the root cause of the gravest crisis in decades. “Investment bankers and politicians in New York, Washington and London were not willing to give these up,” he said.
Update 3:45 AM: More on the same speech from the Financial Times:
He later told journalists: “When we look back 10 years from now, we will see 2008 as a fundamental rupture. I am not saying the dollar will lose its reserve currency status, but it will become relative.”
The minister, who has spearheaded German efforts to rein in financial markets in the past two years, attacked the US government for opposing stricter regulations even after the subprime crisis had broken out last summer.
The US notion that markets should remain as free as possible from regulatory shackles “was as simplistic as it was dangerous”, he said…..
The US, Mr Steinbrück said, had failed in its oversight of investment banks, adding that the crisis was an indictment of the US two-tier banking system and its “weak, divided financial oversight”.
He blamed Washington for refusing to consider proposals Berlin had made as it chaired the Group of Eight industrial nations last year. These proposals, he said, “elicited mockery at best or were seen as a typical example of Germans’ penchant for over-regulation”….
Mr Steinbrück’s proposals include a ban on “purely speculative short selling”; a crackdown on variable pay for bank managers, which had encouraged reckless risk-taking; a ban on banks securitising more than 80 per cent of the debt they hold; international standards making bank managers personally responsible for the consequences of their trades; and increased co-operation between European super visors.
35 comments
Comments are closed.
Need to lighten the mood a bit. I will tell the German minister to hit the highway:
Würden Sie bitte oben schließen?
http://www.youtube.com/watch?v=GZXAKmFPONU
The German is saying what most others are thinking. As usual the messenger will be punished.
Those that need some time in the gray bar hotel will probably go unpunished.
River
Shhhh They also won’t have the worlds reserve currency much longer. Then the fun really starts.
The world will try to cast the US adrift. Could hardly blame them. Oh wait! The US$ is world’s reserve currency where such things as oil is settled in. The prop job only lasts a short time then you deflate or devalue. When they figure out their dollar holdings are worth …say 50 or 60 cents on the dollar then you will hear what they really think of the US.
If a Christian evangelist gloated over a tragedy like 9/11 or Hurricane Katrina, rubbing his hands and anticipating greater church attendance or people turning to religion, many would find it quite off-putting or even offensive. Yet bureaucrats who see in a financial crisis nothing but a golden opportunity to advance their own left-wing ideological agenda apparently do not encounter the same scorn.
They may be right about the US ceasing to be a financial superpower at some point; they are certainly comically wrong if they imagine the new world financial capital will be Brussels rather than Shanghai or Dubai, or if they imagine themselves in the position of dictating the new world order.
Same kind of pattern in Sarkozy speach yesterday.
His neo-con Bush-supporting propaganda has suddenly changed for de-Gaulle-esque attitude.
It was about time:)
Sauve qui peut
Heyyyy, we now have a _name_ for this episode. ‘Black September’ is already taken, but I guess it will have to do. Zombies Do Lunch isn’t going to go over as well.
” . . . [F]ears in the City of London of interference by the European Commission . . . .” *Hah* When this is all over, the City will have one of two choices: go on their belly to the ECB for a re-structure, or try to swim to New York. Couldn’t happen to a more arrogant bunch.
The US is rapidly losing what control it had of how this deleveraging would proceed, structurally or politically. This will become the major story of DeLev 09, but is only incipient now while we have the Punch and Judy Elecion Show here at home.
The German Minister’s rant is clear evidence that this crisis will fast-forward most western countries towards full-fledged socialism. As usual, all problems will be blamed on the (non-existing) free market. And as the socialism progresses and creates more misery and decline, new grand plans will be created, new “helpful” regulations will be enacted. All futile and/or counterproductive.
The trouble is that the man is basically right. There is no going back to the status before all this happened. Rather, everything has to be done to prevent crap like this from ever happening again.
And what’s even sadder is that those who are afraid that the “Anglo-Saxon version of capitalism” is now an endangered species, and that this is not a good thing, are also right. The stupidity and greed of comparatively few has lethally undermined a system that was never quite as bad as it looks at the moment.
As an European, I’d also like to add that while Steinbrück is technically a member of the German socialist party, this does not mean that he is any sort of actual, rabid socialist. The SPD is far too pragmatic w/r to keeping the German economy ticking, than to try anything rash. A lot of the top-level SPD brass (such as Steinbrück himself) have worked for banks or large companies in leading positions, and are just somewhat more worker-oriented in their positions than the “conservative” CSU/CDU. Any differences between these parties are not particularly large these days, though.
Upshot: if someone like him goes on the public record in saying that he believes the US to be finished as the dominant financial power on the planet, then this is not the view of a lone extremist. It’s a leading functionary of one of the world’s most efficient economies voicing what in all probability amounts to a consensus of his government. You, as readers of this blog, can’t say that you didn’t see this moment coming, though…
They may be right about the US ceasing to be a financial superpower at some point; they are certainly comically wrong if they imagine the new world financial capital will be Brussels rather than Shanghai or Dubai
Didn’t you read in the article – they say the financial power will be spread evenly around the world.
It’s still a $14 trillion dollar economy that dwarfs all of theirs. To paraphrase Mark Twain, the news of our death may be a bit premature.
The remarks of the german minister are inappropriate to say the least. First of all, this smells like Schadenfreude, that they are deep down in their hearts oh so glad that this happens to the US. Instead they should be working with the US in order to find a solution for the problem. Secondly, he shamelessly promotes his own ideological agenda. And you better hide when these idiots get their way. They only stand for higher unemployment, more burocracy and so on.
I say we send Palin over there for a little chat, before the debate is canceled!
Paulson was the leader on Wall St when all of this toxic sludge was issued.
Now he is the leader of the treasury. There is absolutely no doubt: he stole trillions from America and the world on the way up, and now he is stealing the rest on the way down.
If you explained the financial crisis to an eight year old, what is the first thing he would ask? Why is Paulson, the head of Wall Street, in charge of the treasury? Of the 6 billion people on the earth, he is the absolute worst choice.
This is pure and simple insanity.
“First of all, this smells like Schadenfreude, that they are deep down in their hearts oh so glad that this happens to the US.”
No. If your neighbour’s house is burning down, there is no time for Schadenfreude, because you are too busy to protect your own home. If you read the whole thing, you’ll find no such remarks. The credit crunch means tough times for everybody, especially an economy so dependent on exports as Germany.
What most people don’t get: Europe’s system doesn’t “stand for unemployment”. But it doesn’t stand for growth at all costs, as well. The last 10 to 15 years have been troublesome, because European companies had to compete with companies with lots of easy money. Have a look what some companies and hedge funds have done just to achieve more leverage and absurd returns on capital.
Now the tide is turning, because debt is dragging these institutions into the abyss. This is what Steinbrueck said. The US will lose its status as the only financial superpower that is able to dominate the markets by sheer size due to leverage. That’s not Schadenfreude.
I agree with Mark Twain, but we do seem to be in quite a pickle, don’t we?
:-)
Mike
I’m an American and let me say, this country is trash. The average American is unbelievably stupid. What’s amazing is the Germans don’t own every useful country in America yet.
country=company
Steinbruck (a socialist) calls this free market capitalism failure. Our dear Hugo Chavez brands Bush socialist and offers his camaraderie.
It is time to re-evaluate who the enemies and friends are in the white house…
damn, by some of the comments on this thread i can see the German minister really touched some sore soft spot somewhere….
“It’s still a $14 trillion dollar economy that dwarfs all of theirs” – hmmm, the economy built on what? built on consumption which is built on greater and greater individual debt?
Baychev said: “Steinbruck (a socialist) calls this free market capitalism failure.”
Don’t be confused by different meanings of words in different countries. Steinbrueck is not a socialist. Social Democrats in Germany are more like the Democratic Party in the US. In his party Steinbrueck is considered to be conservative and pro-business. It were these “German Socialists” who put an end to many protective messures in social security. They are under heavy fire for that.
There is no comparison to Chavez.
So Gregor/Germany, I much agree with you. The performance of the EU looks worse than it is because they have had to compete with a ‘huge’ US which has been floating vapor credit for itself to make up for its inability to compete straight across. This has been going on for thirty years. America has ‘met’ foreign competition by printing itself credit. This was much of the problem with the launch of the euro, for example; faux ‘growth’ in the US skewed exchange considerations. Now, that is ending. _This_ is what Steinbreuk’s point really is: the ability of the US to unilaterally skew currency rates is over.
But Steinbreuk is wrong about an impending ‘non-polar’ financial space. The system _will_ reconstitute a ‘principal’ currency; that is an inherent function of exchanges. The system MUST have centrality for arbitrage, or everyone gets wiped out periodically by swings. The euro will probably be the one; yes, regulations and other issues will have to be re-jiggered there, but that can be done. That is my view, anyway.
Did anyone translate that comment which was posted in Chinese a couple of days ago? Was there anything interesting in it, in anyone’s view? Or was it just a piece of history about the opium wars and “paper tickets,” and the attitudes of different Chinese Imperial governments to the combination of western fiat money and military power. I’ve found this question still runs very deep. Does it reflect in anyway on Brad Setser’s views about borrowing from them to pay interest on what we have borrowed from them?
It is quite tragic to read all the scapegoating and blamegaming.
All countries in the world has accepted the Fractional Reserve Banking system, i.e. a system where banks are allowed to lend way more capital than they have deposited.
This system is in itself to be regarded as fraudulus, since it should not be allowed to create money out of thin air. If all outstanding loans are backed by a physical asset, such as gold, then there would be no risk of creating a credit crisis. Furthermore, people would trust that their deposits in the banks are protected. The banking system would be solid.
But since we do NOT have a stable foundation for our financial system today, then crises can be expected to be naturally occurring and given time the system can be expected to collapse when the public’s trust in the system diminishes. We are very near that point now.
The tragedy is that governments, authorities and columnists have overlooked the basics and are concentrating on treating the symptoms instead of attacking the disease itself. Throwing more good money for bad and regulating an already flawed system is not going to heal the patient. More regulation will only make matters worse. A free market should be left alone to promote good business and punish bad business.
Governments should do two things. Instead of regulation, they should aim for a strong legislation to protect individuals from fraud and other types of assaults on individual rights. And they ought to outlaw fractional reserve banking and reinstate a solid gold standard.
/Liber
Roubini says Deutsche Bank leverage is 50x versus average US bank at 20x. Even if DB has a big investment banking division pushing up its ratio 50x is greater than the Wall Street IBs (past and present). Perhaps DB is just much better managed? Less bloated exec salaries? much safer mortgage lending without put options?
Those who critize you openly are not your enemies- but those who smile at your face and then turn around and stab you in the back.
When the Germans purchased Chrysler they had to pull an Israeli in to save the mess they had made of it.
When the Germans bought the Wasserstein Bank they needed help with that even though it had always made money when it was US owned.
Yeah Fannie, Freddie, the community reinvestment act, and artificially low rates set by the fed are all free market failures.
Give me a break.
You really want more government intervention? You really want to give the Barney Frank’s of the world more control over the economy?
George W. Bush Administration Proposed Changes of 2003
In 2003, the Bush Administration recommended what the NY Times called “the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.” [7] This change was to move governmental supervision of two of the primary agents guaranteeing subprime loans, Fannie Mae and Freddie Mac under a new agency created within the Department of the Treasury. However, it did not alter the implicit guarantee that Washington will bail the companies out if they run into financial difficulty; that perception enabled them to issue debt at significantly lower rates than their competitors. The changes were generally opposed along Party lines and eventually failed to happen. Representative Barney Frank (D-MA) claimed of the thrifts “These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis, the more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.“Representative Mel Watt (D-NC) added “I don’t see much other than a shell game going on here, moving something from one agency to another and in the process weakening the bargaining power of poorer families and their ability to get affordable housing.”
Anon of various posts starting at 2:02 — You may be right about socialism and its “horrors” but please try to grasp for better analogies than evangelists and 9/11. Unless there really is a vengeful Christian God, 9/11 did not happen because of the heathens. But it is quite possible that this financial meltdown happened because of market failure. You have heard of market failure, haven’t you? Or is that just a myth intended to forestall the inevitability of anarcho-capitalism that will be so much better for all of us? I certainly smell something comically wrong here, but I’m not sure it’s the rest of the world.
“If a Christian evangelist gloated over a tragedy like 9/11 or Hurricane Katrina, rubbing his hands and anticipating greater church attendance or people turning to religion, many would find it quite off-putting or even offensive. Yet bureaucrats who see in a financial crisis nothing but a golden opportunity to advance their own left-wing ideological agenda apparently do not encounter the same scorn.”
Has it ever occurred to you that this German gentleman MAY have a point? I mean a real argument, based on certain FACTS?
On this blog, It won’t cut the mustard to agitate the bogeyman of “socialism” as if it was some poltergeist raping children and snatching pregnant mothers at night to maim them.
As Yves wrote a while ago, curing the excesses of capitalism go wrong may require a stiff dose of socialism.
Of course, all of this could be avoided if more people took the time to THINK, instead of parroting gut-hormone-level pseudo-beliefs that flatters the ego but denies reality.
Enough already!
“francois said..
Of course, all of this could be avoided if more people took the time to THINK, instead of parroting gut-hormone-level pseudo-beliefs that flatters the ego but denies reality.Enough already!”
Sigh, my friend, most readers are traveling the Kübler-Ross grief cycle, aka the 7 stages of grieving over losing something very cherished. Nothing we write or say will move them to another stage; they’ll do so of their own accord. The German’s harsh truths revealed where readers are as follows:
Shock stage: Initial paralysis at hearing the bad news.
Denial stage: Trying to avoid the inevitable.
Anger stage: Frustrated outpouring of bottled-up emotion.
Bargaining stage: Seeking in vain for a way out.
Depression stage: Final realization of the inevitable.
Testing stage: Seeking realistic solutions.
Acceptance stage: Finally finding the way forward.
Has it ever occurred to you that this German gentleman MAY have a point?
He has several points, namely:
“The US will lose its superpower status in the global financial system” — correct, alas
“A new multi-polar order where power is spread across the globe” — I guess he, for one, welcomes our new sovereign wealth fund overlords.
“Mr Steinbrück announced a swingeing eight-point plan to reorder the global markets” — The Chinese and Arabs are polite, they will at least wait for his lips to stop moving before politely ignoring him. Vladimir Vladimirovich Putin, on the other hand, will interrupt and tell him in fluent German exactly how tightly to roll up his eight-point plan and which orifice to insert it in.
Sooner than you think there will be a certain Ostnostalgie for the kinder gentler era that has now come to an end.
The German comments are only rational. They followed the “Anglo-Saxon” business model, and look at the disaster it has ended in. Why should they continue to follow us?
The tone of Mr. Steinbrück’s comments leads me to believe that Germany is headed into a deep recession, and its debt situation is about to get much worse. The article in the Telegraph says that Germany has has a public debt of 65% of GDP, the highest level within the elite group of AAA-rated nations. (For the U.S., it is 57%). If we see a downgrade in Germany’s debt, will he blame America for that too?
As an American I oppose the language of “my way or the highway” and “America right or wrong.”
We must work for peace and say “No” to wars.