Capitalism in Crisis The Broken Pact with the People

Part 2: The Crocodiles Below the Surface


Nevertheless, doubts started to creep in over the fairness of the deal’s implementation. Real wages stagnated while investment income and corporate profits soared. At the same time, the gap between rich and poor continued to grow, causing the middle class to shrink.

The gamblers have eroded confidence in both capitalism and democracy.
REUTERS

The gamblers have eroded confidence in both capitalism and democracy.

People were increasingly outraged over the injustice of the situation when a number of managers negotiated golden handshakes worth millions, despite weak performances. The head of Deutsche Post, Klaus Zumwinkel, will have to face criminal charges for allegedly depositing money in a Liechtenstein foundation to evade taxes in Germany.

In the German press, the word "American" became shorthand for greed. Many managers demanded “American” salaries of over $10 million (€7.25 million) a year. They targeted “American” earnings for their companies. Ackermann aimed for profits of 25 percent. German savers were recommended to take an “American” approach to their investments. Saving accounts and government bonds were passé and investing and gambling with stocks was all the rage because it held out the promise of higher returns.

German business practices were frowned upon as conservative and narrow-minded. Sexy investments required a no-holds-barred attitude and a willingness to play the markets and take risks. Let’s be like Americans -- that was the guiding principle for German banks and top company executives. They gleefully played along with what was done on the other side of the Atlantic. Not surprisingly, they also purchased those wonderful securities that had something to do with American homeowners and promised such rewarding returns.

A Gigantic Bubble

German bankers became gamblers. They joined the investment game that had begun in America. They bought securities that had long since lost any connection to economic realities. They flourished in their own world, a virtual world of numbers that continuously grew and created a gigantic bubble.

The players in the game lost touch with reality. Many Americans wanted to own homes, although they couldn’t afford them. When these people received loans, it was a dodgy business. That is actually not difficult to understand, but it failed to sound the warning bells for gamblers who were out to make huge profits out of those risks.

That’s one side of the greed. The other side is the desire to break new ground regardless of the consequences.

A caller to a Berlin radio station recently ranted about “29-year-old banking snobs.” This immediately calls to mind a certain image: well-dressed people with perfectly styled hair who are intelligent and eager to change the world. But there was so much out there already, all kinds of derivatives and securitizations -- those products that have a direct connection with the real world were, by definition, invented long ago.

Anything new had to be even further away from reality. But it wasn't difficult for those eager new bankers to come up with something new once they set their minds to it -- and soon the world had another product that nobody needs and hardly anyone understands. It was a product that was floated on the market for the sole reason that it was there -- and, of course, because it promised to generate wealth. That is how a brave new world is created.

What followed, though, was a horror scenario of a globalization process taking place on two levels. There is a real level that consists of a greater exchange of goods which comes along with a more intense competition for jobs, prosperity and the rights to use the world’s resources. This may seem frightening enough for the individual, although it may be unavoidable and legitimate.

Clandestine Masters of Globalization

But the other level is truly uncanny. This is the lake with the crocodiles. You can’t see a thing; the surface of the lake is smooth. But a lot is happening down in the murky water. The banking snobs have surreptitiously spun their web; they have used sales in countries around the globe to forge links -- silently, uncontrolled, electronically. They are the clandestine masters of globalization. They have created another world, a secret one.

It is not until this world collapses that we notice its existence. By then, of course, it’s too late. Since everything is interconnected, the catastrophe immediately takes on global proportions.

At least some of the banking snobs are brought down by the calamity. There are pictures of them walking out of their office skyscrapers with boxes in their arms. But the bankers who manage to remain quickly adjust. They have learned to be flexible, and what was true yesterday is simply no longer true today. They require protection, they need help from the government and, of course, they have no qualms about asking for it.

A number of German bank managers are outraged that the German government has not immediately launched an initiative to save them all. They have never been modest, so why start now? They of course know that there is an enormous fear of a huge crash. So they brazenly dance on the limb that they themselves have started to saw. And naturally they have no problems with the fact that Depfa, a bank that moved to Ireland to lower its tax bill, should now be saved with German tax money.

Now the greatest skeptics of government intervention will receive state aid, which is probably even a wise move because nobody knows what would happen if a large German investment house were to collapse. Buy why is there no humility, no modesty, no apology for all these monstrosities?

And how does your average German worker feel about all this? What should someone think who has lived on a modest income over the past five years and has been unable to shake off his fear of unemployment? He has kept his side of the 2003 deal; he didn't really have a choice. A low income amid rapidly rising energy prices, a life on the edge of Hartz IV, a real hard life.

The End of the Deal

But now the virtual world is flowing into the real one and the crocodiles are crawling onto land. A recession is looming. It could be that the banking snobs have gambled away this man's job. That is tantamount to a deal breaker for an agreement that was already fairly shaky. It would spell the end of the deal of 2003.

What would be the consequences?

This man will never become a friend of globalization. It will remain a total mystery to him, a dark force. Now he won’t want to help shape globalization.

Nor will he agree to a new deal. Why should he? He has lost his faith in the system. But there will have to be another deal because the next recession will throw the budget into turmoil again and increase the cost of providing social services. If there is an attempt at a new deal, he will take to the streets and demonstrate.

It was hard enough pushing through Agenda 2010. But the current crisis is making Germany virtually unreformable. Now nobody will follow politicians who say that you have to do good things for the economy so that everyone benefits. People will laugh out loud should anyone say that freedom leads to the best results.

It is no coincidence that gamblers have created this chaos, people who fabricate unreal worlds where they can seek their happiness. The gambler is one of today’s most predominant types. He is the Internet freak who blasts away in online games or writes love letters under a false identity. He is the athlete who takes performance-enhancing drugs although he knows about the doping controls.

Politicians, though, are also gamblers -- ones who take pleasure in gambling with power. That, though, is particularly worrisome because it is now up to the politicians to clean up the mess left by the financial gamblers.

Political games go like this: Last Thursday in Saint Petersburg, German Foreign Minister Frank-Walter Steinmeier was unhappy when he came back from the working lunch of the German and Russian delegations: “The protocol of the chancellery has its way, don’t ask me how.” He was upset because he wasn't allowed to sit at the table with Russian President Dmitry Medvedev and the chancellor.

A Landing in the Real World

Steinmeier felt insulted, and perhaps the chancellery actually did pull a fast one, but don’t they have other problems? Now? In a time of crisis?

Politicians are also very skilled at building their own world, a virtual world of power plays where they feel so at home that progress in the real world becomes difficult. Of course power struggles belong to politics, but with the current governing coalition pairing the Social Democrats with Merkel's conservatives, the ruling parties sometimes give the impression that politics consists of nothing else.

It would be a disaster if the chancellor and her foreign minister -- who is also the SPD candidate for chancellor in the general elections next fall -- were to get caught up in a tiny little game over some telltale advantage. They should conduct a fair debate on how to prevent the real world from falling into a recession or how they can establish a new deal for Germany’s labor market. The election campaign will come soon enough in the summer of 2009.

And of course, the criticism comes from a glass house. In the media there are also plenty of gamblers who are not necessarily interested in fairness and accuracy.

While we teeter on the brink of disaster we might reflect on the fact that for politicians, bankers, business people and the media, there is a second challenge more important than that of rising up the career ladder: We also need to secure democracy and the free market economy.

Bringing the state and the world of business and finance into balance with the right amount of control and freedom would be an important step toward attaining this objective. But none of this is possible without a word that is not particularly exciting, and even a bit old-fashioned: seriousness.

So, out go the gambling tables and in come the rows of seats again in the Luftwaffe’s Airbus A310, and fasten your seatbelts for landing -- in the real world.

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