German Economics Experts 'The World Shouldn't Have to Bear the Burden for America's Lapses'

The US government is buying bad debt for $700 billion. Now Washington is asking other countries to jump in and help, too, but the Germans are bowing out. Believing that the rescue package sends the wrong signal, experts from the country's leading economics think tanks argue it's the right call.

By Corinna Kreiler in Hamburg

Banking center Frankfurt: German financial institutions are in better shape than their American counterparts.

Banking center Frankfurt: German financial institutions are in better shape than their American counterparts.

It's not a call for assistance; it's a scream for help. US Treasury Secretary Henry Paulson is asking other countries to help buy up bad US debt. The US government is putting up $700 billion in taxpayer money in the hopes that the measure might restore stability in the financial system. Some countries are planning to help. But the German government has answered this call quickly and clearly: no.

Economics experts think that's the right response. As they see it, in the long run, those responsible for the crisis -- who have been cashed out with high salaries and bonuses for years -- will not be penalized for billions "but will be let off the hook like everyone else," says Carsten Meier of the Kiel Institute for the World Economy (IfW). According to Meier, by injecting capital into the market, the US government is putting everyone who speculated and lost back on their feet and thereby standing in the way of a market cleanup.

Paulson has stated that the US government will pay a fair price for the bad debt, which Meier sees as sending "precisely the wrong signal," adding that "people shouldn't be rewarded for taking such high risks." Meier also finds Germany's decision to sit out any bailout operation to be the right move. "The financial crisis is primarily a problem in America," Meier says. As he sees it, the fact that Germany and Europe are far less affected that the US justifies European reluctance. "The stability of the German banking system is not in danger," Meier points out as he explains why he believes Europe shouldn't provide any funds. "The world shouldn't have to bear the burden for America's lapses."

Germany Shouldn't Have to Bear More Burdens

Still, the financial crisis has already reached German shores, and banks here have had to announce write-downs of nearly €40 billion ($58.5 billion). "German banks are already sufficiently involved in the calamity," says Stefan Kooths of the German Institute for Economic Research (DIW) in Berlin. Either way, experts estimate that half of America's bad loans were sold abroad -- and a large part of that was assumed by Germans. And now the money is gone. "There's no reason why Germany should have to bear even more burdens," says Kooths.

Experts have also criticized the American rescue package for a number of other reasons. Diemo Dietrich from the Halle Institute for Economic Research (IWH) doesn't think the plan is well-balanced: "The government is only buying bad risks and, in doing so, nationalizing the losses." Dietrich adds that taxpayers won't share in any of the profits that the government hopes the stabilized market will bring about in the long run.

According to Kooths, instead of buying those responsible for the crisis out of it and calling on other countries to provide funds, the US should create political regulations that will prevent a situation like this from happening again in the future. "They shouldn't allow people to finance a home with 100 percent credit anymore," Kooths says. (In Germany, banks generally require home buyers to put up as much as 20 percent of the total cost of the house or flat as a down payment.) He also believes that credit should no longer be allocated solely on the basis of a home's rise in value. As Kooths sees it, at the moment we are all still in a state of shock that makes us cautious, but "in 10 years, the crisis will be forgotten and the situation could repeat itself."

Instead of standing in the way of a market shakeout with a cash injection worth billions, Dierich argues the Americans should find another way for the banks to get ahold of some fresh capital -- by putting up new shares for sale to secure new funding, for example. In the current crisis climate, though, no bank is going to voluntarily issue new shares because that would signal to the market that the institution is facing difficulties.

Accordingly, IWH's Dietrich suggests that the US government require all banks to issue stocks and that they be required to back up the issuance with a set amount of capital. Under these circumstances, Dietrich believes that investors would buy shares of the banks that they consider healthy and that the market would make it crystal clear which banks these were. And the institutions that are having a rough time because they can't find investors will go broke. "That step would send the right signal to the market," Dietrich says, adding that those who were performing the worst wouldn't be rewarded in such as situation -- as they are being now.


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