The Lost Decade: What the World Can Learn from 10 Years of Excesses

At the beginning of the third millennium, a man from the 19th century is suddenly in vogue once again. Karl Marx was born in 1818 in the western German city of Trier. In his landmark work "Das Kapital," he would quote a trade unionist as having said: "Capital is as terrified of the absence of profit or a very small profit as nature is of a vacuum. With suitable profits, capital is awakened; with 10 percent, it can be used anywhere; with 20 percent, it becomes lively; with 50 percent, positively daring; with 100 percent, it will crush all human laws under its feet; and with 300 percent, there is no crime it is not willing to dare, even at the risk of the gallows."

Marx's words proved to be true. Fearing a depression after the attacks of Sept. 11, central banks flooded the financial system with liquidity, which in turn prompted financial managers to devise a surfeit of ways to put that liquidity to work.

An exuberant mood took hold in America, where anything that was new was suddenly declared to be beneficial. Talk show host Chris Matthews, a former speechwriter for Jimmy Carter, said that the US was the "fastest country" in the world. For many people, the biggest issue of the 2000s was money: How can I make as much as possible, as quickly as possible?

Fear of a Capitalist Planet

The International Monetary Fund (IMF) tried to convince the skeptical Germans that their fear of turbo-capitalism was unfounded. According to a 2006 IMF report, the new system, which divided risk into small pieces and distributed it among many people, was safer than the old system.

It was a fatal mistake. In mid-2008, a gigantic bubble that had developed, primarily in the US real estate market, burst. Banks tumbled like dominoes and the real economy collapsed. By the end of that year, Germany's gross domestic product had shrunk by 4.5 percent, which was by far the worst decline in the country's postwar history.

The Sept. 11 terrorists destroyed far more than New York's Twin Towers, parts of the Pentagon and thousands of human lives. As a delayed consequence of their actions, capitalism collapsed.

The conventional world was temporarily turned upside down. Politicians, previously despised by bankers, were suddenly called upon to rescue the financial system. There was even talk of a return of politics. Capitalism and bankers were both discredited and confidence had evaporated. But, as it turned out, the financial system had merely experienced a brief setback and soon returned to its old ways. The thirst for profit is back while politicians, paradoxically, are the ones left with the problems.

Today political energy is being channeled into efforts to stabilize the financial markets. Without the state, there would be the risk of a grim 1930s-style depression, complete with the prospect of mass unemployment and possibly even starvation.

Capital is currently needed to jump-start the money supply in stalled national economies. In 2008, the world's stock markets lost $1 billion (€694 million) in value every 24 minutes. Since then, governments have done their utmost to prop up and stabilize the banks, the auto industry and real estate.

Government borrowing has reached unprecedented levels. The lost decade is also the most expensive decade in world history, at least in times of peace.

The G-20 countries are currently spending about $1.5 trillion to rescue their own economies. Taxpayers will still be paying the interest on their governments' various bailout and economic stimulus programs in 100 years' time, so that total payments will amount to several times the original principal. This distracts attention from other important issues and also means that less money is available to address those problems. The German social welfare state, for example, is not equipped to handle the aging of society. The problems that are not being addressed today, because politicians are forced to focus on the effects of the economic crisis, will plunge government budgets and social security funds into new turmoil in the future. When that happens, bankers will likely criticize politicians for not having done enough.

Forging Ahead

These are primarily the West's problems. China, on the other hand, has managed to accelerate its march toward world power status during the crisis. The country has foreign currency reserves of more than $2 trillion, compared with Germany's $180 billion. The Chinese have a private savings rate of 40 percent, while Americans save only about 4 percent of their income. As a result, China has been able to combat the crisis by drawing on its cash reserves.

For the Chinese party and government leadership, the worldwide collapse of export markets was a welcome opportunity to satisfy pent-up demand for investment in the interior of the giant country. The Chinese economy is already growing again, and is expected to grow by over 8 percent in 2010.

The Chinese are also turning this economic strength into political might. The West, unable to cope with the consequences of the financial crisis alone, needs emerging economies like China and India.

The rules that govern the world's financial markets are no longer being written exclusively in places like London, Berlin and Washington. And China, for its part, is not necessarily interested in rules that will help solve the West's problems.

The new Asian contender, which intends to expand its markets in Shanghai and Hong Kong into a new global financial center, loves speculation. Shanghai's Pudong financial district wants to become the new Wall Street, and its stock markets are the world's wildest, freest -- and riskiest.

Western politicians are concerned. But Western capital feels magically drawn to Asia. For several years now, more companies have been listed on China's stock exchanges than on US markets. It is quite possible that the next financial crisis will begin in China.

Paul Volcker, a former chairman of the US Federal Reserve and currently an economic adviser to Obama, shakes his head in disbelief when confronted with the frenzied activity of governments, central banks and financial investors. He advised the president to break up the country's biggest banks, and he has argued in favor of creating a separation between speculation and lending. Volcker, it appeared, wanted to make the banking profession boring again.

But the White House rejected his proposals. Volcker is convinced that the crisis isn't over yet, because its lessons haven't been learned -- or even understood. The world is still intent on behaving irresponsibly. The lost decade hasn't come to an end yet.