Capitalism in Crisis The Broken Pact with the People

Trust capitalism and shun government interference we were told. But irresponsible bankers saw a chance to get rich quick and went for it. Their failure has become ours -- and the promise of a common good has evaporated along with faith in democratic capitalism.

Germany has taken to the skies. It is 9:00 a.m. on Thursday, Oct. 2 and the Luftwaffe Airbus A310 -- Germany’s equivalent of Air Force One -- took off half an hour ago from Berlin’s Tegel Airport. The plane is heading east, destination Saint Petersburg, Russia. Crew members are serving the usual copious breakfast, including omelets, meat, cold cuts, cheese and honey.

The gamblers have eroded confidence in both capitalism and democracy.

The gamblers have eroded confidence in both capitalism and democracy.

On board are many of the people who determine Germany’s position in the world: the German chancellor and six ministers, the heads of major German corporations like Siemens, Deutsche Bahn and E.on, and a number of journalists. There are no bankers on the plane, but they play the leading role in everyone’s mind and in the discussions taking place.

After breakfast, German Chancellor Angela Merkel invites the journalists up to the front of the aircraft for an off-the-record chat with the press. Everyone squeezes into a small room, 25 people in all, standing, sitting cramped together, some of them even on the floor. “The microphone isn’t working again,” says the chancellor to start things off.

She talks about Russia and then addresses the financial crisis. The sound of a toilet flushing can be regularly heard. The aircraft’s lavatory juts into the conference room. It is an earnest discussion. The journalists ask questions in a serious manner and the chancellor responds in kind. Every word resonates concern.

Poker for the Politicians; Blackjack for the Journalists

At the same time, Economics Minister Michael Glos is conferring with the heads of German companies. Here as well everyone is deadly serious, solemn and concerned. The atmosphere on board this Airbus is enough to imbue an observer with confidence: Germany seems to be in good hands and the problems can be solved.

But we could also paint a very different picture. We could throw out the rows of seats and replace them with gambling tables, poker up front for the politicians, roulette in the middle for the corporate executives, and blackjack in the back for the journalists. Everyone has taken off their jackets and loosened their ties. Beads of sweat have formed on some foreheads and tension fills the air. Nobody wants to land. They will play until they crash.

Would this picture be entirely wrong? Or does it contain a kernel of truth?

One thing is clear: The world seems to be teetering on the brink of disaster because a few people have been on a big-time gambling binge. They have lost their stake on bad loans and now banks are collapsing, companies are facing a liquidity crunch, investors are losing their savings and a recession is looming.

This time around, though, there is more hanging in the balance than just the cyclical ups and downs of the economy. This time fundamental issues are at stake. Is a market economy nothing more than an invitation to engage in excessive gambling? And what about the democratic principles that are so closely linked with the market economy, a concept that was used by the West to achieve dominance over the world? This vision of democracy is also at risk.

Suddenly, everything seems possible. Nobody knows which banks will suffer a meltdown and what will be the consequences for the real economy. Nobody knows how big a risk the Wall Street gamblers have taken. That’s what makes the situation so frightening. It’s as if we were riding in a small dinghy on an African lake. The passengers know that crocodiles are lurking in the water, but they don’t know how many there are, nor can they determine the size of the beasts.

Welfare for Banks

Now the challenge is to keep people from losing all faith in the markets, to prevent panic from erupting. Success here also depends on whether the actors and observers of global events -- company executives, politicians and journalists -- take things seriously or whether they too are basically just gamblers.

These days, it is hard to recognize the world as we thought we knew it. A large number of American financial institutions have sought protection from the state, and now the US government has taken action to keep the country’s entire financial sector above water. An entire country, Iceland, threatens to go bankrupt. In Germany, Finance Minister Peer Steinbrück has had to save Hypo Real Estate in a hastily organized bailout operation, and Josef Ackermann, the CEO of Deutsche Bank -- a man who was once a high-flying champion of capitalism -- has been calling for the government to launch a rescue package, which is paramount to providing welfare to banks.

Who would have thought that Ackermann would one day join the ranks of Germany’s unemployed and low wage earners in asking for government aid? The poor had long hoped that the state would help them out of their economic plight. People like Ackermann though -- those who place a great deal of faith in the power in the power and freedom of the individual -- blasted them. Now, taxpayers are expected to help Ackermann's industry out of a jam.

The insanity of the situation becomes clear when we look back to the years 2003 to 2005. At the time, then-German Chancellor Gerhard Schröder of the center-left Social Democrats pushed through his Agenda 2010 reform package. Long-term unemployment payments were scrapped. Those who lost their job knew that time was short before benefits would shrink to those mandated by the new welfare plan known as Hartz IV.

During those years, the economic debate was dominated by true-blue capitalists who sought to limit government intervention. This was the heyday of a neo-liberal ideology that placed its faith in the strengths of the individual and the free market. The word “government” became virtually synonymous with harassment, suffocation, inefficiency and a lack of freedom. Deregulation was the magic formula of the day.

Trust Us

This was the theme music -- played by politicians, business people and journalists -- that accompanied Agenda 2010, an orgy of black-and-white thinking that glorified the individual and demonized the state.

But Agenda 2010 was the right approach. The reforms didn’t go too far; actually, they should have gone even further. They should have harnessed the political momentum at the time to prepare Germany's healthcare and convalescent care systems for the challenges of the future.

Agenda 2010 was a deal between politicians and industry on the one side and the unemployed and workers on the other side. The deal went like this: It might be painful, we are taking away some safeguards, but you will receive something in return. Waiving those benefits will boost the economy, trigger growth and create jobs. Trust us, trust this deal, said the politicians and the captains of industry.

At first, it looked as if this new deal would be a success. Over the past few years, Germany’s economy has been growing stronger again and the number of unemployed has fallen from 5.2 million in February 2005 to 3 million in September 2008. This success can be attributed to Agenda 2010 and to workers’ willingness to settle for lower wages.


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