Split on the Economy 'Right Now, I Don't See a Crisis'

Economist Bert Rürup is convinced the German economy is in deep trouble. His colleague Stefan Homburg isn't so sure. With SPIEGEL as referee, the two discuss whether stimulus programs are merely a gigantic waste of money.

SPIEGEL: Mr. Homburg, Mr. Rürup, how long will the crisis last?

Homburg: Right now I don't see a crisis.

Rürup: Excuse me?

Homburg: Real growth was 3.3 percent and 1.3 percent in the second and third quarters of 2008 respectively, impressive numbers compared to the same quarters in the previous year. More recent numbers do not exist, just gloomier forecasts, but they could be wrong.

Stefan Homburg and Bert Rürup don't agree on much when it comes to the economic downturn.

Stefan Homburg and Bert Rürup don't agree on much when it comes to the economic downturn.

Foto: Norbert Michalke

Rürup: Oh, come on! We can see how orders and production have plummeted in large segments of industry since last September, and how quickly the number of short-term workers is growing. If these are not signs of a crisis, what is?

Homburg: The word crisis is too alarmist, in my view. Unemployment is at roughly three million. That is a long way from the five million unemployed we had four years ago, when there was far less public hysteria than today.

Rürup: I disagree with your assessment completely. Despite the economic stimulus programs, the economy will shrink by more than 2 percent this year. This has never happened before in the history of postwar Germany. I would be pleased to see us reach the bottom in the second half of this year.

SPIEGEL: Mr. Homburg, what makes you say that Mr. Rürup is alarmist?

Homburg: Not just Mr. Rürup but many economists. Alarmism began appearing among scientists earlier on, when they talked about dying forests and the bird flu. Let me remind you of the year 1987. The market went into a slide and the economy shrank by 2.5 percent in the first quarter. But 1987 was not a recession year overall. Looking back, people were wringing their hands and asking themselves: What exactly happened here? I told myself, at the time, that I would not be infected by such hysteria, but instead would take advantage of it to buy stocks. I did the same thing this time around.

Rürup: But unlike earlier downturns, today we cannot expect an economic stimulus from abroad to bring us a recovery. It is not alarmist when I say: We are in a much more precarious situation, compared with past downturns. We cannot compare the current crisis with the 1929 world economic crisis, as some are doing. I agree with you on that. But why is this the case? Because governments around the world have learned from the past and, this time, are doing the right things to prevent the sort of development that happened after 1929.

SPIEGEL: Have you already figured out how you will benefit from the stimulus package?

Homburg: My car is only eight years old, so the scrapping bonus  won't do me any good.

Rürup: The changes in tax rates will ease a single person's tax burden by no more than €300 ($384) per year, and somewhat more for my wife and me.

SPIEGEL: The program is costing the federal government €50 billion (64$ billion). 

Rürup: I'm perfectly satisfied with the program. It represents a compromise, in that the (conservatives) and the SPD both tried to get what they wanted. Under those circumstances, the program is quite good. It will soften the recession this year by at least half a percentage point and improve conditions for 2010. It also affects the general mood in a positive way. I consider this to be a very important effect.

Homburg: I see it completely differently. The economic stimulus program is a waste of public funds and will cause a lot of damage. It is extremely regrettable that the money that has been squeezed out of citizens in recent years through an increased value-added tax and many other programs will now be burned up in one fell swoop.

SPIEGEL: What do you mean by "burned up?"

Homburg: The money will now be passed down the ladder everywhere, all the way down to the small-town mayor. He is supposed to spend it quickly, but he has no plans ready for projects that make sense. As a result, the money will be spent in questionable, poorly considered ways, which will also affect prices. The construction industry is already working almost at capacity today. In this respect, it's a waste of public funds.

Rürup: I definitely disagree with the notion that we have no need for investment in the public sector in Germany. Look how run down much of the local infrastructure is. We have pursued a policy of not investing in recent years, especially in western Germany.

Homburg: But what happens now? No one is buying our BMWs abroad. As a result, BMW is cutting back its workers' hours. And the government reacts by spending money on early childhood education, (welfare) recipients and local construction projects. How does that help BMW workers?

Rürup: Employees are helped by the fact that overall domestic demand is being stimulated, thereby lessening the impact of a sharp decline in the labor market.

Homburg: But if it turns out that Germany is simply making too many cars, then the excess capacity will have to be eliminated, as painful as this would be. The stimulus package will have no effect on this whatsoever.

Rürup: That's right. But alleviating the pain of adjustment is a smart move. You're creating a bogeyman here! No one is claiming that structural problems can be solved with the economic stimulus program. Overseas demand is dropping vertically. Now the attempt is being made to offset this by increasing domestic demand and shortening the amount of time until the next upturn begins. This is good…

Homburg: …but it doesn't work, and most citizens know this. Citizens suspect that they will be presented with the bill after the parliamentary elections, and they're right. Tax increases are as sure a bet as hearing "amen" at church.

Rürup: It's true that the stimulus program costs money, but doing nothing would be more costly to the economy as a whole.

Homburg: Mr. Rürup, you and the expert council have been telling us for years that economic stimulus programs are ineffective. You even write this in your current report! The (governing coalition under Chancellor Gerhard Schrönder) did not launch any stimulus programs, even in times of high unemployment, because it knew that they would be ineffective.

Rürup: In our report, we consistently wrote that the government must react in severe recessions. The European stability pact also calls for such anti-cyclical reactions. Of course, you can easily say, once again, that we are not in a severe recession at all, in which case you would be bidding farewell to reality.

Homburg: As economists, we make ourselves seem unreliable when we fantasize, without solid facts, about this being the worst crisis of all time, and then, to make matters worse, we dredge up old recipes that we considered failed until last year. I don't understand why such large numbers of economists are now changing their position diametrically. Have they all lost their minds?

Rürup: The fact that so many of your colleagues have changed their positions should certainly give you pause. Sometimes the majority is even right. Of course, someone who doesn't want to see the crisis won't see it. Children close their eyes and say: You can't see me.

SPIEGEL: Mr. Homburg, is it at least correct for the government to be rescuing the banks?

Homburg: In my opinion, the financial and economic crises have little in common. The financial crisis is absolutely not the cause of an economic crisis. The savings banks and cooperative banks were not affected at all. The three-month interest rate that banks charge each other for unsecured loans has dropped sharply, which suggests rising confidence. What we are seeing are managers who seek to conceal their individual failures by blaming the financial crisis.

Rürup: That certainly does happen, but I see the situation in a more differentiated way. The effects of the financial crisis will be suffered for a long time. It will make itself felt for years on bank balance sheets and in lending practices.

SPIEGEL: Are you saying that the bank bailouts will cost many billions more?

'One Bankruptcy More or Less Would Not Have Been a Problem'

Rürup: A banking system can be likened to supplying an economy with electricity. If two important power plants fail, the lights will go out throughout the country. For that reason there is, unfortunately, no alternative to rescuing key banks. I hope that Mr. Homburg will agree with me when I say that allowing the investment bank Lehman Brothers to fail was a mistake on the part of the American government.

Homburg: On the contrary. In my opinion, allowing Lehman to fail was the only correct decision. The mistake was saving all the others.

Stefan Homburg and Bert Rürup don't agree on much when it comes to the economic downturn.

Stefan Homburg and Bert Rürup don't agree on much when it comes to the economic downturn.

Foto: Norbert Michalke

Rürup: That, cautiously put, is simply absurd.

Homburg: To prevent future undesirable developments in Germany, allowing Hypo Real Estate to go bankrupt would have been the right thing to do. At least all those responsible, in other words, the executive board, the supervisory board and the shareholders, should have been placed in the same boat as they would in the case of a bankruptcy, including the loss of their pension claims.

SPIEGEL: Which undesirable developments are you referring you?

Homburg: Financial crises routinely follow phases with very low interest rates. Low interest rates encourage carelessness. I predict that the banks will behave in even riskier ways in the future than they did in the past, because they have figured out that when things go wrong, the government will bail them out. I already see the next speculative bubble about to take shape.

Rürup: Only if the central banks and regulatory agencies fail to learn their lessons from the crisis. Besides, the government is not rescuing the banks to protect the executives' retirement pensions. The credit supply would have been jeopardized, and we would have seen a massive loss of confidence. There would have been a run on the banks. The destabilization had already progressed far enough for Switzerland to feel the need to print additional 1,000-franc notes.

Homburg: Oh, come on! I, for one, don't know anyone who called me to ask whether he should close his bank account. We have deposit insurance in Germany, and people know this.

Rürup: We have seen that people have shifted their money to cooperative banks and savings banks. There were good reasons for Chancellor Angela Merkel and Finance Minister Peer Steinbrück to have felt that it was necessary to provide such a comprehensive guarantee on deposits.

SPIEGEL: Was there a risk of a world economic crisis occurring, like the one in 1929?

Rürup: Yes, if the government had followed the advice of people like Homburg. In fact, the damage could even have been worse than in 1929, because of the domino effect stemming from a globalized economy.

Homburg: No. If you look at how little influence a single bank has in globally diversified markets, you have to conclude: One bankruptcy more or less would not have been a problem.

Rürup: Just a minute! Are you saying that if an institution that carries as much weight within the system as Citibank had gone into bankruptcy, it would not have been a problem?

Homburg: No, that would not be a problem. If one bank fails, others take its place. There are enough examples of this in history.

Rürup: A noticeably isolated opinion.

Homburg: My theory is this: Deutsche Bank CEO (Josef) Ackermann and his ilk deliberately unnerved the government. The bailout program is very advantageous for the banks, as it is for Ackermann, because it also rescues his bank's receivables. This helps his bottom line.

SPIEGEL: Finance Minister Steinbrück says that he peered into the abyss.

Homburg: What really happened was that amateurs were held over an abyss. When the British bank Northern Rock was overrun by its customers in 2007, no one felt the need to dissolve its accounts. This panic is heavily influenced by interests, specifically those of the banks.

Rürup: That sounds like the sort of conspiracy theory we (are used to hearing from political radicals).

Homburg: The fact is that the bank bailout was justified by claiming that it was for the common good, and yet the banks are its principal beneficiaries.

Rürup: Sometimes it is unfortunately the case that individual interests must be satisfied temporarily to avert far greater damage to society.

Homburg: Let's take a look at the specific cases. The Commerzbank case is absolutely not about averting bankruptcy, but about using taxpayer money to pay for the merger with Dresdner Bank. In the case of (automotive parts maker) Schaeffler, we have a mid-sized company that, driven by hubris and low interest rates, hits upon the crazy idea of buying a DAX-listed corporation on credit. And as far as Deutsche Bank is concerned, we are looking at a banker who claimed that it was possible to consistently earn a 25 percent return on equity, and who now wants taxpayers to save his neck.

Rürup: All of this may be true, but it doesn't change the fact that in the current situation, the government has no alternative but to invest in the banks.

SPIEGEL: Additional billions in risk are still lurking in the banks' balance sheets, which is why it has been suggested that the government simply collect all toxic securities.

Rürup: If you mean that the government should simply take the toxic securities off the banks' hands without compensation, I reject this idea. It is imperative that the banks' owners participate in the costs. Depositing all this garbage at the government's door is simply wrong.

Homburg: The German banks called for a "bad bank" back in 2003, using the same arguments. Then they turned around and earned handsome profits. This subsidy would in fact be the height of stupidity.

Rürup: Okay. At least we agree on that.

SPIEGEL: Mr. Homburg, Mr. Rürup, thank you for this interview.

Interview conducted by Alexander Neubacher and Michael Sauga Translated from the German by Christopher Sultan
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