The Black Autumn In Search of the Visible Hand

There is an air of desparation in European capitals and in the United States as politicians try to stop the global financial meltdown. The crisis has grown into a major test for the government of Angela Merkel. On Monday, Berlin signed off on a major bailout package.


It was only a short note posted on the bank's doors, but everyone knew what it meant: "All payment transactions are suspended until further notice."

It was the morning of July 13, 1931, a Monday, and long lines immediately began forming in front of the branches of Darmstädter und Nationalbank (or Danat Bank). Nobody had ever expected this to happen: Germany's second-largest bank was insolvent. The news spread like wildfire, triggering widespread panic.

Soon customers were storming Berlin's other banks -- Deutsche Bank, Commerzbank, Dresdner Bank and savings banks -- to retrieve their savings. By noon, the banks were no longer able to withstand the swelling masses and branch managers ordered the doors locked. More police officers were sent into the streets to "immediately stifle any attempts to take advantage of the current situation by inciting the masses."

By evening, the entire financial system of the German Reich had ground to a halt. Germany was experiencing its Black Monday, part of the most turbulent days in its economic history.

Long lines of nervous customers waiting to withdraw their savings -- the images of 1931 have been burned into Germany's collective memory. They have become symbolic for the world economic crisis that began in 1929, plunged millions of people into unemployment and poverty and eventually led to the Nazis' rise to power in 1933.

Indeed, these images were what prompted German Chancellor Angela Merkel and a visibly distressed Finance Minister Peer Steinbrück to step in front of the cameras on the Sunday before last in the atrium of the Chancellery in Berlin. But their statement, reassuring citizens that the government would back their savings, was so poorly worded that the German government press office was forced to issue a subsequent statement to clarify what the chancellor had said.

After this memorable appearance, anyone who had still seriously questioned the gravity of the situation was quickly disabused of such notions. Although there were no long lines at bank counters the next day, Merkel's €1 trillion ($1.35 trillion) bailout promise failed to improve the situation. Armored car companies had to add extra shifts to keep the cash machines filled, €500 ($675) bills have never been in this much demand and anyone interested in buying gold bullion or coins can expect to wait up to three weeks for delivery.

Only 29 percent of Germans believe that Merkel would be able to live up to her promise if push were to come to shove, while 66 percent believe she would not. Only 28 percent are confident in the German government's handling of the crisis, while 53 percent say that it worries them.

At this point, who can stop the crisis? Can it even be stopped?

Its destructive force is growing from one week to the next, as governments are forced to prop up banks on the verge of collapse. The entire country of Iceland could face bankruptcy.

Instead of billions or even hundreds of billions, the losses stemming from the financial crisis could now number in the trillions. Mountains of public debt could limit the ability of governments to act for years, if not decades. In the United States, an additional digit had to be added to the national debt meter in New York so that it could display a number in the double-digit trillions.

Nevertheless, the panic had been limited to those individuals acting behind the scenes, the bankers and politicians who were becoming increasingly aware of the true scope of the disaster. At least until last week, when panic reached the stock markets.

Stock prices plunged worldwide. The week began with a Black Monday, and conditions hardly improved in the following days. Never had so much market capital been wiped out in the US, Germany and Japan in such a short amount of time -- more than $3 trillion (€2.22 trillion) within a few days.

Congressional approval for the $700 billion (€520 billion) bailout plan for US banks didn't help. Neither did the European Union announcement of its own guarantee to ensure the survival of major banks, nor did the concerted interest rate reduction made by leading central banks, including the American Federal Reserve Bank and the European Central Bank (ECB).

Bank balance sheets have grown larger than many country's GDPs.

Bank balance sheets have grown larger than many country's GDPs.

Market players seem to have lost confidence in the ability of politicians and bankers to solve the fundamental problems on the financial markets. Moreover, they have apparently realized that the financial crisis will affect the real economy far more seriously than was previously thought possible.

At the end of this turbulent week, the banks' problems, which Merkel had sought to alleviate with her government guarantee, had grown instead of shrunk. The chancellor was faced, once again, with the same question that had been hotly discussed on the previous weekend and, at first, answered in the negative: Will the state have to nationalize the banks, at least in part? Will it have to guarantee all deposits and not just those of private citizens, as Merkel had promised?

After prolonged hesitation, Merkel and Steinbrück have now answered that same question in the affirmative. A major European bailout plan has been unveiled, a coordinated concept to rescue the banks and secure the credit supply. It is intended to leave room for national variations, but it will also include a measure that the Germans had fiercely opposed for days: the partial nationalization of private banks.

European governments intend to implement the plan quickly. The heads of government in the euro zone, the 15 countries where Europe's common currency is used, hammered out the details at a summit meeting in Paris on Sunday. On Monday, the German government introduced the plan and the necessary legislation will be pushed through in fast forward this week. Within a week, the two houses of the German parliament -- the Bundestag and the Bundesrat -- and the president are to approve a rescue plan that is substantially larger than previous bailout attempts. The cabinet in Berlin established a bailout fund worth a total of some €500 billion ($680 billion), Merkel announced on Monday.

The program, if ultimately approved, would resemble in some respects the measures taken by the government of Chancellor Heinrich Brüning in 1931. But the similarities don't end there. Then, as now, it all began with a speculative bubble. In the 1920s, investors gambled with debt-financed stocks, and in the 2000s it was credit derivatives. Then, as now, politicians initially underestimated the extent of the crisis, and their reactions came too late and lacked coordination. In both cases, there were bankers whose actions were excessively risky and who exerted far too much control, then covered up the entire disaster and eventually proved incapable of taking concerted action to solve the problem.

An era came to an end in 2008. It was the age of unbridled capitalism, which, stemming from the United States and driven by uninhibited financial markets, fundamentally changed the global economy. It was an era that considered debt healthy and pronounced all risks manageable, and now threatens to choke on those same debts and risks -- and drag the world economy down with it.

The crisis is eating into the foundation of the financial system with terrifying speed, jeopardizing the real economy's money supply in the process. German investors are pulling out of their money market funds, because they are not covered by Merkel's guarantee. But these funds invest in corporate bonds, thereby supplying capital to German corporations.


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