The legendary Lehman Brothers crash made the financial crisis become apparent to everyone and soon there were calls for greater government controls and better protection for investors. But under no circumstances did the investment companies want state control, so the “too big to fail” clause was created and billions of taxpayers’ money were poured into the banks that had (almost) ruined themselves by speculation in the wide casino world. Even the Swiss banks had to be supported with 50 billion. To be sure, the receivables remained, and politics urged the banks to raise their equity capital, which is now to be increased to 5%. However, any citizen who wants to take out a home-building loan must procure equity of at least 20 per cent which is absolutely justified. A bank that, nota bene, speculates on the financial markets will get away much more economically. Also the investor protection that was enforced now appears rather modest. Just a week ago the Federal Councillors were not able to bring themselves to give small investors more protection against the investment companies. The politicians are struggling to act consistently here. Professor Marc Chesney demands more protection against casino capitalism as it has evolved over the last 20 years. He is the director of the department of Banking and Finance of the University of Zurich and author of the book “Vom grossen Krieg zur permanenten Krise”. In the following interview he explains his assessment of the situation of the financial markets and the economy.
Current Concerns: What do you see as the causes of the financial crisis in Greece? What is the connection between the financial crisis of 2007 and the situation in Greece today?
Professor Marc Chesney: This is related to the creation of the euro. Essentially, Greece would not have been able to adopt the euro. But it used tricks to conceal its actual financial situation. In particular, the bank Goldman Sachs helped Greece to hide a portion of its debt. They called this financial innovation, and suddenly the situation in Greece appeared to be better.
What relevance had this?
All at once the country was able to meet the Maastricht conditions. Nobody in Brussels, Frankfurt or Paris asked how this could have become possible in such a short time. Between 2002 and 2005 Mario Draghi was head of Goldman Sachs Europe, currently he is President of the European Central Bank (ECB) in Brussels. Until today he has never officially condemned this Greek practice.
What were the consequences for Greece?
When Greece was already in the euro zone the interest rate fell continuously, so that the country could take out cheap loans. This came in very handy for big banks in Germany and France. Both countries wanted to sell arms to Greece, and this was funded generously by their banks with credits, although it was known that the Greek economy and state budget were not in a good condition.
What were the banks’ calculations here?
They assumed that Greece would repay the loans after a few years, but that was an illusion, instead the debt became astronomical.
What happened in 2011, when the disaster became apparent for all?
Private debts became public debts. This is a disgrace for Europe. Why did Ms Merkel and Mr Sarkozy make the decision to support ailing banks with government money? Banks should be responsible for what they do. If the German or French big banks decided to give Greece huge loans, they should be responsible for this like all other banks. That is, if Greece is bankrupt and cannot repay its debt, then they have to bear the cost and certainly not the taxpayers. The purpose of this financial assistance by the taxpayer was not to aid Greece, but to rescue the big banks. Why should the taxpayers pay for this? This question should have been asked already before 2011, as now the situation is very complicated.
What could Greece have done in this situation?
One would have had to proceed as was done in Germany after the Second World War. Then the debts were huge, about 200 per cent of the gross domestic product. It was clear that Germany would not be able to pay its debts. For this reason a debt cut was decided at the London Debt Conference. More than 50 per cent of Germany’s debts were cancelled. We should envisage doing the same for Greece, whose debts have reached 200 per cent of GDP. This is impossible to pay and will never be settled. Even the IMF has – unfortunately only by the beginning of July 2015 – recognised this reality, at about the same time as the referendum in Greece took place. The IMF has observed that it is unaffordable for both Greece and Europe. These are the problems between the IMF on the one hand and the EU and the ECB on the other with respect to the question of who will bear the costs.
What will happen if the creditors do not agree to a debt relief?
Then Greece should go the same way as Ecuador went. That is, it should perform a debt audit. But unlike in Ecuador the debt in Greece is more public than private. In addition, the products of the financial casinos are much more developed today than 20 years ago. So for example there are CDS (Credit Default Swaps) which allow one to bet on a bankruptcy. The question remains which major banks bought or sold these products in the case of Greece. This is not transparent, and we will not know until Greece will stop paying a portion of its debt. Then it will become obvious who made huge bets here. We will then see whether they were made in Paris, in Frankfurt, in London or in New York. Bold solutions are needed to eliminate this lack of transparency. Things cannot go on like this as the debts are even higher than before the last “rescue package” in the summer of this year.
This would mean ultimately that one cannot negotiate objectively because it is about so much money, that money can be won because of a bankruptcy.
Those who purchase the CDS bet on the bankruptcy of Greece, and those who sell them bet that there is no bankruptcy. An example is the fall of Lehman Brothers in 2008. The American insurance AIG sold the Lehman Brothers’ CDS and believed Lehman would never go bankrupt. The sale of these CDS was a money machine. Conversely, some big banks that had purchased these products did everything to ensure that Lehman Brothers would go bust. Today Lehman Brothers does no longer exist, instead there are bets on Greece and other countries or companies. But that is all non-transparent. After the Lehman bankruptcy it was known that the AIG was involved because subsequently it was virtually bankrupt as well. Because of these bets and the financial casino in general, people are suffering, especially in Greece. You cannot survive in Europe with a few hundred euro a month. That is impossible for the people concerned. The financial sector has taken power and is pumping more and more money from the society and the economy into its own organisation. Part of the debt should be paid and the Greek banks should be recapitalised with the money. But the debt volume is much too large, and the recapitalisation of the banks is a bottomless pit. All this is a hopeless task. We need other solutions here.
The crisis in Greece is a symptom of the overall situation in the financial sector. The media hardly ever write about it. Have we learned anything at all from this financial crisis, so that such a thing will not happen again?
No, for our society this is unfortunately not the case. But the “too big to fail” banks have learned something. Today they can take every risk because our society will pay for it. They have strong lobbies and can move forward along this path. Our economy is generally based on debt in many areas. Currently it must make debts in order to try and stimulate growth which is needed to finance a part of the debts. This is a vicious circle. At the end of the day, the growth is sluggish, and the debts are unsustainable. That is why we need bold reforms. Although much spoken of, the progress is very modest.
There was a long discussion about regulation. What has been re-regulated?
The regulation is too complicated. With a financial sector that is far too complex, we need simple regulations with one objective: the financial sector has to serve the economy and society. To do this you do not have to write 600 pages like the Basel III agreement. Fewer pages, such as the Glass-Steagall Act, and clear rules would be enough. The financial institutions which have taken risks should bear them. In fact, banks that are “too big to fail” are particularly problematic for the stability of the financial sector. We need small banks with a much higher equity capital so that the state does no longer have to pay. We need the Separate Banking System, as it was the case in the United States until 1999 with the Glass-Steagall Act. We need a transaction tax and other measures that are simple and understandable. We need to change the doctrine at universities and colleges, because they train the so-called elite for tomorrow. This will all play an important role in the future.
You have mentioned this Financial Transaction Tax. Could you explain it in more detail?
This is an idea of the financial entrepreneur Felix Bolliger. It stipulates the following: in Switzerland there are approximately electronic payments to the extent of 100,000 billion Swiss francs a year, currency transactions not included. This corresponds to about 160 times the Swiss GDP. If we had a transaction tax of 0.2 per cent, it would raise 200 billion Swiss francs per year. That is more than all taxes in Switzerland together, including the 170 billion francs VAT. The system of the transaction tax would be much easier. For each electronic transaction, in particular with the credit card, 0.2 per cent would be deducted. This tax would not be a kind of Tobin Tax, that means not limited to securities transactions. Neither is it intended as an additional tax, but should replace current taxation.
That means that there would be no income tax etc.
No, that would no longer be needed, but the new tax should be introduced slowly. First, the Value Added Tax should be abolished. That would have a great (positive) impact on the tourism industry, because it suffers from the strong Swiss franc. We would pay our taxes automatically, as soon as we raised money from an Cash dispenser. This would actually mean that with a purchase of 100 francs I would pay 20 centimes of taxes. Even if we paid cash, we would have taken out the money from the Cash dispenser before. Ultimately, we could theoretically forget the tax declaration then.
If I go to an cash dispenser today which does not belong to my bank, I have to pay much higher fees.
Yes, we constantly pay any fees. The cost could be much lower as it is the case today. The system of the transaction tax would be easy and good for almost all businesses and all households. Unemployment has increased slightly in Switzerland which has to do with the expensive Swiss franc. With this new tax new companies from abroad would come to Switzerland because the system would cause less taxes and administrative burdens. Thus, new jobs could be created. For big banks and hedge funds the system would be different; they would pay more taxes.
You probably mean big banks and hedge funds which practice in particular high frequency trading. Do we absolutely need these activities in our country?
No, we do not need that actually because the economy does not work per microsecond. We would have more financial stability with less such activities in Switzerland. The transaction tax system as a solution could be implemented around the world. In Switzerland, we have a direct democratic political system and try to find common solutions. Hence, if the transaction tax system worked in Switzerland, taxpayers in Germany and France would be wondering why they do not have such a system. It is very inefficient that a state in the EU claims 30 to 40 per cent of the middle class’ wages as tax revenues.
In Switzerland you could achieve that with an initiative. But what will the other countries do which have no such possibilities?
It depends on the citizens. It takes citizens who speak out and raise their voice. Brussels has too much power in the EU. If citizens want such a system, they must communicate with other citizens and politicians in their region. The latter are their representatives. The Internet as well could be used for debate and support of such concern. The initiative must just begin somewhere, then something very dynamic can possibly develop. If we limit the dynamics of the financial casino with direct democracy in Switzerland, this will have an influence on other countries.
You see direct democracy as the basis for a more humane, equitable and therefore more peaceful life together.
Yes, absolutely. I see that democracy in other countries is very much blocked. People can vote for the political left or right, for one or the other party, however, there is only one financial and economic policy, namely that of the financial markets. It is a monopoly, a dictatorship of the financial markets, and many media help them. We need alternatives and other solutions.
What are you thinking of here?
For example, I am thinking of the separate banking system. This is not utopian. Why are there so many financial transactions? They are oversized compared to what the economy really needs. Hence the idea of the transaction tax: who turns over large amounts of money will also have to pay taxes for it. If that is successful, the other countries will follow.
This must necessarily be discussed. Let us talk once again about the financial situation of Greece and the Ukraine. Can you not see the two crises as an expression of the entire situation?
Let me begin with a comparison between the Ukraine and Greece. The financial situation in the Ukraine is disastrous, the debts are high. And this even more because the seceded eastern part is in fact an important industrial part of Ukraine. And funnily enough, the IMF behaves much more complaisantly to the Ukraine in comparison to Greece. For the IMF, debt restructuring for the Ukraine doesn’t seem really to be problematic, for Greece, it was a taboo until early July 2015. The question is, why? And here, the geopolitical dimension is particularly relevant. The Ukraine is a focal point of competition between East and West. It was moved into the focus of the EU, but without a mandate. In the West of the country projects for the exploitation of shale gas are realised in order to prevent dependence on Russian energy sources such as gas, which is not only inefficient, but also dangerous for the environment
What should be done?
All parties should sit around at a table to negotiate and find a solution. The situation in the Ukraine has been tense for a long time, which shows in the existence of a Western and an Eastern part among other things. Either they develop a solution like in Switzerland and live together peacefully in a kind of Confederation, or else they should separate. If no common solution can be found, than they would better separate. What is emerging, is a new cold war. The fall of the wall was a stroke of luck, but the West did not take benefit out of it. The West let the opportunity go by.
What should the West have done differently?
The Warsaw Pact was dissolved, but NATO remained. It did not only remain, but expanded further East. The West and NATO have passed up a huge opportunity to dismantle nuclear weapons in Europe. Now the tensions increase, and Europe would be right in the front line. What we need is an open Europe, a Europe which – instead of extending counterproductive economic sanctions – would be in a position to negotiate in order to find solutions. This applies in particular to Switzerland, which is very important as a neutral country in this context. There is an indirect confrontation between Russia and NATO, and one can only hope that it will not become a direct one. This is a very dangerous situation.
Is not all this an expression of the disastrous financial situation in the United States – those United States, which are actually bankrupt and struggle for survival with Russia and China?
Not only Ukraine or Greece, also many other countries such as the United States are entrapped in huge debts, for example. Their total debt, which means private and companies’ debts, governmental and financial sector debts amount to approximately 300 per cent.
Let us come back again to the financial situation in Europe, to the strong Swiss franc and the policy of the Swiss National Bank. How do you see this?
When in 2013 we started to back the euro, it was not a good solution. The National Bank is unfortunately not of sufficient size to compete against hedge funds. I am trying to illustrate that. Per day financial transactions are undertaken in different currencies (dollar, euro, swiss Franc, etc.) amounting to 5,000-6,000 billion dollars. In that scale, one week’s volume is sufficient to satisfy the needs of international trade in goods and services. The remaining contributes to the financial casino and creates systemic risks. Let us assume that a hedge funds speculates on an increasing value of the Swiss franc. It has an equity amounting to a billion and takes a loan of 20 billion from a major bank, which means it needs only 5 per cent equity and can speculate with up to 20 billion based on an equity of one billion. It can speculate with 10 billion based on 500 million of equity and have an influence on the euro/Swiss franc exchange rate. In fact, the daily euro/Swiss franc transactions amount between 50 and 100 billion. The National Bank would have to cash down regularly billions of francs. This is impossible.
What should be done instead?
Why should the National Bank buy so many euros? The euro is weak. Within 15 years it has lost approximately 33% in value in comparison to gold. The dollar went down 95% compared to gold in 100 years, the British pound as well. It would be better to invest in gold, or even better, not to have sold a large part of the gold reserves of the SNB, namely about 1,550 tons, at the beginning of the 21st century. What do we do with the euro without a sovereign wealth fund? We need to invest the euro. Should we buy a significant amount of German and French bonds? Not really; this creates a huge amount of money, which is no longer available for the Swiss economy. That makes no sense. The SNB’s balance sheet explodes. We need a sensible solution in the form of a negative interest rate, but only for foreign investors who want to speculate with the Swiss franc. It is a pity that the National Bank has not gone this way. It should have done this instead of linking the franc to the euro. The fault has already come about with the decision in 2011. The SNB has invested too much in euros and dollars, which have lost their value. Moreover, no one knows what will happen to the euro in the future.
One should give the money to a fund and strategically decide what to do with it.
Should we have got out earlier?
Yes, we should have done that, when the franc noted at 1.24 or 1.25, and not as late as when the franc was at about 1.20. That was probably connected with the decision of the ECB to begin purchasing government bonds. There is a lesson to be learned from this situation. It is not possible to buy euros infinitely. The balance cannot be increased infinitely. What we need are national banks that operate a sensible monetary policy.
How do you assess the conduct of the ECB?
The ECB aimed to curb inflation. It was curbed and is even too low today. The ECB wants to achieve two per cent inflation, but that does not work. It would like to preserve the stability of the financial markets which unfortunately failed. The ECB operates the quantitative easing as the United States do. It has pumped a lot of money into the economy, but that doesn’t work either, the money remains in the financial sector. For this reason, we have hidden inflation on financial products, of the stocks and real estates. It is a huge bubble. So far, there is no inflation because the money remains in the domain of the financial casino.
So is that the reason why we have no inflation yet?
Yes. But when inflation is coming, it could become huge, because the money supply is so inflated. At the moment, nothing is happening. There were actually reasonable solutions to bring the money to the economy, but currently the central banks play with fire. They have driven us into a dead end street but they are still accelerating. They will supply even more money, but this way companies cannot get enough credits yet. There are so many areas which are dependent on loans. So investments in the energy sector are due, for example, as money is urgently needed there.
What would be the solution for Europe?
To stimulate the economy, the ECB would be better off to lend money at 0% directly to the companies that want to realise sustainable investment projects. We also need more direct democracy, which is the most important. The people must have a say resulting in a better control. In addition, it takes further measures such as separation in the banking system, etc. The situation may not be that in the end the taxpayer has to answer for this and has to pay more and more. Taxes are too high. In the period from October 2008 to October 2011, the European States spent about 4,500 billion euros, about 37% of their GDP to help their banking sectors, with a success we are well aware of! As the IMF stated in April 2014, the value of state guarantees for banks amounted to approximately 50 billion dollarsin the United States and Switzerland in 2011/2012 and to more than 300 billion dollars in the Euro zone.
We citizens are paying for this. However, this is really disproportionate. To subsidise “too big to fail” banks, or even to rescue them, is contrary to the very liberalism, which the financial sphere proclaims. For the benefit of the economy, we need small banks that work much more efficiently.
Professor Chesney, thank you very much for this interview. •
(Interview Thomas Kaiser)
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