SPECULATIVE HOPE

The Crisis Spiral

By Hans Christoph Binswanger

[The St. Galen economist Hans Christoph Binswanger says, money is still earned in bailing out banks. The next crisis looms on the horizon. The environment loses again. This interview published in the Swiss WoZ-Wochenzeitung, 10/23/2008 is translated from the German on the World Wide Web, www.woz.ch/artikel/rss/17019.html.]


If one believes the Bundesrat [Swiss upper house], bailing out UBS [mammoth Swiss bank] will not cost us anything. UBS will pay the money back with high interests. The deadbeat securities will be sold when they are worth something again. With some happiness, a profit is even anticipated. Is this a beautiful fairy-tale, everyone wins and no one pays?

Hans Christoph Binswanger: Underlying all these bailout actions is the idea we simply had an accident that must be managed. Afterwards the economy will grow again. But the problems that led to the crisis are not solved this way.

What were the problems?

The order or structure of today’s economy leads inevitably to speculations. Bubbles form that inevitably burst or lead to inflation.

Why?

In the normal course of the economy, central banks lend money to commercial banks so these commercial banks can give credits to their customers. Since money no longer needs to be really covered by gold and silver any more, money can be printed at will this way. Businesses accept this money as credit and buy labor, energy and raw materials to produce. But when more money can be earned by speculating, speculation becomes the priority, not production of real goods. One buys securities in the speculative hope that their value will increase. In buying them, one contributes to their increased value. This is particularly interesting with low interests. But no real assets are created that correspond to the increasing value of the securities.

The central banks lend money to the commercial banks. When 54 billion was made available to UBS, wasn’t that what central banks always do?

To a certain extent but now the interbank market is tight. UBS is lent money in the hope that real growth will increase again. This hope is obviously speculative.

Clearly one hopes too much. The 6 billion that UBS receives from the Swiss government must yield 12,5 percent. In other words, one expects that the deadbeat UBS can gain at least 12.5 percent profit.

UBS does not have to earn 12.5 percent on every franc because it can issue many times this 6 billion as credit. But this assumes the credit creation continues.

This is very abstract for an economic layperson. Can this turn out all right? Can states bailout their banks and at the end still post a profit?

That depends on whether nature joins in.

What has nature to do with this?

The deficient trust of banks in one another is emphasized. The adventurous financial market products were wrongly assessed. These were nothing but symbolic things.

The matter is clear when an adequate real growth occurs and real assets are created that correspond to the expected increased value. In other words, more must be produced. But that requires resources. The raw materials must be cheap.

There is at least one piece of good news in the crisis: the raw material prices are falling. Oil costs less than half as much as in July.

The high oil price was in large part speculative. As soon as the financial crisis is conquered, the high oil prices will return – and higher prices for metals, food and so on.

Today everything reflects the financial crisis. A few months ago the raw material – and food crises dominated. The ecological crisis intensifies even more. Are these crises connected with each other?

The first three are monetary crises. The fourth is indirectly connected with them because stimulating economic growth forces the exploitation of natural resources burdening the environment. Contradictory politicians now take the limelight. For example, German chancellor Angela Merkel wants to support the German automobile industry that suffers under the financial crisis while CO2 emissions should be lowered on account of climate change.

You said at the outset, low interests promote speculation. The US Federal Reserve under Alan Greenspan pursued a low interest policy. In that way, he could cushion the dotcom bubble. Did the solution to the last crisis lead to the current crisis? Is the next bubble being inflated today?

If nothing is changed in the system, one either accepts the next bubble or inflation.

Money is now pumped into the system because banks are no longer liquid. But you argue the crisis occurred because too much money value was created speculatively. Is there now too much or too little money in the system?

Where is the money? Obviously it is lacking in the interbank market. These days one can often read how much money was destroyed through the sharp drop in prices. So many sensible things could have been done. But only fictional money is now destroyed that should not even exist.

Everyone says there is no alternative to bailing out the banks.

That is probably true for the moment… Regulations now increase capital holding requirements. Management salaries should be reduced. All this is sensible but is not enough.

What is still needed?

I see two possibilities in the monetary realm. The first is the full money idea. Full money means the credits given by banks must be fully covered. A commercial bank can only give as much credit as it receives from the Federal Reserve. The central bank assumes more responsibility.

Could one state introduce this alone?

No, but a large state like the US or the EU could take the initiative. An international agreement is needed as in Bretton Woods in 1944.

What is the second possibility?

We must ask whether we can still afford the social form of the stock corporation in its present form. The logic of the stock corporation leads to all profits ultimately being used to raise the stock price, which promotes speculation. The alternative would be the foundation idea. The goal of businesses should be providing products, not making as much profit as possible.

Doesn’t this mean the economy must serve society and see its end in satisfying needs – instead of leaving it to its own self-dynamic?

Slowing down the self-dynamic of money creation, the stock corporation and the growth spiral is crucial. In my opinion, zero growth is impossible. Economic growth must be kept at a low level. The economy would be more ecologically friendly, less prone to crisis and more just because no basis of exorbitant incomes would exist any more.

Do you see signs people are reflecting on the proper goal of the economy? Are there influential economists and economic decision-makers who echo your proposal?

The second possibility – foundations instead of stock corporations – is promoted by Mr. Binswanger from St. Galen (laughs). But the full money idea is well known and is not new. A world economic conference in the style of a new Bretton Woiods is actually discussed. At least a framework is set so such ideas can be introduced.

Hans Christoph Binswanger

Before becoming an emeritus professor in 1994, Hans Christoph Binswanger was an economics professor at the University of St. Galen (Switzerland). Money theory and environmental- and resource-economics are his themes. He founded the Institute for Economy and Ecology at the University of St. Galen, which he directed from 1992 to 1995.

The liberal-minded former local politician – Binswanger was in the St. Galen city council for the FDP – is one of the most prominent critics of the growth obsession of the economy, which is partly responsible for destruction of the environment. In his book “The Growth Spiral” (2006), he showed the economy is subject to a growth pressure. He criticizes the dominant doctrine of economics, so-called neo-classicism, for only seemingly explaining economic growth. Neo-classical economists ignore the growth pressure because they want to see something positive in economic growth.

Translator’s Note:

In his 1983 book “Arbeit ohne Umweltzerstorung. Strategies of a New Economic Policy,” Pofessor Binswanger argued that the three problems – unemployment, destruction of the environment and trade imbalance – can only be solved by breaking out of the system and replacing quantitative growth with qualitative growth.

In “The End of Suburbia,” James Howard Kunstler asks whether we will have the resources to make the change from suburbia to community.

Gross social happiness could replace gross domestic product. Economists must learn to subtract (cf. www.adbusters.org) and change the measurements to reflect the limits of resources and the changes in priorities. People freed from conspicuous consumption and the ladder of success can be storytellers and researchers, geniuses of words (like John Kenneth Galbraith) and nonviolent spiritual pioneers.

Alternative economists could be bridge-builders and myth destroyers. In the 50s, we lived in a guns and butter world where there were no limits and increased productivity – pushing the workers – was the panacea for all problems. Thirty years ago the Group of Rome published its study on “The Limits of Growth.” Today they warn us about the “limits of competition.” If all nations become super-competitive, we face mass unemployment.

The church, media, unions and universities are independent realities that often lose their critical and independent nature. Building a social net is the precondition for sharing work. If everyone had health care and a functioning social infrastructure, they would share their work. If working hours were reduced, energy consumption would be greatly reduced. If the economy were only a part of life and not a steamroller crushing personal initiative and self-determination, people would be freed from life-long anxiety.
Without vision, the people perish. Without vision, people become only bones for CocaCola! Todos somos Marcos! We are all Marcos of the Zapatistas!

Welcome to the post-cheap oil era! www.youtube.com/watch

and to the Seven Loose Pieces of the Global Jigsaw Puzzle:
flag.blackened.net/revolt/mexico/ezln/1997/jigsaw.html

RELATED LINKS:

www.storyofstuff.com
www.onthecommons.com
www.foe.org
www.foodfirst.org
www.scorecard.org
vimeo.com
www.buzzflash.com