Fromj the middle of the seventies, the interest rates exceeded the real growth rates. This made it even more attractive for owners of capital to invest their money in the financial markets rather than the real economy.
THE NEW INEQUALITY MACHINE
Stock market crash, debt crisis and social democratic failure
Interview with Elmar Altvater
[The political scientist Elmar Altvater teaches political economy at the Otto-Suhr Institute for Political Science in Berlin. In this interview, he speaks about the financial markets, threatened democracy, the necessity of a new global financial architecture and the possibilities of a leftist project. This interview published in: WochenZeitung, 11/7/2002 is translated from the German on the World Wide Web,
http://www.woz.ch/archiv/old/02/45/6850.html.]
WoZ: Did the latest stock market crash surprise you?
Elmar Altvater: No; I expected that. The crash confirmed the actual wildness of the financial markets. The massive losses in assets would not have occurred if an enormous bubble had not formed through wild speculation – above all in the New Economy in the US. The financial capital also became wild through the management of mammoth corporations where corruption, fraud of shareholders and selling off pension funds cheaply spread.
There were stock market crashes in the early 20th century. What is new about the financial crash today?
Globalization was not so far advanced at that time. In addition the separation of the financial sphere from the real economy is greater than ever in the history of capitalism. This separation occurred with the industrial crisis and inflation at the beginning of the seventies when the interest rates were raised. The financial markets began to compete globally for capital with the collapse of the system of fixed rates of exchange and liberalization of capital markets. The costs for capital are interests and stability promises. Guaranteeing currency stability and keeping interests high were political functions of nation states. From the middle of the seventies, the interest rates exceeded the real growth rates. This made it even more attractive for owners of capital to invest their money in the financial markets rather than the real economy. Expressed in numbers, the world economy grew around forty percent in the nineties while the financial markets grew hundreds of percent. Funds could not possibly yield fifteen percent profits for years while the real economy only grew one to two percent. Trees do not grow to the sky.
Aren’t the financial markets somewhat autonomous?
This may be one of the mistakes in reasoning of many small investors. The financial markets make themselves independent but still depend on what happens in the real world. Some time or other the claims from the $50 trillion of derivative assets must be settled. If that does not happen, there will be an open crisis.
In one of your books, you conclude from these developments that financial stability is like a public asset that should be secured by a new world financial architecture.
Financial stability is a public asset. Without financial stability, money is worth nothing. Without it, the economy and society could fall into deep crisis. The financial crises of the nineties also showed that stability is a very precious asset. Some societies must spend twenty to fifty percent of their gross domestic product to maintain their banking system in crisis times. This is not only a third world phenomenon. In Berlin, for example, the general public had to spend 21.6 billion Euros to save the banking corporation insured by a state guarantee from bankruptcy. This has strained the budget so some schools have no money to buy toilet paper today. The term speculation bubble awakens the erroneous impression that this is only a game. However this is not true at the end. The profit demands are virtually produced but must be concretely fulfilled. If that does not happen, the financial market presses on the claims of the general public by flexibilizing labor markets and reorganizing social benefits. Employees must renounce on their demands so the claims of capital can be fulfilled. An enormous redistribution of capital is in full swing that could be simply described as an inequality machine. Thus a new financial architecture is needed that limits the possibility of speculation bubbles, for example by controlling short-term capital movements. The World Bank and the International Monetary Fund (IMF) must be reformed. In addition the global credit markets need an ordering framework. The offshore centers must hold to international agreements.
You said in Zurich the Swiss have civilized themselves. What did you mean?
Switzerland has civilized itself by doing several things to stop the money washing – later than other countries. However it has done nothing up to now against the tax flight from abroad. In Germany 35 billion Euros of regular taxes can flow into Switzerland. This should not happen between neighbors. Still Switzerland does not do anything against this.
Beside speculation bubbles and money washing, wild financial capital produces another tragedy: the indebtedness of developing countries. In heavily indebted Brazil, the newly elected leftist president Lula da Silva promises to improve the living conditions of the population. At the same time he must hold to the rigorous economizing conditions of the IMF. How is this possible?
Lula is in a very difficult situation. His predecessor had negotiated an IMF credit of $30 billion. This credit was tied to the condition that Brazil achieve a budget surplus of 3.75 percent. This surplus is only possible with savings, that is with a new transfer of national assets into the treasuries of the large Brazilian and foreign banks. This also demonstrates the bitterness of help from the outside. On one side, institutions like the World Bank say they want to reduce poverty in half while on the other side pursuing a policy that brings about the opposite.
What do you recommend to Lula?
Lula must try to observe the conditions with the IMF while also re-negotiating them. Secondly, he should not comply with the prescribed growth. Brazil will not be able to realize a surplus with this growth. Lula must focus on the informal sector that involves over sixty percent of employees. They need credits, non-profit cooperative structures and political measures for better income distribution. The informal sector may not remain the shock absorber for globalization tendencies as under Lula’s predecessor. Cannot Brazil build an alliance of developing countries against the IMF and other creditors?
This is still a long way off. In the eighties, the IMF prevented the formation of a debtor cartel. I do not see any great hope on account of the immense counter-pressure of the US. On the other hand, Brazil’s progressive forerunner role could create a counterweight to the US in Latin America in the long-term. Debt cancellation is also a problem of political opportunity. Egypt, for example, would hardly have become indebted if it had not supported the 1991 Gulf war.
In Europe social-democratic governments were in power in the nineties. They could not or would not prevent the parallel expansion of the power of the financial markets. Hasn’t social democracy finally accepted that there is no alternative to capitalism?
There have always been alternatives. August Bebel said social democracy is the physician at the sickbed of capitalism. This has not changed. Social democracy stands for reforms that obviously benefit the masses and stabilize capitalism. The last social democratic attempt to carry out autonomous Keynesian policy against the markets was made in 1981 by Francois Mitterrand and failed because the markets Europeanized or globalized at that time. The French shopped in Germany. Since then, European social democrats have mutated into moderate neoliberals, an idea that ideologizes itself in the concept of a “third way.” They pursue a policy that supports the markets and still maintains something social.
In your essay “Time needs Radicalism and Radicalism needs Time,” you wrote that a new leftist project is necessary. What would that look like?
That kind of alternative project cannot be conceived or even tested on the nation-state plane. A total concept on a global plane is necessary that cannot be drafted on the writing desk. This concept must arise in the discourse and political praxis of new movements. I have great hopes in new movements like Attac. New perspectives must emerge in the process itself and cannot be anticipated.
Can you name a few benchmarks?
I return to the beginning of our conversation. A global project to regulate the global markets is certainly imperative. This is a necessary reform, not an alternative to capitalism. In addition, labor must be protected. The great uncertainty in flexibilized working conditions leads to rightwing populists exploiting this situation as we see already in Holland, Denmark and Austria. The uncertainty problem cannot be solved through nationalization since nationalization cannot accomplish anything when the real economy, the factory and the office have lost their centrality.
Doesn’t that mean that democracy is lost to us through the expansion of market power?
This is a great problem that the United Nations has also recognized. The latest report in the UN program on human development is devoted to the question about democracy in a fragmented world. The conduct of self-confident financial magnates or the remark of the head of the Deutsche Bank that politics is in the towrope of the financial markets and that this is good shows that a partial de-democratization occurs with the independence of the financial markets. The last minimum of equality in society is undermined. When this equality doesn’t exist any more, there is no concrete democracy any more. It is easy for populist movements to break with the formal side of democracy. Italy offers abundant illustrative material of that danger.
Stock market crash, debt crisis and social democratic failure
Interview with Elmar Altvater
[The political scientist Elmar Altvater teaches political economy at the Otto-Suhr Institute for Political Science in Berlin. In this interview, he speaks about the financial markets, threatened democracy, the necessity of a new global financial architecture and the possibilities of a leftist project. This interview published in: WochenZeitung, 11/7/2002 is translated from the German on the World Wide Web,
http://www.woz.ch/archiv/old/02/45/6850.html.] WoZ: Did the latest stock market crash surprise you?
Elmar Altvater: No; I expected that. The crash confirmed the actual wildness of the financial markets. The massive losses in assets would not have occurred if an enormous bubble had not formed through wild speculation – above all in the New Economy in the US. The financial capital also became wild through the management of mammoth corporations where corruption, fraud of shareholders and selling off pension funds cheaply spread.
There were stock market crashes in the early 20th century. What is new about the financial crash today?
Globalization was not so far advanced at that time. In addition the separation of the financial sphere from the real economy is greater than ever in the history of capitalism. This separation occurred with the industrial crisis and inflation at the beginning of the seventies when the interest rates were raised. The financial markets began to compete globally for capital with the collapse of the system of fixed rates of exchange and liberalization of capital markets. The costs for capital are interests and stability promises. Guaranteeing currency stability and keeping interests high were political functions of nation states. From the middle of the seventies, the interest rates exceeded the real growth rates. This made it even more attractive for owners of capital to invest their money in the financial markets rather than the real economy. Expressed in numbers, the world economy grew around forty percent in the nineties while the financial markets grew hundreds of percent. Funds could not possibly yield fifteen percent profits for years while the real economy only grew one to two percent. Trees do not grow to the sky.
Aren’t the financial markets somewhat autonomous?
This may be one of the mistakes in reasoning of many small investors. The financial markets make themselves independent but still depend on what happens in the real world. Some time or other the claims from the $50 trillion of derivative assets must be settled. If that does not happen, there will be an open crisis.
In one of your books, you conclude from these developments that financial stability is like a public asset that should be secured by a new world financial architecture.
Financial stability is a public asset. Without financial stability, money is worth nothing. Without it, the economy and society could fall into deep crisis. The financial crises of the nineties also showed that stability is a very precious asset. Some societies must spend twenty to fifty percent of their gross domestic product to maintain their banking system in crisis times. This is not only a third world phenomenon. In Berlin, for example, the general public had to spend 21.6 billion Euros to save the banking corporation insured by a state guarantee from bankruptcy. This has strained the budget so some schools have no money to buy toilet paper today. The term speculation bubble awakens the erroneous impression that this is only a game. However this is not true at the end. The profit demands are virtually produced but must be concretely fulfilled. If that does not happen, the financial market presses on the claims of the general public by flexibilizing labor markets and reorganizing social benefits. Employees must renounce on their demands so the claims of capital can be fulfilled. An enormous redistribution of capital is in full swing that could be simply described as an inequality machine. Thus a new financial architecture is needed that limits the possibility of speculation bubbles, for example by controlling short-term capital movements. The World Bank and the International Monetary Fund (IMF) must be reformed. In addition the global credit markets need an ordering framework. The offshore centers must hold to international agreements.
You said in Zurich the Swiss have civilized themselves. What did you mean?
Switzerland has civilized itself by doing several things to stop the money washing – later than other countries. However it has done nothing up to now against the tax flight from abroad. In Germany 35 billion Euros of regular taxes can flow into Switzerland. This should not happen between neighbors. Still Switzerland does not do anything against this.
Beside speculation bubbles and money washing, wild financial capital produces another tragedy: the indebtedness of developing countries. In heavily indebted Brazil, the newly elected leftist president Lula da Silva promises to improve the living conditions of the population. At the same time he must hold to the rigorous economizing conditions of the IMF. How is this possible?
Lula is in a very difficult situation. His predecessor had negotiated an IMF credit of $30 billion. This credit was tied to the condition that Brazil achieve a budget surplus of 3.75 percent. This surplus is only possible with savings, that is with a new transfer of national assets into the treasuries of the large Brazilian and foreign banks. This also demonstrates the bitterness of help from the outside. On one side, institutions like the World Bank say they want to reduce poverty in half while on the other side pursuing a policy that brings about the opposite.
What do you recommend to Lula?
Lula must try to observe the conditions with the IMF while also re-negotiating them. Secondly, he should not comply with the prescribed growth. Brazil will not be able to realize a surplus with this growth. Lula must focus on the informal sector that involves over sixty percent of employees. They need credits, non-profit cooperative structures and political measures for better income distribution. The informal sector may not remain the shock absorber for globalization tendencies as under Lula’s predecessor. Cannot Brazil build an alliance of developing countries against the IMF and other creditors?
This is still a long way off. In the eighties, the IMF prevented the formation of a debtor cartel. I do not see any great hope on account of the immense counter-pressure of the US. On the other hand, Brazil’s progressive forerunner role could create a counterweight to the US in Latin America in the long-term. Debt cancellation is also a problem of political opportunity. Egypt, for example, would hardly have become indebted if it had not supported the 1991 Gulf war.
In Europe social-democratic governments were in power in the nineties. They could not or would not prevent the parallel expansion of the power of the financial markets. Hasn’t social democracy finally accepted that there is no alternative to capitalism?
There have always been alternatives. August Bebel said social democracy is the physician at the sickbed of capitalism. This has not changed. Social democracy stands for reforms that obviously benefit the masses and stabilize capitalism. The last social democratic attempt to carry out autonomous Keynesian policy against the markets was made in 1981 by Francois Mitterrand and failed because the markets Europeanized or globalized at that time. The French shopped in Germany. Since then, European social democrats have mutated into moderate neoliberals, an idea that ideologizes itself in the concept of a “third way.” They pursue a policy that supports the markets and still maintains something social.
In your essay “Time needs Radicalism and Radicalism needs Time,” you wrote that a new leftist project is necessary. What would that look like?
That kind of alternative project cannot be conceived or even tested on the nation-state plane. A total concept on a global plane is necessary that cannot be drafted on the writing desk. This concept must arise in the discourse and political praxis of new movements. I have great hopes in new movements like Attac. New perspectives must emerge in the process itself and cannot be anticipated.
Can you name a few benchmarks?
I return to the beginning of our conversation. A global project to regulate the global markets is certainly imperative. This is a necessary reform, not an alternative to capitalism. In addition, labor must be protected. The great uncertainty in flexibilized working conditions leads to rightwing populists exploiting this situation as we see already in Holland, Denmark and Austria. The uncertainty problem cannot be solved through nationalization since nationalization cannot accomplish anything when the real economy, the factory and the office have lost their centrality.
Doesn’t that mean that democracy is lost to us through the expansion of market power?
This is a great problem that the United Nations has also recognized. The latest report in the UN program on human development is devoted to the question about democracy in a fragmented world. The conduct of self-confident financial magnates or the remark of the head of the Deutsche Bank that politics is in the towrope of the financial markets and that this is good shows that a partial de-democratization occurs with the independence of the financial markets. The last minimum of equality in society is undermined. When this equality doesn’t exist any more, there is no concrete democracy any more. It is easy for populist movements to break with the formal side of democracy. Italy offers abundant illustrative material of that danger.
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