Lübeck, Germany It is amazing how much the economic recession and the responses to it are alike in the United States and Germany. American banks are said to have roughly two trillion dollars in toxic assets. Some twenty German banks have an estimated one trillion dollars in the same kind of toxic holdings that are backed by risky mortgages. They are toxic because they have lost value and may be losing more.
The German government is considering helping those lenders by giving them debt certificates in return for the assets. The government would not be exposed to a loss in the assets’ value until after the certificates mature in 15 or 20 years.
Germany’s minister of finance, Peer Steinbrueck, is seriously concerned about “the enormous amount of liquidity that has been pumped into the markets.” He believes that to finance its deficit, “the U.S. will have to attract about two-thirds of all savings worldwide every year.”
Industrial leaders in both Europe and the U.S. are complaining that even banks that received billions of dollars in government aid do not make the loans needed for a sustainable recovery. That is particularly true for Europe’s hard-hit aerospace and defense industries because airlines have been canceling orders.
Executives of financial institutions that suffered record losses nevertheless are demanding full payment of their contracted bonuses. A former executive of Dresdner Bank, for example, is suing for a severance package of 1.5 million euros, even though his division lost 5.7 million euros in 2008.
Steinbrueck apparently speaks for many of his countrymen when he questions the validity of the hitherto widespread belief that markets succeed best if they regulate and discipline themselves. That thinking was strongly promoted in the 1980s by President Reagan and Prime Minister Thatcher. “Rules are for fools,” the advocates of more deregulation used to say. Now Americans and Europeans learn the hard way that, when insufficiently regulated markets fail, it is the state that has to come to the rescue with massive bail-outs.
At a time when there is growing evidence of a worldwide loss of confidence in financial institutions, not only among investors and customers but also in inter-bank transactions, it makes no sense to discredit state aid and regulation as impediments to free markets.
The trillions of dollars which the Obama administration is now expending on aid to struggling banks and manufacturers increasingly worries America’s trading partners, in particular the Chinese government which holds nearly $2 trillion in dollar reserves. The governor of China’s central bank recently questioned the use of the U.S. dollar as the world’s dominant reserve currency in an article entitled “Reform the International Monetary System.”
Unless the economic downturn can be reversed within a year or two, many European commentators fear that the social security systems will suffer and create angry responses from the most vulnerable people. The former Soviet-controlled countries east of Germany are still lacking the economic resilience of Western Europe so that their governments may find it particularly difficult to soften the recession’s impact on the lower and middle classes.
Even in relatively well-to-to France, a recent survey found 50 percent of respondents in agreement with frustrated workers that want to take their bosses hostage.