Moon of Alabama 21 Gennaio 2009

Last week Helmut Schmidt, former German finance minister and chancellor who just celebrated his 90th birthday, published a longer piece (in German) on the financial crisis.

The headline asks: How can we escape the depression trap?

In the first part Schmidt explains why the financial crisis happened and why the international steps taken so far are, by far, not enough and come to slowly to lower the risk of a possible depression. The lost trust in financial institutions, Schmidt says, is the greatest factor contributing to the slump of the real economy and hinders any eventual recovery.

For the second part over to Schmidt as translated by me:

Six steps to curb speculation

Today's focus of governments and parliaments in many countries is to rescue some banks with extensive guarantees by taking over their non-performing assets and through the purchase of new shares (called nationalization). At the same time, central banks use similar means. This is in most cases useful, even as the states budgets plunge into egregious deficit, and although the unorthodox and enormous increase in money supply in dollars and sterling establishes future threats. But this alone will not restore confidence in the reliability of financial markets nor will the many national 'economy and investment programs' achieve such.

Because of the risk of depression the networked global economy can not wait years for the healing of the financial markets! Therefore, I think it is appropriate that the G-20-states urgently implement some very drastic steps. Considered for implementation by law or regulation must be these:

1. All private financial institutions (including investment banks, mortgage banks, investment and pension funds, hedge funds, equity trusts, insurance companies, et cetera.) And all marketable financial instruments are to be put under the same banks- and financial supervisory authority.
2. The financial supervisory authority sets equity-minima for all sectors of the private financial institutions.
3. For all financial institutions any activities outside of their own balance sheet (and the profit and loss account) are prohibited and punishable.
4. All financial institutions will be prohibited, under threat of punishment, from dealing in any financial derivatives and certificates, that are not approved and listed at an accredited exchange.
5. All financial institutions are by punishment prohibited to sell any futures and options on securities and financial instruments it does not possess at the time of the sale. This is to make speculation on falling prices ('short selling') more difficult.
6. Financial deposits and loans in favor of companies and individuals registered in tax and regulation havens are prohibited under penalty.

Obviously the leaders of the international financial industry will protest against such laws with sophisticated arguments. Obviously some radical market-oriented governments will give in to these protest, since they are already in the awkward situation to need the experience and expertise of the hitherto offenders. Therefore there is the question whether the 16 European countries in the Euro zone should implement this on their own.

/end of excerpt/

The last third of Schmidt's piece is about the implementation of stimulus packages and the need for more global cooperation on these issues.

Probably needless to say is that Schmidt certainly favors such a Euro-realm solution for financial re-regulation as any more global solution is unlikely to come early enough to prevent a depression.

Also probably needless to say is that I agree with Schmidt on this about 95%.

What is your take on this?

Source > Moon of Alabama | Jan 19