Financial Crisis

In a talk with DW-WORLD.DE, Thomas Straubhaar, head of the liberal Hamburg Institute of International Economics, discussed the limited impact of political summits on financial markets, urged thoughtful decisions on global legal frameworks, and predicted 2008 would be a year of upheaval.

DW-WORLD.DE: Every day there seems to be another news story about bank crises and unrest in financial markets. How dramatic is the situation, really?

Thomas Straubhaar: For the financial markets, the situation is really quite dramatic. All told, in just a few days, several billion worth of assets have been lost, which has had an enormous effect on many individuals.

But for the real economy, we have high expectations that the stock-market drop in the US and the finance and real-estate crises there will have a relatively slight effect on Germany. Financial markets have a different rhythm than real goods and commercial markets.

Developments on financial markets are one thing, and the economic developments of real markets are another.

Politicians have begun talking about crisis intervention and solutions. Leaders of the Big-Four European nations (Germany, France, the UK and Italy) met on Tuesday to discuss recent developments on the financial markets. Can these countries actually improve the situation if they act together?

Such meetings are definitely symbolic events. They send the message that politicians are aware of the problems, that they are concerned about developments on financial markets, and are doing something about them.

But for financial markets, these meetings are essentially trivial. Financial markets operate by their own set of rules, and are much more hectic, breathless, and strongly influenced by economic forecasts. Any political decisions come way too late -- even more so when they don't lead to definitive actions. The current market's internal dynamic has been set loose, and until the last shockwaves have receded, political discussions will have little influence on it.

The most politicians can do is think about how regulations can be changed, or better applied, for the next phase of development. That is definitely important. But in terms of real economic development, the things that are being discussed on the highest political levels are less important than the decisions that filter down through daily politics.

We can only hope that [world leaders] won't try to influence the markets with panicky snap decisions, especially since the markets can't be so easily influenced. Hectic reactions are less important than giving thought to what basic legal frameworks are needed for global financial markets.

What sort of frameworks should be put in place?

First off, we now know that transparency is absolutely crucial. We now know that non-transparent risk-management can lead to enormous problems. Everyone involved is demanding something like reporting requirements.

Secondly, it is clear that the rights of shareholders need to be strengthened, and that they need transparency of management board activities. Supervisory boards are in fact responsible for guaranteeing this right. If they don't do it, or not to a great enough extent, then we have to think: How do we guarantee that the shareholders' property isn't damaged by poor behavior on the part of individual managing directors?

Should countries decide on these frameworks together?

One of the most important functions of these international meetings is that they can really discuss how these issues are dealt with and solved in other countries. It is important and positive for one country to learn from another country's experiences. Then you have to wonder whether single countries are capable of action, or if there needs to be an international agreement.

"Global players need global rules," as the saying goes. It is important to use such meetings to determine how far a world-wide framework for global financial markets should extend. It is a process of give and take, since worldwide regulations act to inhibit the competition of national regulations, which can advance experimentation and improvements.

Is there one country that has the best suggestions right now?

No, I couldn't say that. I think all the countries have been equally affected by the crisis, even though the source of the crisis lies in the US. But even in Germany we can learn from the mistakes of the US, especially in terms of the securitization of risk and the transfer of risk from one financial institution to another. I think we need to learn from the mistakes of other countries.

Shouldn't the banks take more responsibility and learn their own lessons from this crisis?

I think banks had to pay for their mistakes with enormous write-offs; they substantially dented their capital resources. Up to now in continental Europe it has been people who were active in trading who were affected by the losses, and there hasn't been any externalization of charges. Bank shareholders have bled, but not the public.

To me, it is important that it stays that way. It is an aspect of a free-market economy that not only the profits, but the losses are privatized, and not socialized. For this reason, I think aid packages for shareholders are totally the wrong way to go. I even see it as an error to bail out investors by lowering rates, because lower rates mean higher inflation expectations. And that means innocent third parties -- all of us -- end up paying for single acts of misconduct.

What are your predictions for 2008?

It depends on the frame of reference. Compared with the last two years, this year will be decidedly worse. If we look at the first five years of the decade, though, then I expect to see improvement ahead. More jobs will be created this year. So the mood in Germany will be better than it seems today.

Growth will be good at 1.5 to 2 percent, even if it is a bit slower than now. It will be a year of upheaval. After two good years, the question in 2008 will be: Where are we going in the mid-term? There is no reason to panic, but it is important to send the correct signals -- for example by preparing, now, a program to lower taxes in 2009.