The public discussion about the root causes and consequences of the financial crisis seems to be over before it really began. In Europe, the discourse focuses on the astonishing economic recovery, rather than the roots of the crisis and how we can prevent a recurrence.
What would it take to prevent a recurrence? In addition to rebalancing the relationship between the state and the financial sector, the state must regain its dominance and its capacity to act, independently from the financial sector. What might this take?
1) Financial “borders”: In a world in which multinational companies are able to dominate national politics and shift their capital freely between jurisdictions, it is illusionary to think that states will ever be able to set and enforce rules for the financial market. It is only possible to combine two of the three following conditions:
- globalized financial players
- stable financial markets
- national policies
In the European context, there is a dispute between those who insist on regional supervision to ensure stable markets and those who insist on national supervision. The implementation of a European financial supervision institution was a step in the right direction. But, some member states would impair the institution by denying it sufficient funds and personnel. If we still want to allow cross-border financial institutions in Europe, the regionalists must win out over the nationalists in order to ensure strong and effective supervision.
At the global level, as long as we find a world government or world regulation unrealistic or undesirable, then the stabilization of the financial markets will depend upon the ability of nation states regulate every financial player within its political borders.
2) State Capacity: Investigations into the causes of the financial crisis reveal a frightening deficit of expertise in national public institutions. In many cases, market-related laws have been written (and passed) in the relative absence of information (not to mention deeper analysis and understanding) about market size, structure and character. This is analogous to designing and constructing schools without studying the demographics sufficiently to know who the schools might be serving. Thus, parliaments and state institutions desperately need to expand their expertise on financial markets and establish effective rules. Financial supervision authorities, in particular, need better and more-independent research to understand the national, regional and global markets over which they have authority.
3) Political influence of Markets: In Germany, the financial sector contributes less than five percent to GDP, but 20 percent to party donations – a similar trend can be observed in most industrialized countries. Could this be a reason why, in virtually all states, the interests of the financial players seem to have priority over the interests of the majority of citizens? We can see many examples – in Germany and elsewhere – of how financial interests trump all others. When do we acknowledge and deal with the consequences for democracy? As a starting point, we must take action to ensure that regulated entities, such as financial institutions, are not allowed to make donations to political parties.
4) Consequences of the Crisis: How can we address the adverse impacts of the crisis if we lack information about these impacts? My impression is that, due to conflicts of interest, much relevant information about impacts is being suppressed. If we really knew what happened, I am sure that some people would be fired; some would be required to pay compensation for damages, and some would be punished by law. To date, the main financial institutions have not faced any legal consequences.
We need powerful parliamentary committees investigating the crisis in several countries. In the U.S., we have yet to see the report of the Financial Crisis Inquiry Commission. In April 2010, Iceland published a very detailed report (including analysis of cross-border transactions) which establishes who was responsible for the unprecedented crisis that hit that country so hard. But, in Germany as well as almost all other countries, there is no institutionalized or systematic investigation of the financial crisis at the national level.
We must come to terms with not only the political dimensions of the crisis, but also the legal dimensions. Investigating complex financial misbehaviour or even crimes can only be done by highly qualified specialists, but most states do not have such specialists at their disposal. This must change so that the state can put legal pressure on financial players and, thereby, fulfill its responsibility to its citizens.