[DEBATE] : ATTAC’s statement on the financial crisis and democratic alternatives

[Riaz K Tayob]

The time has come: Let's shut down the financial casino
ATTAC’s statement on the financial crisis and democratic alternatives
“Disarm the markets!” When Attac was founded in 1998, this slogan was 
formulated against the
background of the financial crash in East Asia. In the meantime, we have 
witnessed other crises
triggered by financial markets: in Russia, Brazil, Turkey, Argentina and 
the burst of the “New
Economy” bubble in 2001.
At present, the rich world is in the middle of a crisis, which is the 
heaviest since the Great
Depression in 1929. The crash at Wall Street in September 2008 marks the 
end of a historical
period: the system of financial capitalism, a system driven by the only 
search for maximum profit,
has collapsed. It destroyed itself as a result of its own inherent 
contradictions. The financial
shock waves have just reached the real economy. The US has entered into 
a recession, the EU is
following. The entire global economy will be affected.
The contraction of economic activity will increase unemployment and 
inequality. New pressure
will be put on wage-earners to accept more “flexibility on labor 
markets” implying lower wages
and weaker social protection. The decrease in aggregate demand from the 
rich countries will
also hit the vulnerable economies of the developing world and increase 
poverty. The Millennium
Development Goals and the goals of a socially and environmentally 
friendly sustainable
development worldwide will get completely out of reach.
The financial crash and the recession converge with a sharp increase in 
prices for oil and food
which has led to severe social crisis in several developing countries 
and generated hunger
revolts. Both, commodity and food price increases have multiple causes. 
But again as with the
several financial crises, speculation by hedge funds and other 
institutional investors has
considerably contributed to the price peaks and instability.
The trigger of the current crisis was the excessive lending of subprime 
mortgages to US
households, and the corresponding flawed procedures of securitization 
through which these risky
loans were sold to financial institutions and households, in the United 
States and worldwide. The
ongoing wave of defaults had dramatic consequences on financial 
institutions such as investment
and commercial banks, or hedge funds. Now, also the non-financial sector 
is affected
tremendously. The economic, social and environmental outlook for 2009 is 
bleak for quite some
parts of the world.
One should have known better. The crash unfortunately confirms the 
forecasts by heterodox
experts such as Nobel Prize laureate Joseph Stiglitz, by Attac, by 
social movements and by other
critics. Even supervisors knew that the system was risky, but there was 
no willingness to act due
to the dominant belief in the self-regulation of the market.
Now, under the pressure of the crisis, even the mainstream of the 
financial community is calling
for reforms. However, these proposals do not go far enough since they do 
not tackle the
systemic problems behind the crisis. They are mainly aimed at the 
financial industry and oriented
at issues of stability. This is not enough. Financial capitalism has 
also disastrous consequences
on distribution and democracy. Bankers call for state intervention, what 
they mean is socialising
losses, while keeping profits in private pockets. The rescue actions by 
the US over 700 billion –
the biggest in human history – the rescue packages in the UK, Germany 
and other countries
clearly show this logic. When the financial community talks about reform 
they, at best, mean a
piece-meal (re)regulation and short term crisis management, trying to 
save the neo-liberal course
and to return to business as usual after a while.
What is needed in the interest of the large majority of the people are 
real changes towards
another paradigm, where finance has to contribute to social justice, 
economic stability and
sustainable development. We cannot allow to return to the status quo 
ante in the years to come.
The crisis is not the result of some unfortunate circumstances, nor can 
it be reduced to the failure
of supervision, rating agencies or misbehaviour of single actors. It has 
systemic roots, and hence
the structure and the mechanisms of the system in general are at stake.
The financial markets constitute the centre and the driving force of 
neo-liberal globalisation. The
finance sector evolved to become dominant over the economy after the 
introduction of free
floating exchange rates between the major currencies in 1973, the 
abolishment of capital
controls and the subsequent liberalisation and deregulation of financial 
markets and the financial
industry, including making supervisors so called independent, but in 
practice subject to heavy
and successful lobbying from the financial industry. Since then, the 
financial industry and
mechanisms have experienced a phase of rapid expansion; the masses of 
financial assets, debts
and world wide search of financial profits grew in tandem. It is also 
important to remember the
sharp acceleration of this process in the aftermath of 2001, when the US 
economy recovered
from the dot.com-crisis in particular the dramatic rise of both the 
domestic debt of the United
States (notably household debt), and the growing external deficit of 
this country, financed by the
rest of the world.
Together, these trends have led to the establishment of a new economic 
model, a new form of
capitalism, which by some is called financial globalisation, some call 
it financial capitalism and
others speak of shareholder capitalism. However you name it, one thing 
is clear: whereas in
previous times financial markets had a subordinate and instrumental role 
to the real economy, this
relationship has been turned around. The grasp of “financial interests” 
on the “real” economy
increased tremendously by making all economic activities subservient to 
profits in the financial
markets and creating financial instruments to make profits only through 
the financial markets,
while at the same time failing to serve sustainable production and 
farming, and stable savings by
‘normal’ customers. The logics and dynamics of short-termed profit 
maximization have penetrated
into all pores of economic and social life. The perfect mobility of 
financial capital, which is the
result of neoliberal policies, plays a crucial role in the world 
economy, today. It creates global
competition not only among multinational firms, but also among nation 
states, their social and
fiscal systems and among workers of different parts of the planet. By 
creating a power
relationship in favor of corporations relative to their workers, this 
domination of capital has led to
rising inequalities, to decreasing labor, social and environmental 
standards as well as to the
privatization of public goods and services.
Shortly, the “freedom” of financial actors has been extended at the 
expense of the huge majority
of people and has lead to economic activities that degrade the 
environment. The failure of this
model has never been as obvious as today in the food crisis, the climate 
crisis and energy crisis.
This model that was supported by governments worldwide is completely 
discredited. Therefore
clear consequences must be drawn so that political and economic 
decision-makers fully turn
around this unsustainable and un-equitable financial system towards the 
needs of people, equity
and sustainability.
A historic window of opportunity is opening. It will depend on pressure 
from public opinion
whether a real change of course is achieved.
Another finance system is possible: Stability and solidarity before profits
Due to the complexity of the present finance system, it is impossible to 
resolve the problems with
only one instrument. There is no Archimedean point. A whole box of 
instruments will be
necessary. However, in view of the hundreds of single proposals which 
will come up in the near
future and which all will be controversial, we can define some basic 
requirements which have to
be met in order for single proposals to be acceptable as emancipatory 
reforms:
A. Systemic changes instead of piecemeal repair
The whole finance system in its neo-liberal form has proven to be 
economically unstable and
inefficient as well as harmful to equality, general welfare and 
democracy. Therefore, systemic
changes are necessary. One of our major goals is to break down the 
pillars of neoliberalism, in
particular the worldwide mobility of capital. Some regulatory measures 
aimed at maintaining
asset-driven capital accumulation and pure financial stability, 
protecting the wealthy, and
superficial reforms aiming e. g. at mere “transparency” are unacceptable.
B. A new Bretton Woods instead of “self-regulating market forces”
The crisis shows that markets left alone without political regulation 
and democratic accountability
lead to disastrous results. Therefore, democratic control is required as 
well as international
cooperation instead of destructive competition between national 
economies. In economic and
financial decision-making, priority has to be given to sustainable 
development and to the human
rights of all three generations.
An appropriate institutional setting under the auspices of the UN has to 
be set up to strictly
regulate and re-orient the financial system. Due care will need to be 
taken to make such a setting
accountable and pro-active towards equity and sustainability, and 
capable of preventing (rather
than reacting to) financial crises. For instance, discussions to give 
the IMF a mandate to monitor
the link between financial markets and the real economy should be given 
to the UN, and should
assess the link between the financial markets and poverty and 
sustainable development. It should
support strong international intervention to prevent build up of huge 
trade surpluses / current
account surpluses in some countries and huge trade deficits/ debt / 
current account deficits in
other countries (currently US vs China). Such a UN body would also be 
the forum for decisionmaking
about the extent to which financial services companies, financial 
products/services would
be liberalized and freedom of capital movements is being limited. This 
would mean that such
decisions would not be taken in the WTO/GATS and free trade agreements 
(FTA) as is currently
the case.
National supervision and international cooperation between regulatory 
and supervisory bodies,
especially at the EU level, have to be strengthened, made democratic and 
broadened with a
mandate to serve societal needs. The participation of trade unions, 
consumers and other
stakeholders in regulation has to be assured. Rating has to become a 
part of public supervision
with a mandate to also assess the impact on society (e.g. avoid 
financial products, loans and
companies that destroy the environment).
For the immediate crisis management, close international cooperation is 
needed on European
level, including Switzerland and Russia and on transatlantic level.
Limits must be placed on unrestricted free trade and free capital 
mobility worldwide. The
dogmatic “openness” of goods, services and financial in- and outflows 
must be substituted by a
more differentiated approach. New international agreements must put 
other goals – like financial
stability, tax justice, or social justice and sustainability- over the 
free flow of capital, goods and
services. Social rights and historical conquests of workers must not be 
endangered by these
treaties; on the contrary, they should foster international solidarity 
instead of competition.
C. Breaking the dominance of financial markets
The basic orientation for a real change has to aim at breaking the 
dominance of financial markets
over the real economy. Some suitable instruments for that purpose are:
- taxation of all kinds of financial transfers including currency 
transactions, in order to finish with
speculation, to slow down the speed of financial markets and to end 
short termism while
financing fair and sustainable trade, production and consumption should 
be stimulated. This
includes a multilateral tax on all currency transactions to discourage 
short-term speculative
transactions across borders.
Second, national authorities should unilaterally impose an appropiate 
taxation on national stock
exchange transactions in order to stop speculation and ensure a more 
progressive taxation.
-Prohibition of the creation of (worldwide) financial industry 
conglomerates which are too big to
fail, or too internconnected to fail, and too complex to manage all 
potential risks.
- Progressive taxation of capital income. A main factor contributing to 
the swelling of financial
markets is the concentration of wealth. Thus, in order to slow down and 
stabilize financial
markets, substantial redistribution of income and wealth from the rich 
to the poor is required as
well as reducing incentives for excessive profit making and taxation 
evasion mechanisms used by
the rich and even the financial industry itself.
- Before redistribution, economic policy has to provide for just 
distribution: Wages must not grow
slower than productivity (except working time is reduced) and work has 
to be shared fairly.
- Privatisation of social systems and of important infrastructure such 
as energy and railways has
to be stopped and reversed where it already happened. The privatization 
of pension funds has to
be revised as they have lead to the creation of capital roaming the 
world for high profits and
investing in company shares that are socially and environmentally 
irresponsible.
D. Mitigating the effect of the crisis on real economy and “speculator 
pays principle”
As the current financial system and the crash have affected the real 
economy and society,
emergency programmes to mitigate its effects on the real economy and 
society are urgently
needed..
Given the depth of the crisis, bail out packages might be inevitable in 
order to prevent the total
collapse of the financial system. However, these rescue packages must be 
linked to strict
conditionality, excluding any moral hazard. In cases, where bail outs 
are successful without
nationalization, its costs have to be repaid by the shareholders - 
including interests. Where this is
not possible, the state acquires shares or nationalizes completely the 
enterprise.
The overall costs of liquidity injections, bail outs and mitigating 
measures should be paid primarily
by those who are responsible for the crisis and have amassed fortunes. 
Therefore a special crisis
fund should be set up in each country. The fund is fed by a one-off 
extra duty on all capital
income above 50.000 Euro and a 1% extra tax on all corporate profits in 
the financial sector.
A share of this fund should be used internationally for the assistance 
to those poor countries
which suffer from the crash and are hit by the food and commodity price 
crisis.
In addition, substantial public investment should be undertaken into the 
social infrastructure,
education, culture and environment as these sectors sufferend from 
under-investment and will
create employment and support sustainable development.
E. Reforming the EU, democratic control over the European Central Bank
Special attention has to be given to the EU. The financial dimensions in 
the Lisbon and other
treaties are shaped according to neo-liberal dogma. Article 63 of the 
Treaty on the Functioning of
the European Union (ex art. 56 ECT), which forbids any restrictions on 
capital flows not only
within the EU, but also to all third countries and thus sets the perfect 
conditions for the
overwhelming hold of finance on society, must be changed: There are good 
reasons to partly
restrict the movement of capital: to guarantee financial stability; to 
avoid tax evasion and tax
competition; to exercise an employment-friendly monetary policy without 
risking capital flight. We
also call for restriction of the freedom of establishment (art. 49), 
leaving capital free to migrate
wherever conditions are most favourable and financial institutions free 
to seek asylum in the City
of London or anywhere else they choose.
The decision-making on financial regulations and supervision at the EU 
level and in EU member
states needs to be fully revised and reoriented away from mainly 
supporting the growth and
competitiveness of the financial industry. A common system of regulation 
and supervision should
be set up, which is shaped according to the highest standards and not in 
the logics of a race to
the bottom.
Parliaments need to regularly assess if the right regulations on the 
financial markets and on the
financial industry are in place. The European Parliament needs to have 
the right to introduce
regulation. EU regulations should set all necessary criteria for the 
financial industry (for lending,
risk assessment, investment, issuing of equities/investment banking 
activities) so that financial
means and services are only provided to sustainable activities and 
poverty eradication.
Furthermore, it is necessary to alter the monetary policy of the ECB. 
The bank is at the very
centre of neo-liberalism in Europe. It completely rests upon the 
monetarist ideology by
committing itself primarily to price stability at the expense of 
employment, social justice and
economic stability. Consistent with the neo-liberal ideology, it is 
so-called independent and not at
all subject to democratic control. We demand the democratic control over 
this institution, whose
policies influence dramatically the fate of citizens. We disagree with 
the focus of the ECB on
keeping consumer price inflation under 2% - this is a central pillar of 
neoliberal policy. Instead,
we want the ECB to focus on employment and just distribution. Even the 
annual report of the
Bank of International Settlements (BIS, June 2008) advises that the 
interest rate policy by Central
banks should not only look at inflation figures to keep interest rates 
low but also assess the
impact of interest rates on “excessive and imprudent credit growth”, the 
creation of bubbles, and
spending and production patterns which are excessive.
The increase of the interest rate by the ECB as reaction to the oil 
price hike was fully in the line of
the neo-liberal dogma. Although the increase of relative prices, as in 
the case of oil, should not be
confused with inflation (which is an increase of all prices), Frankfurt 
was painting the spectre of
inflation on the wall. However, in the present conjuncture inflation is 
not the problem, but
recession and unemployment. The ECB’s policy is accelerating and 
deepening the crisis to
which the EU is heading.
Society friendly financial, monetary and economic decision-making will 
be improved when full
control and transparency of lobby and “consultations” by the financial 
industry and other large
corporations will be restricted and made accountable (to start with full 
transparency).
F. Reforms in central parts of the system
In light of the crisis, some cornerstones of the present system require 
special attention, such as:
a. Capital requirements and prudential practices in the banking sector
Capital requirements for banks have to be upgraded. In that respect 
Basle II was a step in the
wrong direction. Therefore Basle III is needed, drawing consequences 
from the crash. Offbalance
deals which are at the heart of the current crisis must be banned.
The procedures of securitization must be restricted to institutions 
under the strict control of
governments. Risky procedures of securitization, as in Collateralized 
Debt Obligations whose
purpose was the massive resale of subprime loans, must be prohibited.
Speculative financial products should be prohibited, especially in food 
and where they have a
destabilizing effect. At the very minimum: the bigger the financial 
conglomerate, the lesser
speculative products it can sell or trade in.
All new financial products need to be tested by supervisors for their 
impact on financial stability
and on society before being allowed.
Investment banking has to be shrinked to an extent, where its volume 
does not constitute any
more systemic risk. What remains from investment banking is fully 
brought under regulation and
supervision, and separated from other financial services. All investment 
banking activities should
include criteria that promote sustainable development of societies e.g. 
promoting shares of
companies that produce environmentally friendly products.
All financial-conglomerates covering retail and investment banking, 
securites trading and
insurance need to be restructured or separated and supervision fully 
adapted to the remaining
conglomerate structures.
The high bonus system should be forbidden as it incites risky behaviour 
up to the top
management, without accountability when high losses are made by the 
financial company or by
(its poor) clients.
b. Strengthening of the public and not-for-profit banking sector
After World War II, in Europe, the locally orientated, not-for-profit 
and public banking sector did a
good job. Over the last two decades, these banks increasingly merged and 
transformed into forprofit
commercial banks whose shares were traded on the stockmarket, developing 
towards the
Anglo-Saxon marked-based financial system. This trend hast to be 
inverted; public and not-forprofit
banks must be strengthened and exempted from EU competition law. The 
public should
own at least some of the key banks to provide stable finance for 
sustainable and just
development.
The re-nationalised banks and banks where the state has acquired shares 
as a consequence of
bail outs should be restructured to service the needs of society, 
including affordable credit for
sustainable projects and enterprises, universal access to good basic 
financial services, etc.
c. Rating agencies under public control
Rating agencies - which failed badly in the current crisis as well as in 
almost all crises in the last
few decades - should come under public control. They should no longer be 
paid by the firms they
rate – instead they should be financed out of a fund paid for by all 
users of the ratings and
issuers of financial products. They should not only rate the financial 
aspects but also take into
consideration social and environmental risks.
Accountants have failed to expose the weaknesses of the risk control 
systems of financial
institutions. The accountants allowed some activities in the subprime 
mortgage market,
derivatives and other assets to be off balance. Accountant rule settings 
needs to become again
a(n inter)governmental matter.
d. Regulating funds, especially hedge funds and private equity funds
Who needs hedge funds and what is their benefit for the economy? When at 
the 2007 G8 the
Germans asked for more transparency for Hedge Funds, it was argued that 
these funds have a
useful function because they take risks that others are not ready to 
take. In reality, these risks are
the risks of speculation only at the service of maximum profit. There is 
no benefit for the economy
stemming from these operations, on the contrary they destabilise the 
system. Due to the
practices of leverage the risk is transferred to the banks. This is why 
they should not take place at
all, and the current prohibition of short selling is unsufficient. 
Declaring hedge funds as an
instrument of risk prevention is the same as giving a pyromaniac the 
task of fire protection.
Hedge Funds have to be banned. Regulators and supervisors have to 
prevent banks from doing
business with hedge funds who are located in fiscal paradises. Nobody 
needs hedge funds
except rich individuals and institutional investors in search of 
high-risk maximum profit.
Private Equity Funds, too, have proven to be a stability risk and have 
served as a conveyor belt of
shareholder capitalism to real economy. This untransparent business 
model has to be stopped.
As an alternative, incentives have to be created to involve banks much 
more into company
financing and venture capital, in particular for small and medium sized 
enterprises. The public
banks have to play a lead role in company financing.
More generally, the EU should regulate all kind of funds with a 
directive: All funds must publish
their investment strategies and management fees. Certain investment 
strategies shall be
forbidden (e. g. naked sales), the credit borrowing (leverage effect) 
must be limited and a ceiling
of assets under control must be set. Profits made by funds must be taxed 
more than labour
income. Funds that have no legal seat in the EU (e. g. in offshore 
centres) or that do not comply
with EU standards should not get access to the EU market.
e. Limiting strongly derivatives.
Financial derivatives should only be traded at the stock exchange, 
standardized and authorized by
a supervisory body like pharmaceutical products are being assessed for 
their (long term) negative
impacts. When of pure speculative nature, derivatives should be banned. 
Trade over the counter
(OTC) should be banned.
f. Offshore Centres
Who needs offshore banking centres (OFCs) and fiscal paradises? Only 
rich individuals and
institutional investors who want to hide their assets from tax 
authorities, the mafia, terrorists, arms
traders and other criminal forces who want to launder money. There is no 
reasonable economic
argument in favour of maintaining the economic status of such 
territories. Therefore their
economic function should be completely closed down.
As long as this is not possible, because some big rich countries 
maintain themselves as OFCs
and protect others, a set of unilateral measures can be used, ranging 
from lifting the bank
secrecy of the banks under their sovereignty, via obliging banks which 
maintain branches in tax
heavens to close them, to putting a high levy on transactions with OFCs.
The “Savings Directive” of the EU has to be extended to all capital 
incomes (at present only
interest payments), to legal persons (at present only natural persons) 
and the automatic
exchange of information mechanism to Austria, Belgium and Luxembourg (at 
present 24
countries). The closure of these loopholes is a condition to exercise 
credible pressure on other
tax heavens like Switzerland or Liechtenstein to give up their bank 
secrecy and cooperate in an
international information exchange.
g. Measures against short term shareholder value policies
John Maynard Keynes recommended to “marry investors to their assets” in 
order to encourage
long term investment and impede harmful short term speculation. The 
power of short term
oriented shareholders could be limited by coupling the share voting 
rights to a minimum period of
share holding (5 – 10 years) and by the prohibition of stock options 
(which incite managers to
only care for the share price).
Instead the management fees should be ceiled and partly coupled to an 
indicator of general
welfare. Furthermore, trade unions, consumers and other stakeholders 
must be given effective
participation rights in corporate decision making.
h. Regulating indebtedness of households
Regulatory limits must be placed on indebtedness, first concerning 
households, by the imposition
of ceilings on the ratio of repayments and interests to income in every 
country. The housing of
social strata with lower purchasing power is one component of social 
programs on the part of
Governments. It must not become the privilege of the worst segments of 
private financial
institutions. We strongly support proposals to set up a new procedure of 
foreclosure which
would allow over-debted home owners to become tenants. However, access 
to individual home
ownership should not remain the main objective of social programs. We 
demand a real public
social housing development, with high social diversity and ecological 
standards.
Attac Austria, Attac Denmark, Attac Finland, Attac Flanders, Attac 
France, Attac Germany, Attac Hungary, Attac Italy, Attac Morocco, Attac 
Norway, Attac Poland, Attac Spain, Attac Sweden, Attac Switzerland