Staggering news from the Netherlands - The bankruptcy of neoliberalism according to bankers and entrepreneurs

On November 14, 2013 there was a meeting in Amsterdam with interesting and surprising statements, coming from the financial and business community in the Netherlands and Europe. They advocated – in a confidential setting – for measures virtually no socialist party would dare to take on his behalf. In business circles one is surprised that people do not rebel against the state’s budget cuts. Here is a report.

Last night we had a special, baffling Gulf Group Evening about neoliberalism. One of the attendees had just returned from a meeting with Dutch bankers and entrepreneurs, employees of the European Commission and the Dutch Central Bank and some scientists.
Here is a brief account of the evening. The following was said by bankers and entrepreneurs, with additions of participants to the evening:
- The Dutch economic and financial policy is all wrong , the economy is hurt dramatically by the cuts;
- The multinationals have accumulated too much money and are not investing it productively;  so there is over-accumulation, a Marxist term used by the bankers;
- The corporate tax for companies should be dramatically and rapidly increased so that money flows back to the state and can redistribute it;
- The ratio between capital and labour is totally skewed and has grown at the expense of labor;
- The wages in the Netherlands for many years have been too low and should urgently be increased because people are not spending and small and medium businesses go bankrupt;
- The cuts in state expenditures are fragmenting and undermining society;
- It is astonishing that the Dutch do not revolt, said a surprised banker;
- The 3 % target for the government budget deficit relative to GDP, which makes people widely unemployed and unhappy (according to a recent newspaper article the suicide rate in the Netherlands has increased by 30 percent) is a randomly picked rate;
- The banks in the Netherlands are in a precarious situation, because when people want to get their money en masse from the bank, that money is not there and the government must intervene with much higher amounts than previously - which is probably impossible;
- The trade union movement in the Netherlands is very weak, they are wimps, they walk behind the government policy .

The participants to the Gulf Group Evening noted that the same austerity policies in the Netherlands and other European countries in the thirties had led to almost all political parties to look alike in their austerity drive, and that this had led to a mellow population that lost confidence in politics, and to the emergence of nationalist and fascist movements, in the Netherlands and elsewehere, but especially in Germany. And it had led to the Second World War.
Only after the devastating war in Europe Keynesian policies were put in place, with an important role for the state in the economic process, and a redistribution of power between capital and labour in favour of labour, and the welfare state was carefully built.
Participants also noted that it was strange and unfortunate that it first appeared the financial and economic crisis of 2008 would lead to a replacement of the global financial system – that with its derivatives and ever newer and incomprehensible financial products had become unmanageable - by a better system, but that nothing was done with the proposals of the international committees that were set up. The current financial (non)system just went on, and even deepened. A large part of the population of Europe goes along with it, and is part of it by home ownership and as co-holder of the pension system.

Aafke Steenhuis
Jan Joost Teunissen

The future of Europe

Drawing made by my daughter Belle after a photo of 1967 when young people in Europe were full of energy and optimism.

In July 2013, FONDAD organised a conference on the future of the euro and Europe at the Dutch central bank in Amsterdam (De Nederlandsche Bank) that was attended by officials and academics. It was a closed meeting of a small group of experts exchanging views.

In August, September and October I was six weeks in Latin America for a book my wife and I are writing on ports and the world economy and upon my return, after I had done some follow-up to that trip, I resumed my readings on internet about the current state of thinking and acting on the world financial system and the future of Europe.

A week ago I received from one of my friends of the FONDAD network, Avinash Persaud, an article to be published in the Financial Times, Bail-ins are no better than fool's gold. I circulated it among the participants of the July Conference at the Dutch central bank and a few others. That prompted reactions and I circulated more articles, the last one being a speech George Soros gave at a conference in Kiel on the future of Europe.

When I circulated these articles over the past week, I accompanied them by short letters. To share with you some of my thoughts on the world economic system and Europe I copy those letters below.

22 October 2013
Friends,
Below is a piece by Avinash Persaud, partly inspired by the FONDAD conference held at De Nederlandsche Bank in July.
After a quick reading my initial comment is that, in my view, financial crises are, first of all, a result of policy failure (rather than market failure), and that boom-bust cycles can be prevented by establishing a better international monetary and global financial system, and by good countercyclical policies.
I fully agree with Avi that we do not need bail-ins if we prevent systemic crises. In my view it is a shame that, say during the last decades, evitable systemic crises have not been prevented. Crisis prevention should have become a priority for policymakers. Policymakers should have listened to the warnings Bill White and Avinash and others made many years before the current crisis started in 2007. It is a shame they did not.
Yours,
Jan Joost

23 October 2013
For those of you who are not familiar with Bill White's analysis and warning of systemic crisis many years before it erupted in 2007, here is a piece that summarises Bill's role. I assume it is based on a long article that was published earlier by Der Spiegel. You may agree or disagree with the last para of the piece that follows (arguing that central bankers should step back and let the free market control financial activities). http://www.thenewamerican.com/economy/economics/item/4442-william-white-of-the-bank-of-international-settlements-predicted-the-economic-crisis

27 October 2013
I recognise some of my own thinking in Soros' recent speech on the future of Europe (see below) and agree with him that Europe's creditor countries (including the Netherlands) are in a position to create a more hopeful and more efficient Europe.
In my view, Europe could become again an inspiring example for the world -- if it maintains its social ideals, its social system and creates more effective economic policies, for the sake of Europe and for the world at large.
Large companies are thinking and acting locally and globally, and people and governments in Europe and elsewhere should do that as well. It would be a shame if Europe drowned in its own impotence and self-created problems catering at nationalism and xenophobia.
I apologise for sending you during a week so many articles and bothering you with my own beliefs and intellectual and social anger, but I hope you will forgive me and take into account that I was in Latin America for six weeks (for a new book I am writing with my wife on ports and the world economy) and gradually updated myself by reading old and new news.
Have a nice Sunday,
Jan Joost
http://business.financialpost.com/2013/10/02/george-soros-the-euro-crisis-might-be-over-but-europes-nightmare-is-getting-worse/

28 October 2013
I hope the German and Dutch officials are going to move, but I doubt they will and I am almost sure that if they move they will do so insufficiently. The dogmas among the officials and the economic interests of the companies and better-off citizens (not only in Germany and Holland) are strong and the politicians and technocrats with other, wiser views are weak. Also, there is too little wisdom and too little pressure coming from academics; many of them sharing the same dogmatic ideas about proper economic policies and systems. I remember Robert Triffin once was saying to me, with a sad and lightly angry expression on his face, that most of his academic colleagues were whitewashing policies rather than criticising them and suggesting alternative policies. 
Yours, Jan Joost

Dijsselbloem is right!

 

Jan Joost Teunissen

Just a few days ago, I was disappointed by Jeroen Dijsselbloem ... and now I am excited and would like to give him a compliment, even a great compliment!

He challenged the financial sector, telling them that from now on it would not be the taxpayer who would pay for the risks they have taken, but themselves and that the party - where profits were private and losses borne by the community - was over!

Naturally he received a lot of criticism for his surprising stance, both as leader of the Euro group and as Minister of Finance of the Netherlands. The criticism came, not surprisingly, from people who had set aside a lot of money in the Cypriot banks. And it came from politicians who said that, okay, he was right to finally tackle the financial sector, but he should have done this silently and not openly and publicly as it would stir emotions in the financial markets and among savers who would no longer trust that their money was safe in the banks. Thus it could prompt a widespread run on European banks when the next banking crisis emerged in another European country. And if that country were a large country, then the whole euro system might tumble. It would not be the first time that a chain reaction would damage the world financial system. This young and inexperienced Dutch minister of finance has behaved incompetently and irresponsibly. He should be replaced as soon as possible by someone more experienced who is familiar with financial markets and knows what one can say and do, and what one cannot say and do!

Since late Tuesday evening I have followed the harsh and emotional attacks on Dijsselbloem. What was actually the criticism? No more than that he had sown anxiety among people who work in the financial markets or among people who defend the markets through thick and thin. And, obviously, among savers who have put more than 100,000 euros in the Cypriot banks that are now being "cut up" or dissolved.

Dijsselbloem’s new policy is clear: "Shareholders, bondholders and big savers: from now on, you will have to contribute to the rescue or restructuring of a bankrupt bank."

Good, I think, finally there is the beginning of a change of policy vis-à-vis the financial sector! It's high time!

The only exception I would make is for people and companies in Cyprus that are "unreasonably" affected by the new policy of Dijsselbloem and his colleagues. If a business customer of a bank has all his money in a bankrupt bank, it seems unjust that he will lose an important part of the money that exceeds 100,000 euros. If I would still be in the position that Fondad would have over 100,000 euros on a business bank account and I would have established Fondad in Cyprus instead of the Netherlands, I would now protest and say that our work was made impossible if our bank was dissolved and we had lost a significant portion of our revenues.

For the rest, I have nothing but praise for the initiative by Dijsselbloem, and his openness about it. Without that openness, without the media echoing his words, the financial sector could have continued to lean backwards and let the taxpayer pay for its risks, revenues and losses.

I hope Dijsselbloem’s initiative will be the beginning of a democratization and socialization of the international financial system, in which governments and politicians take back the reins instead of, as they have done way too long, giving the financial sector free play. The current crisis in Cyprus, in Europe and in the rest of the world, gives good reasons for such democratization and socialization.

Cyprus, Dijsselbloem and the Need for Democracy

Jan Joost Teunissen

In the case of Cyprus, the error of Jeroen Dijsselbloem, the Dutch finance minister and head of the Eurogroup, as well as of his European colleagues, is that they forgot about democracy. You cannot abolish democracy, even though in the cases of Greece and Italy it appeared that you could replace democratic governments by technocratic governments. Also, Dijsselbloem and his colleagues underestimated the anger and the fear of savers like you and me, as well as the "investor sentiments" of the people operating in the financial markets.

Of course, in principle Dijsselbloem is in favour of democracy. But then he, and his colleagues, should have welcomed that in Cyprus democracy - the parliament - has triumphed and not the technocracy.

More democracy in economic policy making in European countries is urgently needed, if only because its citizens are rapidly losing confidence in their leaders. Yes, they have chosen them, but not because they trusted their leaders to do a good job but because they had no alternative.

More democracy in economic decision-making and more protests of undignified citizens, are also urgently needed to remind policy makers that they should think better about how to address the crisis of Cyprus, and of the euro. And, last but not least: both the protests and the rethinking should help to change course!

Economic policymaking is too narrow-minded, as it is not embedded in a broader vision of what is at stake in society. Over the last decades, it has lacked that broader embedding and, instead, has left much of the thinking and acting to the players in the financial markets, especially the bankers. This has not only given way too much space to idiotic things that brought our economies to the brink of bankruptcy, but also led to recurrent crises in Latin America, in Asia, in Russia, until eventually the system was hit in its heart, that is, the U.S. and Europe.

One pretends that small countries such as Greece, Portugal and Cyprus are the problem, but they are not. The problem is the capitalist system with the dollar as the key international currency and the unbridled financial markets with their agents operating in it to enrich at the expense of others. That is the problem.

Not the poor but the rich are the problem!

Not Greece or Cyprus are the problem, but the United States and the maintenance of the dollar as the key currency of the system, are the problem! And let’s not forget that from the sixties onwards, sensible plans to reform the system have been proposed and even discussed by policymakers in endless meetings (eg in the early seventies by the so-called Committee of Twenty, a predecessor of the current G20). But no action was taken. Instead, an international monetary and financial system was maintained in which the United States and the U.S. dollar play a dominant role.

As we all know, economic policymaking is a matter of balancing political interests and choosing a policy that underpins political interests and keeps them intact - or changes them!

We also know that economic policies support a distribution of power between people and groups, or, to mention an old-day distinction that still applies: between labour and capital.

"The" economy is the result of human action and the power of people and groups who participate in it, and that is almost everyone. Consequently, economic policymaking is not "neutral" or "technical" as technocrats want us to believe, it is political.

What policy makers, politicians, entrepreneurs and journalists present as "sound" economic policies is equivalent to satisfying the needs of people working in the financial markets. In this way, economic decision-making has become dependent on "investor sentiments" and short-term horizons of the people who work in the financial markets.

It is not only the 'day traders' whose capricious behaviour they respect, but also those who make investments decisions for pension funds and other institutional investors.

By adopting "neoliberal" policies, governments have become the slaves of bankers and other powerful people in the financial sector. They have little impact on what is economically happening within countries and between countries. This explains their powerlessness to solve the euro crisis and other crises.

The financial markets not only have a too dominant role in the current world capitalist system, but they are also a major cause of the emergence and persistence of the crisis, both the international and the European crisis.

If one wants to address the crisis in Europe and the global financial and economic crisis in a more serious way, one should begin by reforming capital markets rather than labour markets.

We need more, rather than less, democracy in economic policymaking. This applies both for individual countries and for the joint international approach to the euro crisis and the international crisis.

Dijsselbloem and his colleagues should welcome the fact that the parliamentarians in Cyprus and the people who elected them, took action against technocratic decisions made by the Eurogroup and the government of Cyprus.

Without noise, resistance and protests, there is no democracy. Dijsselbloem, as a former parliamentarian, would or should agree with that.

Flaws in the Austerity Debate - Remember Triffin

With a friend who belongs since long to the Fondad Network (John Williamson)  I had a discussion on the austerity debate (see, for an interesting article, "Paul DeGrauwe and the Rehn of Terror" by Paul Krugman).  

 In one of my letters I said:

"Following up on the austerity debate, I see a serious neglect of the world system aspect of the crisis in most analyses, in both the euro crisis and the international crisis. Rather than focusing on the way the crisis has emerged and developed, the debate focuses completely on the worrisome level of government debt, "inflexible" labour markets, and insufficiently regulated and supervised banks -- to name three features that experts, politicians and journalists discuss endlessly.

This framing and narrowing down of the discussion is fair enough if its purpose is to focus on certain aspects of the crisis. But it is not fair if its purpose is to prevent a broader and more fundamental analysis of and response to the crisis.

A second flaw in the debate about the (euro) crisis is that most experts, politicians and journalists reduce the debate to policies that they see as adequate responses to the crisis. So they present austerity as the solution to the government debt problem, "reform" of labour markets (i.e. reducing wages and making it easier to fire workers) as the solution to the problem (what exactly is the problem?) of inflexible labour markets, and better regulation and supervision as the answer to the problem of having to bail out banks.

I have long hoped for a more serious discussion of the crisis that would have departed from how the crisis emerged and developed in the international capitalist system. As you know, it started in some weak, sensitive parts of the system, spread to other parts of it, and ended up in creating, among other, the euro crisis. A serious analysis of the crisis would have suggested other responses than the current ones. Current policy responses are basically geared at crisis management instead of crisis resolution and crisis prevention.

I find it depressing and a shame that most analyses are superficial, flawed and misdirected. In such way it will be difficult, if not impossible, to resolve the crisis and prevent future crises. 

Finally, I think that we should analyse the crisis not only from an economic point of view but also from a political and (socio) psychological point of view. Otherwise, we will not come up with proper responses." 

The picture above is of Robert Triffin and me, taken during an interview I had with him in 1985 at his room at the University of Louvain-la-Neuve. I have written several articles about Triffin, when he was still alive and active, and after he passed away in 1993. In my bio as member of the board of the Triffin Foundation you can read a little bit of how important Triffin has been for me, and still is. 

The Irish example

The Swiss newspaper Le Temps of today summarised it nicely:

L’Irlande finit par assainir sa situation économique
L’ancien tigre celtique pourrait se passer du soutien européen fin 2013. La croissance reste cependant atone et le chômage massif.

“Ireland succeeds in curing its economy – The old Celtic Tiger will be able to do without European support at the end of 2013. However, growth remains sluggish and unemployment massive.”

For those of you who read Spanish, this article, written by Vicenç Navarro, may be interesting. It argues that Spain should not follow the Irish example.