U.S. will lose financial superpower status: Germany blamed the United States on Thursday for spawning the global financial crisis with a blind drive for higher profits and said it would now have to accept greater market regulation and a loss of its financial superpower status. In some of the toughest language since the crisis worsened earlier this month, German Finance Minister Peer Steinbrueck told parliament the financial turmoil would leave "deep marks" but was primarily an American problem. "The world will never be as it was before the crisis," Steinbrueck, a deputy leader of the center-left Social Democrats, told the Bundestag lower house. "The United States will lose its superpower status in the world financial system. The world financial system will become more multi-polar." – Reuters
Dominant Social Theme: Those American cowboys!
Free-Market Analysis: We wrote about how Europeans seemed a little smug recently when being quoted about the problems in the US. What the problems come down to, in our estimation, is that the Federal Reserve carried on with a loose money policy for so long that it created a euphoria of lending that it then punctured with rate hikes. Now, you could also make the point that the lending boom would have turned to bust no matter whether the Fed raised rates or not as nothing goes on forever in a straight line. The point of all this being that the subprime crisis in America was actually just another fiat money crisis, and the US$700 billion or whatever it turns out to be, is yet another fiat money bailout.
That the Germans would feel especially sanctimonious is perhaps predictable. But it is interesting to examine the downside of whatever it is that they are going on about. Here's the solution proposed by Minister Steinbrueck:
Steinbrueck, whose efforts to secure greater transparency on hedge funds during Germany's G8 presidency last year collapsed amid objections from Washington and London, attacked what he called an Anglo-Saxon drive for double-digit profits and massive bonuses for bankers and company executives. "Investment bankers and politicians in New York, Washington and London were not willing to give these up," he said. He proposed eight measures to address the crisis, including an international ban on "purely speculative" short-selling and an increase in capital requirements for banks in order to offset credit risks.
What this amounts to is just what Americans tried to get away from – the restrictive money culture of Old Europe. When you have a central bank with the power to print money, you have the most awesome power in the world. And sooner or later, about once every five or ten years, something goes wrong – the money piles up and the boom turns to a bust. So over time, regulations are put in place to ensure that the money spigot is controlled. Of course, in our opinion, these regulations are deeply cynical, since the problem is the central bank's money creation itself, not the way the money is handled after it has been printed.
Over time, regulations concretize and the lending function becomes wholly the property of the same monetary elite that is printing the money. That is, the control begins with the banking sector but eventually extends, through regulatory mismanagement throughout the country. This is of course the case in European countries which have this sort of bias culturally. But to see it taking place in America is quite unusual. It is not as far gone as the Europeans would like, though probably sooner or later it will be. And still the main problem will not have been dealt with, the money spigot itself. But this is understandable as everything that has been put in place has resolutely avoided grappling with the real issue.