The impact of the economic crisis

A quarter of the respondents saw his income reduced by the crisis. People with a lower income and a lower education are disproportionately hit harder.

Geert Noels, managing director of Econopolis and author of Econoshock:
‘I am not surprised. Half the population receives his income from the government. It is actually a bit worrisome that so few people feel this, because the crisis is real. I wish there was more solidarity towards those who are affected – the people who lose their job. This could be done by also handing in a bit – on the pay and pensions of civil servants – by which the labour cost could decrease some and people would be fired less expeditiously.’

Paul De Grauwe, professor economy at the KU Leuven, has a different view on this: ‘The social protection and the pay agreements in a country like Belgium make sure that there is indeed a more limited impact on the income. Because of this the recession isn’t so deep. Propositions to hand in do not strike me as a good idea. At least not for this crisis. This is a crisis of the dropping out of demand and with such a measure you will further decrease the demand.’

Two out of three thinks it is good that the government has saved the banks. Probably not by coincidence the 55+ with the largest financial savings score the highest. Relatively more independents and labourers do not agree.

De Grauwe: ‘It indicates that people apparently understand that letting the banks go bankrupt would have caused a lot more damage to everyone. The positive thing is that we have actually learned from history for once and, different from the thirties, did not drop the banks.’

ABVV-president Rudy De Leeuw feels invigorated because of this score. ‘We have always defended the saving of the banks, provided that we advocated socializing the banks and thus bringing the financial know how back to the government. Now we have nationalized the charges and privatized the benefits. Luckily there is a correction now that obligates the banks to contribute to the public finances.’

Two out of three says they still have full trust in their bank. 21 percent has lost that trust, for the laborers this even rises to 30 percent.

Professor De Grauwe finds that a very high figure after what has happened. ‘I am sure that the number would have been a lot lower if the government had not saved the banks. That is why, with this number, people sort of express their trust in the system and the government guarantee attached to it.’

Six percent of the respondents has switched banks.

Noels: ‘That is actually a whole lot, if you know how reluctantly people switch banks. Apart from that it does not say anything about how many people have opened accounts with different banks. That number lies a lot higher.’ Febelfin, the Belgian federation of financial institutions, could not provide exact figures on the number of people that has switched banks.

55 percent of the respondents thinks that the government should obligate the banks and the financial institutions to invest the money entrusted to them in the battle against climate change.

Noels does not agree with this: ‘Enforcing does not work. Banks will not invest green if there cannot be made sufficient profit and this implies that the true environmental costs are to be included in the prices. If this happens, people will massively invest green. That was shown immediately when the oil price was high. Greed is the strongest incentive, that is how people are. People and banks did not invest in the internet because they were forced, but because they believed they could make a profit. That is how it should be for green investments.’

Noels does not believe that we should expect voluntaristic actions from the financial sector. ‘What can be done, is that governments issue bonds for green investments and thus offer a chance to people who would like to invest their savings in an ecologically responsible way. That is possible, but it has a more limited effect. Again: the higher oil price has had a larger impact than the entire Kyoto process. We do have some luck. As if by divine coincidence, the oil supplies are at their peak at the exact same moment the climate crisis gets worse.’

According to professor De Grauwe governments can make sure that green investments become profitable by means of subsidizing and correct prices: ‘That way you prevent banks from possibly ending up with bad credits because they invest in the wrong green investments.’

Professor Hans Bruyninckx (KU Leuven) finds that you can ask banks to aim their investments more towards sustainable investments. ‘Dexia and KBC –and especially Triodos – have taken initiatives on sustainable investing. We can expect more from that.’

45 percent of the respondents thinks that the government should not intervene in the financial sector, the bankers have to solve this. 43 percent thinks the exact opposite.

Noels: ‘I find it a lot that 43 percent thinks the government should intervene, while they might think by nature that the state should not mingle in this. A reason is of course that in our country no less than 4 systemically important banks got into trouble. That is enormous.’

Rudy De Leeuw thinks that with the crisis we have reached the point of no return. ‘The people want us to go against the market fundamentalism and the growing inequalities of capitalism. Do not forget that globally financial transactions are fifty times as large as the actual economy. What is the societal use of that? That layer of casino capitalism on the real capitalism does not teach us anything. Politics does not accept that anymore. This explains why the EU is now in favor of the Tobin tax. I give a prediction by the way for those who are headstrong: we will have to pay attention as to not get a new soap bubble in the price of CO2-rights.’

Two out of three find that banks have a societal responsibility, that they should do more than just make profit.

Noels: ‘I am glad that a majority finds that important. However, with this it is not clear how far that responsibility should reach. After all, it is with the definition of that societal responsibility that the discussion starts. Is it about correct management of work means or about positive discrimination of minorities in the recruitment policy? To mention only a couple of things. It seems to me that the minimum is that the bank sector does not endanger the economy, that it does not damage the real economy and exactly that is what happenes now. Which indicates that the banks took their responsibility lightly.’

De Grauwe: ‘That reaction does not surprise me. Profit does not have a good name already as it is. If one finds that banks should not just make profit, what is meant by that? Now, bankers have searched for profit in the short term and passed the buck onto society. After us the deluge, that was actually almost criminal. If banks opt for profit in the long run, they already take their responsibility more seriously, but with that they still do not invest in a green economy.’

Professor Bruyninckx thinks that you can ask from banks, who emphasize themselves their societal function, to enroll in a number of new dynamics – sustainability being one of them.

21 percent of the respondents would entrust his money to a bank now founded by the government. 76 percent would not.

Geert Noels thinks this is a bit hypocritical. ‘Everyone is content that there was a government guarantee, but a government run bank does not appeal to many. While that government guarantee also causes a lot of problems: small banks experience the disadvantages because their bankruptcy does not pose a systemic risk and so they can count less on that state support.’

Professor De Grauwe is not surprised by the relatively low number of advocates of a government run bank: ‘It indicates the huge mistrust in the capacity of the government to manage a corporation. Which is astonishing an sich: the state is allowed to save the banks but not to run them. This way the losses go to the tax payer and the profits to the share holder. To prevent exactly this, I advocated that the state would take over the banks for a while so that part of the future profits would go to the tax payer.’

Isn’t it ideological to say just like that that a government run bank is synonym to inefficiency? The ASLK did perform well? De Grauwe: ‘That is true. I think that since then a large mistrust has grown towards government services. Do you have to go court? Then you are actually lost. In a mixed environment, with also private banks on the market, a government run bank, in my opinion, could work pretty well. This has been proven, there then is sufficient pressure from the market to keep the provision of services up to the mark.’

Rudy De Leeuw is somewhat disappointed that the idea of a government run bank does not have more supporters. ‘We have lost the tradition, so trying to start it now would be quite a challenge. With the ASLK, and in part the Gemeentekrediet, we had public banks that took in 21 percent of the savings. Those were little jewels of economic performing. Then there was trust and the people apparently forgot that. In short, 21 percent is a starting point, but the potential is in my opinion a lot larger.’
Engineer and climate expert Peter Tom Jones is astonished that a whole lot of people think banks have a societal responsibility but that only one in five is in favor of a government run bank. ‘Nonetheless, that societal responsibility will only be taken on by government run banks or cooperative banks. And this will be necessary to truly get to work on the climate problems.’
You can find the complete results of the survey on www.MO.be

Paul De Grauwe (KUL) on the future: ‘I’m sceptical’

It is clear by now that the enormous risks the bankers took – gambling to maximize profit – are at the basis of the crisis. The fact that governments saved them – they are too big to let them go bankrupt because their fall threatens to take the entire system down with them –heightens the odds that they will take crazy risks again in the future. Unless the governments now take the measures necessary.
Professor Paul De Grauwe (KU Leuven) is not optimistic: ‘The measures contemplated by the EU and the US are insufficient to prevent a repetition. The crisis is now so the problem doesn’t pose itself yet. The problem is more the other way around: the banks are that much averse to risk that there is not enough credit. Once the economy repairs itself, the banks will launch themselves again in products of which they do not understand the risks correctly. I’m not convinced it won’t happen again.’

What should happen then?

A separation of deposito banks, where you and I bring in our money, and business banks – as was the case until the nineties. That should prevent normal banks engaging in those sophisticated financial transactions and thus exposing themselves to nontransparent risks. Business banks that venture too far, can be let to go bankrupt. In case of crisis, deposito banks need to be taken over by the government. In any case the share holders ought to be punished, if not, you invite them to again take risks at the expense of the government. With us that only happened with Fortis: the shattered share holdersship made political influence a lot harder. Dexia and KBC dodged the ball – respectively through influential organizations and families. In Belgium there was obviously no clear line.

Why isn’t it decided to separate business banks from deposito banks?

The banks are against it. Period. They pretend as if we would go back to the middle ages, with low growth and little credit. But those are stories, because when was the growth the highest? When that division was still a fact, from 1950 until 1970. The political influence of the banks is enormous.

If the measures are not sufficient, then why is there so little criticism?

The large majority of the people does not really understand that financial world. And most journalists believe the stories told by the bankers. (jvd)