Economics and politics - comment and analysis
9. February 2016 I Heiner Flassbeck I Economic Policy, Financial Markets

Sentiments on the stock markets become apocalyptic – a global banking crash cannot be excluded

In the era before financial deregulation, adjustments taking place in stock markets were considered to be normal corrections. These corrections could be either right or wrong, but the point is that they were based on relevant indicators about the productive economy. This is no longer the case. Since 2012, a new bubble has been inflating the stock market. This bubble was based on absolutely nothing. Stock exchanges and values have become completely detached from the real economy. The stock market went up an up and now the hot air escapes with loud, hissing sounds.

The dramatic condition of the global productive economy is reflected, among other things, in that, yesterday for the first time ever, ten-year Japanese government bonds showed a negative return on the bond market in Tokyo. If this is not a clear signal to the financial leaders of the world that something very serious is wrong, then I do not know what to say. Anyone who is still saving now or even mentions the need to save is a fool. There is no longer a choice. Policy-makers and the public need to stand up and make these fools responsible for the sliding global economy and the impending financial catastrophe that may once again be upon us.

The fact that it is in the first place banking stocks that are leading the downward spiral also gives food for thought. Only a few weeks ago, we warned that the business model of the Deutsche Bank is not sustainable (its share is one of the largest losers worldwide. Shares lost more than half of their value since last September (see here)). What everyone knew now comes back with a vengeance: the attempts to re-regulate the financial crisis after the financial crisis of 2008-2009 have been absolutely insufficient. In fact, they hardly scratched the surface of what really had to happen.

Big banks still have no viable (let alone a socially responsible) business model when it comes to ‘investments’ in equities or comparable assets and the betting in derivatives, which is part and parcel of it. Some investment banking areas were indeed somewhat regulated, but there is no question that this has been grossly insufficient and that the financial casino-model must be outlawed. There is no other way. However, the few new regulations did not even touch it. Almost no politician even dares to mention that high risk betting is destructive for economies, countries and communities and that there can be no question that such extremely hazardous risk taking will not be covered by any potential future bailout. The problem is what some call moral hazard: the big banks do what they want because they are ‘too big to fail.’ They know that governments will bail them out, because letting them sink may entail even greater costs.

All this highly paid gambling by investment bankers is primitive and destructive. As long as global stock prices rose, commodity and raw materials investments paid off and as long as it was possible to earn big money by going long in these asset classes, everything went well for the financial sector (see my article on speculation in commodities and raw materials here). Now that all these markets crash, the fundamental primitiveness of casino finance shows and dark clouds gather over the world economy. It is easy to imagine what will happen next: Mrs Merkel and Mr Schäuble will give a press conference to announce that the deposits of the public are safe and that we must save the Deutsche Bank because it is a systemic part of our economy. They will certainly not explain to the public why gambling also is a systemic part of our economy.