BERLIN – What went wrong with global financial markets? In a nutshell: the implosion of the brave new world of modern finance, and the economic crisis that followed, was rooted in the idea that free and unregulated capital markets always work for the public good, and are all that is needed for economic prosperity. The prologue to the crisis was a combination of cheap money, deregulation, and a race for returns by executives undeterred by the associated risks.
When the housing bubble burst and financial markets collapsed in its wake, growth slumped worldwide as never before since the Great Depression. GDP in the advanced economies is expected to shrink about 4% this year. Total financial-sector losses in the world’s advanced economies stand at around $1.6 trillion. The IMF estimates that losses of more than double this total are yet to come. Jobs will continue to be shed. Future generations are being saddled with an explosion of public debt. It will take years before we recover fully.
Despite all this pain, the remaining financial-market participants gained significant benefits from government bailouts. The G-20’s average headline support for the financial sector is more than 30% of GDP (including capital injections, guarantees, treasury lending and asset purchases, liquidity provision, and other central bank support). In our political response to this crisis, new forms of financing and fiscal burden-sharing will have to play a role. It is in this context that German Foreign Minister Frank-Walter Steinmeier and I have advanced our proposal for a global financial-transaction tax (FTT).
Remaining financial-market participants are not pulling their weight in this crisis. But “Main Street” sees what happens on Wall Street – and in London and Frankfurt. Citizens are aware of the hundreds of billions of euros and dollars that have been used to prop up banks. Bonus payments in the financial sector now go hand in glove with massive job losses in the real economy.