Have the bankers been foolish and criminal? Some have been criminal. Others have definitely been foolish! But their foolishness goes back much earlier than 2008. So many bankers names have a German ring, Goldman Sachs, Rothschilds, Barings, Warburgs, Lehman Brothers; most were originally from Germany and naturally felt close to their German cousins. Yet only friends and relations can be completely taken for a ride.
Although acutely distrustful of Germany after the Second World War, the bankers began to forge new friendships with their former homeland by the 1950s. Year after year of happy trading followed, until their relationship was completely cemented. Soon other countries began to put their faith in Germany, and in German investment policies, too!
The arrival of the euro seems to have promoted a mass exodus of cash from Germany. While productivity-adjusted wages actually declined between 2000 and 2008, and unemployment stood at nearly 12% in 2005, literally billions of German money went abroad. Masses of America’s sub-prime assets were bought by the Germans, whilst almost a Trillion German euros were showered on Portugal, Ireland, Greece, Spain, and Italy – the PIGS!
The PIGS, and the bankers processing the transactions, should have turned down the cash. There were actually no viable investments left as safe havens for the money. But wasn’t it sensible Germans who were offering the funds? So the bankers succumbed to the temptation and bricks and mortar sprouted everywhere. Money was lent to people with doubtful reputations, who would surely have trouble paying it back if interest rates edged higher.
In December 2005, the ECB began to raise interest rates again. After that they inched up relentlessly, creating a ripple effect in other continents. In May 2007, after an increase in VAT, the German unions at last demanded more money. Then the Bundesbank alleged that the country was being drowned by inflation and, even more astonishingly, managed to persuade French ECB President, Jean-Claude Trichet, to raise interest rates for the whole euro zone – to curb it! Finally, despite banks already tottering, and some even going bust in Europe and America in 2007, the ECB put interest rates up once more in 2008. Two months later Lehman Brothers collapsed.
It has been alleged that the Federal Reserve Board of Governors in Washington, commonly called the Fed, actually caused the Lehmans crash by tightening the money supply. But was not that move just defensive? In the year 2000 the US was sitting on a mountain of cash and could dictate interest rates world wide, but by 2008 it was sitting on a mountain of IOUs to Europe, terrified that the European funds would disappear. It was the ECB which caused the crash, not the Fed. And egging on the ECB was the Bundesbank.
If only the bankers had studied the 1873 crash more closely they might not have been taken in by their German cousins. The stock market crash of 1929 was coloured by the war reparations saga but the crash of 1873 is a close parallel.
After Bismarck’s unification in 1871, the 26 states and cities of the German Confederation decided to give up their currencies and adopt the Gold Standard. Germany was soon awash with cash, as France paid its war reparations straight away and Germany issued gold coins before calling in the silver ones, resulting in a tripling of the money supply.
After the states debts had been paid off there was no good home for the money but the bankers recycled it anyway and it flowed as far away as North America. Railways were the favoured investment of the time, but all kinds of foolish real estate and banking investments were indulged in. The world was awash with cash and it looked as though the party would never end.
Then interest rates rose and Germany removed silver from its coinage. Money suddenly become scarce. Stock markets crashed in Austria, Germany and North America and scandals of all kinds hit the headlines. The continuing odium against the bankers rolled on for years.
Even though economists now agree that the German expansion in the money supply was a mistake, Bismarck has escaped all blame for the 1873 crash. Yet who is the most to blame, the one who provides the excess cash or the one who processes it? Bismarck had hung the bankers out to dry and escaped all censure!
The Blame Game for the euro zone’s present troubles has already started. At the G20 summit, José Manuel Barroso, President of the European Commission, denied that Angela Merkel’s austerity policy was aggravating the depression in Southern European nations and laid the blame for their plight squarely on the Lehmans crash and the Wall Street bankers, who had, in his words, initiated the crisis with their ‘unorthodox practices’. The Libor scandal at Barclays has given weight to his accusations. The future of Britain’s best industry, The City, is now in jeopardy and our country is snowed under by debt.
Yet what has happened to all that money that Germany lent Southern Europe? All those widows and orphans who have German bonds in their portfolios can sleep easy. When the ECB stepped in to bail out the PIGS, it enabled the German banks to bring their money home. So it is the European taxpayers now who are now shouldering the burden of Germany’s spending spree in the years before 2008, particularly in France. If the misery goes on for years, lets hope that they remember that it was Germany that got them into that long deep depression in the 1870s.