What does that say about the various international banking stress tests that were conducted in the last couple of years?
I think there was a sizeable opinion among experts that the stress tests of last year were rather loose and not stringent tests. The stress tests were a way of boosting confidence and assuring markets that collapse was not around the corner. But in a way they ended up being costly because governments didn't see the urgency and importance of addressing the balance sheets of the banks.
But aren't the banks at the heart of this whole mess? We wouldn't be worried about Greece if the European banks had not overpurchased Greek debt. If the banks had been more prudent in buying all this sovereign debt the problem could have been solved a long time ago by just giving the bond holders a haircut. The whole trouble is that the bond holders are the banks or at least were until they were trying to divest themselves of bonds in recent weeks. To give a haircut to the banks might bring down the banking system.
I think the political story here is there has been an alliance for mutual gain between the governments and the banks. In this alliance for mutual gain the banks would buy up immense quantities of sovereign debt instead of lending to small businesses for innovation. They were not required to hold any capital against such assets and pressure was no doubt put on the ratings agencies to give all this sovereign debt a triple AAA rating. And this was also great for the governments and lots of governments took advantage that they didn't have to pay as high interest rates as they would otherwise have to pay. And they began borrowing a great deal. I think this alliance between the banks and the governments lies at the heart of the eurozone crisis.
The huge bank bailout just a few years back for those who according to the view of many in the US and Europe were responsible for the crisis in the first place was harshly criticized by the public. How would another massive bank bailout be received and what would this do for people's perception of capitalism?
I certainly agree with the public that the European banks as well as the American banks - but now we are talking about Europe - behaved with monstrous irresponsibility. Going forward, there have to fundamental reforms. Europe has to get back to banks that lend to businesses the way they used to do in the last decades of the 19th century and for some years afterwards. It's no good if the banks don't support the business sector and instead are in bed with the governments. This is corporatism, it's not capitalism.
Maybe we shouldn't have a bailout, because a bailout would just permit them to do what they have been doing.
Are you hopeful that this reform of the financial system which has to take place at least on a European, but preferably a global level, will take place because many people feel that the reforms so far have been mostly cosmetic?
Here in the United States there is a feeling that all these regulations coming out of the Dodd-Frank bill (Wall Street Reform and Consumer Protection Act signed into law in 2010 - the ed.) are going to be evaded by the banks. The banks are largely left to calculate the riskiness of the assets. Can you imagine after showing they don't know the first thing about the risks of assets they are the ones being asked to calculate the risks of the assets that they will have to hold capital against? This is incredible. It's like asking a motorist to calculate his speed before he is given a speeding ticket.
Do you think the Occupy Wall Street movement has run its course?
I think they were quite right to point to the poor performance of the economic system in recent years. Here were the bankers on Wall Street with already very high bonuses again while these young people in Zuccotti Park in the heart of the financial district couldn't get jobs and had almost no income at all. It was a very effective and silent protest. All they had to do was stand there and say look at this contrast between us and them. They didn't have much of an idea what should be done. Unfortunately, I think the occupiers have fallen under the influence of people who want to attack globalization.
I think that the Occupy Wall Street movement has served to heighten people's consciousness that something has to be done to improve the effectiveness of American economy and to address the disparity in opportunity that exists in this country. So many people have lush opportunities for making money, having fun and achieving high positions while a lot of people at the bottom these days seem to have very poor opportunities in the private sector. So I would commend the occupiers for bringing this to the attention of Americans, but probably they have outlived their usefulness and done their job. We have to get busy with reforms of the system.
Interview: Michael Knigge
Editor: Rob Mudge