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Global Financial Crisis

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US ‘Will Lose Financial Superpower Status’
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The US is poised to lose its role as a global financial “superpower” in the wake of the financial crisis, Peer Steinbrück, German finance minister, said on Thursday as he called for a regulatory crackdown on financial markets. By Bertrand Benoit.

25th September 08 -  Bertrand Benoit, Financial Times

“The US will lose its status as the superpower of the world financial system. This world will become multipolar” with the emergence of stronger, better capitalised centres in Asia and Europe, Mr Steinbrück told the German parliament.

“The world will never be the same again.”

Mr Steinbrück launched a biting attack at the US government for resisting calls for stricter regulations of financial markets even after the subprime crisis erupted last summer, for which he said Washington was partly responsible.

In language that went much further than recent comments by Angela Merkel, Germany’s chancellor, Mr Steinbrück said tougher capital market rules were an urgent necessity.

“Crisis management alone will not rebuild the lost confidence,” he said. “We must civilise financial markets, and not just through moral appeals against excess and speculation. Self-regulation is no longer sufficient.”

The US belief in “laisser-faire capitalism; the notion that markets should be as free as possible from regulation; these arguments were wrong and dangerous,” he said. “This largely under-regulated system is collapsing today.”

The US had failed in its oversight of investment banks, Mr Steinbrück said, adding that the crisis was an indictment of the US two-tier banking system and its “weak, divided financial oversight.”

He pointed the finger at Washington for failing to take seriously proposals Berlin had made as it chaired the Group of Eight industrial nations last year. These proposals, he said, “elicited mockery at best or were seen as a typical example of Germans’ know-better attitude.”

By contrast, Mr Steinbrück praised the US crisis management, including the government’s planned $700bn rescue package for the financial sector. Washington, he said, had earned credits for acting not just in the US interest but also in the interest of other nations.

Yet he reiterated Germany’s refusal to mount a similar rescue operation using taxpayers’ money to acquire toxic assets. “This crisis originated in the US and is mainly hitting the US,” he said. In Europe and Germany, such a package would be “neither sensible nor necessary.”

Unlike the US two-tier banking system, he said, Germany’s three-pillar system had weathered the storm. The network of savings banks, much derided in the past by US critics, had provided business with more credit in the first half of this year than in the same period last year.

“In Germany, the three-pillar system has acted as a stabilising factor,” he said, and was continuing to provide the economy with sufficient liquidity. Yet he said the crisis had been a warning to the state-owned Landesbanks, which now needed to rethink their business models and consolidate.

Mr Steinbrück put forward eight proposals to help resolve the current crisis and prevent future financial meltdowns on a similar scale.

Among these were a ban on “purely speculative short-selling”; a crackdown on variable pay for bank managers, which had encouraged reckless risk-taking; a ban on banks scrutinising more than 80 per cent of the debt they hold; international standards making bank managers personally responsible for the consequences of their trades; and increased co-operation between European supervisors, culminating in the long term in a European supervisory system.

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German Finance Minister Blames US for Financial Crisis

German Finance Minister Peer Steinbrueck deemed the US banking crisis an "earthquake" that will cost the US its role as a superpower of the world financial system. He stressed that German banks can cope with losses.

"Wall Street and the world will never again be the way they were before the crisis," said Steinbrueck in a speech to the German parliament, the Bundestag, on Thursday, Sept. 25. Write-downs and write-offs of bad credit spawned by "a blind drive for double-digit profits" have so far totaled $550 billion and no end to the crisis is in sight, he added.

The world financial system will consequently become more "multi-polar," he predicted.

Steinbrueck told the Bundestag that the Group of Seven (G7) finance ministers would be meeting in Washington next month to discuss how to tighten regulation of capital markets.

The German federal government, meanwhile, would continue efforts to trim spending, but would also make some moves to stimulate the economy.

He reiterated Germany's refusal to set up its own bank bail-out scheme, saying the crisis was principally a US problem.

Irresponsible moves

Reiterating Berlin's push for tighter regulation, Steinbrueck accused the US of blunders.

"The cause of the crisis was the irresponsible exaggeration of the principle of a free, unrestrained market," he told the Bundestag.

Washington has been reluctant to increase minimum equity rules and has too many competing regulators over US investment banks.

"This system, which in many ways is inadequately regulated, is now collapsing," he said, adding that Germany's banking system remained "relatively robust," with German regulators confident they can absorb losses.

"New rules of the road" for the financial markets were needed, he said.

Plans to be debated when the finance ministers of the G7 meet will include tightening cooperation between the International Monetary Fund (IMF) and the Financial Stability Forum (FSF).

The agencies were created by western nations as an early warning system.

Strengthening cooperation

Steinbrueck also renewed his call for fusion across Germany's state bank sector. The country's big commercial lenders, the so-called "Landesbanken," have been hard hit by the financial crisis. 

The next move needs to be made by the individual states, as co-owners of the leading state banks, said the Social Democrat minister: "They need to overcome regional political pride and embrace pan-regional co-operation."

This, he said, would strengthen the German banking system and boost its sustainability.

"Financial support from the government in mopping up problems in this sector should not be expected," he added. 

Given that past attempts to fuse the "Landesbanken" have failed, Steinbrueck proposed a redefinition of their business models in order to avoid excessive risk and to increase returns.

The financial crisis has, however, shown that both savings banks and cooperative banking institutions are stable and reliable, said Steinbrueck.

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