A new era of accountable capitalism

By Karl-Theodor zu Guttenberg

T he current financial and econ­omic crisis is apparently sweeping aside many established ideas of how societies should run their economies. In Germany, the crisis has ballooned into the worst recession in postwar history. By way of diagnosis, some say we are observing the end of the financial world as we know it. Not so long ago some had heralded the era of Alan Greenspan, former US Federal Reserve chairman, as the realisation of a new economic paradigm. By way of therapy, some have called for the renaissance of state-monopoly capitalism, sometimes labelled “new capitalism”. The crisis should have a cathartic impact on the financial sector but there is a risk that responses to it will overshoot.

We already have the conceptual approach we need to set up intelligent rules to which all market actors have to adhere and that will foster transparency, credibility and trust. We know how to pursue stability-orientated monetary policies. We need to revive a culture of stability and responsibility in business. Individual incentives should reward long-term success, prevent short-termist excesses and punish inordinate risk-taking. We know that sticking to rules on competition, state aid and trade shelters the long-term gains from competition and trade from short-term protectionist and interventionist reflexes. Our social systems should shield market participants from the consequences of market upheaval – but not at the expense of market flexibility. These principles are the leitmotifs of the social market economy model on which Germany’s economic rise after the second world war was built.

For both short-term crisis management and long-term decisions, it is imperative that policymakers, bankers, investors and voters understand clearly what went wrong with the world economy. Some elements of the build-up of the housing and financial bubbles have been clearly identified: loose monetary policy; the wrong kind of incentive in the housing markets; a lack of regulation of financial institutions, which allowed the creation of a shadow banking system; inadequate incentive and risk-management systems within banks; and a failure of rating agencies and of financial market supervision.

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