THE BEAR'S LAIR The US needs Ordnungspolitik
By Martin Hutchinson
The resignation a week ago of Jurgen Stark, Germany's representative on the
executive board of the European Central Bank (ECB), was due to a failure by the
ECB to follow the German concept of Ordnungspolitik.
In the German view, Ordnungspolitik - which may roughly be translated as
the politics of order - demanded that Greece be treated harshly because of its
failure to follow even the most basic rules of euro membership, while the ECB
should avoid risking its credit standing by investing in the debt of tottering
Mediterranean countries. It's a very useful concept; its presence explains much
of Germany's extraordinary economic success, and its recent
absence explains many of the failures in the remainder of the West.
Ordnungspolitik is not a traditional attribute of German economic life.
While the great Otto von Bismarck was undoubtedly a devotee, under Kaiser
Wilhelm II economic policy was determined largely by the whims of the kaiser
himself and his leading ministers at any given moment; consequently it tended
to be somewhat arbitrary. Under the Weimar Republic, the breakdown of political
and social order extended to the economic sphere. There was no Ordnungspolitik
about Rudolf von Havenstein's creation of the great inflation; he simply
printed money in order to meet the government's day-to-day bills.
Then after a brief period of order following the December 1923 establishment of
the rentenmark (which since it was itself a fiat currency might have failed
completely without a certain degree of faith in the Ordnungspolitik of
the system) Germany fell into the Great Depression followed by the Third Reich,
an embodiment if ever there was one of government by whim and expediency.
The champion of Ordnungspolitik, who cemented it irretrievably into
German economic life, was its aged post-war chancellor Konrad Adenauer (Ludwig
Erhard was always supposed to be the architect of Germany's economic miracle -
he certainly liked people to think so - but Adenauer was unquestionably the
boss and setter of the philosophical tone.) Under Adenauer, the Bundesbank
(central bank) was set up with two features the US Federal Reserve lacks - a
unitary decision-making structure and an ownership by the German Lander (the
country's 16 federated states) that prevented national parliamentarians or even
the national government from direct meddling.
In consequence, German monetary policy was always the tightest in Europe and no
monetary slack was left for the state to run excessive budget deficits. German
industrial relations were also organized by Ordnungspolitik; unions were
given seats on German company supervisory boards, but pay bargaining thereby
became largely consensual, with far fewer major strikes than in Britain or
France.
The social market economy produced a somewhat more redistributive tax system
than in Britain and the United States, so its combination with Ordnungspolitik
(which limited tax evasion) produced remarkable social and industrial peace, as
well as enviable economic success.
In the 1990s, the system seemed to break down. The German industrial system
came to seem inflexible, as the Anglo-American model produced unprecedented
prosperity and stock markets roared ahead. In retrospect, it is clear that the
problem was not the German economic system, which reacted adequately to the
changes of the 1990s, but the immense costs imposed on West German industry and
society by Helmut Kohl's foolish 1990 decision to unify the West and East
German marks on a 1:1 basis, and the massive subsidization of East Germany that
resulted therefrom. In any case, by 2005 the costs of East German reunification
were beginning to decline, and German's labor competitiveness was again
improving rapidly against its luckless fellow members of the euro.
Coming from a background of Ordnungspolitik, the German public naturally
sees Greece's hopeless economic position as being the result of corruption and
unfair subsidization of failure from the European Union budget. Conventional
commentators, notably the Financial Times and The Economist, urge the Germans
to rise above this view or, if this is not possible, the German government to
impose a bailout solution on them. For the average journalist, Greek disorder
and sunshine is greatly preferable to German regulation and gloom.
There are two problems with this approach. First, it does not work. Given the
level of Greek uncompetitiveness, no amount of subsidization will restore
Greece's ability to pay its way economically while remaining a member of the
euro; it will simply relapse into a perpetually subsidized basket case, to the
great moral detriment of the Greek people and the even greater financial
detriment of northern European taxpayers.
Second, even a cursory examination of the current world economy should convince
us that the German approach to economic management is in most respects correct.
Rather than regarding it as an eccentric anachronism, citizens of less
well-managed polities - one thinks notably of the United States, Britain,
France and the Mediterranean European countries - would do well to adopt its
principles and thereby reform their own economic arrangements.
In the US and Britain, for example, Ordnungspolitik is the quality most
notably lacking in financial markets. It should be a basic principle of sound
financial management that the gambling activities of modern trading should not
take place in institutions benefiting from deposit insurance. The US$2.3
billion loss from a rogue trader at UBS has demonstrated again that such
activities should be confined to hedge funds or other privately owned
operations in which capital is provided by principals willing to lose
everything if their trading desks blow up.
My partner in authorship, Kevin Dowd, believes that abolishing deposit
insurance would eliminate this problem, but that would simply transfer the risk
to retail depositors, who have neither the power nor the knowledge to prevent
problems. The only true solution is a system of Ordnungspolitik, either
regulatory or much better self-regulatory, in which speculative trading
activities and deposit taking are not permitted to coexist in the same
institution.
Monetary and fiscal policies have in recent years suffered from an acute lack
of Ordnungspolitik. In a well-ordered system, governments do not run
budget deficits except at times of deep recession, when demands for social
amelioration are greatest. Similarly, well-ordered monetary policies allow for
negative real interest rates only fleetingly, and certainly do not back the
global monetary system into a corner in which the solution to the problems of
excessive monetary stimulus is held to be more monetary stimulus. Paul Volcker,
German by ancestry, understood the demands of Ordnungspolitik; his
successors have lamentably failed to do so.
Similarly in the housing market, Ordnungspolitik demands that the
institution making housing loans retains some interest in the creditworthiness
of the borrower. In a well-ordered system, it would not be necessary for the
originating bank to retain a substantial percentage of the loan itself because
the bank would understand it had a responsibility to ensure that the credit was
sound, and a legal liability if too many of its loans turned out not to be
sound. In the US system, in which lawsuits are brought for frivolous claims and
the government both provides quasi-guarantees of home mortgages and issues
innumerable vague but legally binding rules about who should get them, the
locus of responsibility is lost, resulting eventually in a collapse of the
system.
The Solyndra affair (the California-based company suspended its operations in
August, leaving the United States government as its largest creditor) is
another example of Ordnungspolitik being neglected, to the great
detriment of the system and taxpayers. Germany has various systems under which
loans are handed out to entities whose activities are thought beneficial to
some policy objective or other, but in Germany there are bureaucracies whose
job is to vet the loans for soundness, and those bureaucracies are not
overruled by politicians benefiting from campaign contributions.
As in the Weimar Republic or the Third Reich, lack of Ordnungspolitik in
US economic management bears a primary responsibility for our current troubles.
The principle provides an excellent guideline for questions currently thought
to be of great difficulty.
Greece must be expelled from the euro and allowed to find its own level with a
new drachma. Interest rates must immediately be brought up to well above the
level of inflation while rigorous programs of public spending cuts must be
combined with the closure of tax loopholes to restore integrity in public
finances. Slush funds for housing and green energy must be wound down
immediately. The Volcker Rule must be rigorously enforced on the largest global
banks, so that trading is pushed off into systemically insignificant hedge
funds where it belongs.
Konrad Adenauer believed in capitalism, but he understood that capitalism
required order in order to thrive. It is a lesson we urgently need to re-learn.
Martin Hutchinson is the author of Great Conservatives (Academica
Press, 2005) - details can be found on the website www.greatconservatives.com -
and co-author with Professor Kevin Dowd of Alchemists of Loss (Wiley,
2010). Both are now available on Amazon.com, Great Conservatives only in
a Kindle edition, Alchemists of Loss in both Kindle and print editions.
(Republished with permission from PrudentBear.com.
Copyright 2005-11 David W Tice & Associates.)
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