Prof. Dr. Rolf Hasse Beirut Conference March 26, 2013 WANTED! R E -I NFORCING M ARKET E CONOMY BY R E -I NTEGRATING THE F INANCIAL S ECTOR Beirut Conference, March 26, 2013 Prof. Dr. Rolf Hasse

Two messages: 1. To reinforce market economy by strengthening its principles and its actors in the real economy 2. To overcome the split between the real economy and the financial sector (re-integrating the financial sector into the scope of market economy) Prof. Dr. Rolf Hasse Beirut Conference March 26, 2013 Beirut Conference, March 26, 2013 Prof. Dr. Rolf Hasse 2

Strengthening the three essential principles of a market economy (1) Every economic order has a special sociological structure A market economy is more than a set of economic targets, instruments and markets. An economic order is a mirror of the institutional framework of the society. A market economy has always a societal aspect. 1. Reinforcing market economy in the real economy Beirut Conference, March 26, 2013 Prof. Dr. Rolf Hasse 3

(2) A market economy needs a reliable public – legal and administrative – infrastructure. A market economy needs freedom for mainly private activities, but their actors are not able to organize a complete self-ruled order. The state has the responsibility to establish the frame for free economic activities and to control them to protect this freedom against private and state infringements. If the state succeeds to ensure the rule of law and competition in the markets, the state „produces“ its most important input for a market economy: stability of expectations Prof. Dr. Rolf Hasse Beirut Conference, March 26, Reinforcing market economy in the real economy 4

(3) A market economy is based on private activities mainly, be it on the supply or the demand side. Enterprises, entrepreneurs and scientists are the essential drivers of innovations and sustainable growth. They all need encouragement and freedom for their activities. And, they work mainly in SMEs. SMEs are not only the most important part in all successful market economies. Prof. Dr. Rolf Hasse Beirut Conference, March 26, Reinforcing market economy in the real economy 5

Moreover, SMEs and their actors „coin“ the sociological structure especially of a market economy. To put it in another frame: In case of a trade-off between (pretended) economic efficiency (concentration, less competition) and freedom for economic activities and actors, the choice – ensured by the public order – ought to be in favour of freedom. In the long run this is the better choice for the societal and economic targets. Prof. Dr. Rolf Hasse Beirut Conference, March 26, Reinforcing market economy in the real economy 6

2. To overcome the split between the real economy and the financial sector The most severe danger for the international market economy is the split between the real economy and the financial sector. This gap has been opening since the 1990s. The subprime crisis since 2007 and the European debt crisis since 2010 have deepened the gap Prof. Dr. Rolf Hasse Beirut Conference, March 26, Re-Integrating the financial sector 7

The rescue-policies have damaged the rule of law, distort the competition order, and tend to perpetuate the split. This endangers seriously the market economy – more than any “traditional” state interventions before.  It splits the economic order and legal order between the real economy and the financial sector.  It wipes out large parts of the legal order.  It introduced and has been prolonging unprecedented privileges and systems of subsidizing especially for “systemic” banks – which were highly responsible for the financial crisis. Prof. Dr. Rolf Hasse Beirut Conference, March 26, Re-Integrating the financial sector 8

 These privileges (unlimited re-financing facilities, historically low interest rates) do not improve the transmission mechanism – the main task of banks in a market economy – but fuel the danger of a bubble in the stock markets. Despite these unconventional excess of central money supply and near zero-rate interest policy, positive impulses for the real economy are rare or absent. A “Japanese Disease” is more realistic than a broad economic upswing. Prof. Dr. Rolf Hasse Beirut Conference, March 26, Re-Integrating the financial sector 9

What is more serious? These policies and privileges are no longer only an economic problem, they are  a political problem, because the policy institutions do not dare a change of policy – they behave as being in a trap.  The “systemic” banks exercise a sort of blackmailing and  the economic order is continuously distorted. Prof. Dr. Rolf Hasse Beirut Conference, March 26, Re-Integrating the financial sector 10

1. There is a fundamental lack of scientific analysis about the long-term distortions. What we need is an analysis similar to the one which J. Schumpeter presented in to provoke political changes. This provocation was successful and led to a political change which turned his pessimistic forecast to be wrong J. Schumpeter, Capitalism, Socialism and Democracy, New York 1942 Prof. Dr. Rolf Hasse Beirut Conference, March 26, 2013 Some conclusions 11

2.The present situation is similar to the one the USA faced between : the Free Banking Era and the High Time of Trusts. By competition laws (i.e. Sherman Act 1890 and following actions) the policy destroyed powerful trusts and split banks due to an economic rationale but mainly due to a political rationale of democracy and the rule of law: to restore the freedom of citizens and to protect the supremacy of the legitimate political institutions in political affairs and in topics of the economic order. Prof. Dr. Rolf Hasse Beirut Conference, March 26, 2013 Some conclusions 12

3. A similar strategy is necessary to reintegrate the financial sector – especially the “systemic” banks into the market economy. Prof. Dr. Rolf Hasse Beirut Conference, March 26, 2013 Some conclusions 13

The choice “(pretended) efficiency vs. freedom” has to be taken:  Competition has to be restored.  Financial institutions have to be brought back to a liquidity restraint.  All banks have to be put under the rule of being responsible for losses and frauds – like the enterprises, employees and consumers in the real economy.  And last but not least “systemic” banks should even be detached by action of competition policy – a rule rarely used but from time to time necessary to keep freedom of economic actions. Prof. Dr. Rolf Hasse Beirut Conference, March 26, 2013 Some conclusions 14

The choice “(pretended) efficiency vs. freedom” has to be taken:  Competition has to be restored.  Financial institutions have to be brought back to a liquidity restraint.  All banks have to be put under the rule of being responsible for losses and frauds – like the enterprises, employees and consumers in the real economy.  And last but not least “systemic” banks should even be detached by action of competition policy – a rule rarely used but from time to time necessary to keep freedom of economic actions. Prof. Dr. Rolf Hasse Beirut Conference, March 26, 2013 Some conclusions 15

Thank you for your kind attention! Prof. Dr. Rolf Hasse Beirut Conference, March 26, Prof. Dr. Rolf Hasse Beirut Conference March 26, 2013