French President Nicolas Sarkozy was in a combative mood this week at the World Economic Forum in Davos, interrupting the usual backslapping with contrarian advice that was long overdue. After Jamie Dimon, Chief Executive Officer of JP Morgan Chase and Company, complained that American banks had suffered “unproductive and unfair” criticism for their role in the recent crisis, Sarkozy shot back that “the world has paid with tens of millions of unemployed, who were in no way to blame and who paid for everything.” Dimon argued that financial reform came up at the next G-20 meeting that “people take a deep breath” and acknowledge that “[b]usiness and banks are part of the solution.” Sarkozy, who famously blamed the collapse of Lehman Brothers on a lack of “common sense” warned Dimon, “Don’t be accusatory of us. We will be reasonable, but we will be wise.” He subsequently explained that he didn’t wan’t to be “presented as obsessed with regulation. I just want to put some more regulation in sectors that have lacked some.”
The exchange echoed Sarkozy’s rousing opening address to the WEF last year, in which he suggested that “[f]rom the moment we accepted the idea that the market was always right and that no other opposing factors need be taken into account, globalization skidded out of control.” As free-market fundamentalism took hold of global finance, deregulation helped “service the deficit of those who were consuming too much with the surplus of those who were not consuming enough.” Credit-loving Americans siphoned hundreds of billions of loaned dollars from the prudent Chinese, as “[t]he perpetuation and accrual of these imbalances [became] both the driving force and the consequence of financial globalization.”
Sarkozy noted that deregulation produced a “globalization of savings” and “the use of leverage, to an unreasonably disproportionate extent.” This encouraged the growth of a form of capitalism in which “taking risks with other people’s money was the norm, allowing quick and easy profits but all too often without creating either prosperity or jobs.” He argued that this caused a “steady depreciation of the future” in favour of the “exorbitant demand for high yields in the present.”
To reverse these dangerous, abstract tendencies Sarkozy advocated “sav[ing] capitalism by rebuilding it, by restoring its moral dimension.” Then he added, “ I know that this expression will call forth many questions.”
To be sure, the captains of Wall Street must have spent a sleepless night or two considering the implications of the President’s next idea, that taxing the “exorbitant profits of finance” for poverty relief could begin the “moralization of financial capitalism.”
Many of Sarkozy’s assertions are self-evidently true. The ascendance of short-term thinking, for instance, is noticeable in the lavish bonuses which Wall Street’s bankers awarded themselves just before the crisis struck. In 2005, Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch, and Morgan Stanley paid US$25 billion in bonuses; the following year, $36 billion; in 2007, $38 billion. In 2006, the average bonus at these firms accounted for 60 per cent of total compensation – in some cases it was several multiples larger the employee’s base salary – but even when the system had just been saved with massive infusions of taxpayers’ money, these banks continued to pay out gargantuan bonuses. Much of this largesse was underwritten by the banks’ wholesale addiction to the “moral hazard” which lay at the heart of the crisis. (The economist Nouriel Roubini describes moral hazard as “someone’s willingness to take risks – particularly excessive risks – that he would normally avoid, simply because he knows someone else will shoulder whatever negative consequences follow if not bail out those who took those risks.”)
In principle, Wall Street roundly condemned this distortion of the free-market, but its willingness to latch onto huge Federal Reserve loans and the controversial Troubled Asset Relief Program (TARP) in the wake the crisis indicate a willingness to suspend judgment in cases of “moral hazard” that work in its favour.
In his 2010 address, after offering several examples of the need for multilateral agreements that could restrain the restless, speculative impulses of deregulated capital, Sarkozy called for “a new Bretton Woods” to ease the contradictions of having “on one the one hand, a multipolar world and, on the other, a single benchmark currency across the globe” and the hypocrisy of “preach[ing] free trade and [tolerating] monetary dumping.”
These fighting words will be tested when France, which chairs the G8 and G20 this year, gets around to detailed proposals for international financial reform. But Sarkozy’s willingness to confront doctrinaire globalization is a very welcome change in Davos’s rarefied atmosphere. If nothing else, his speech suggests that naïve utopian visions of globalization are yielding to clearer ideas of the actual world. “A few years ago, people were predicting the end of nations, the advent of nomadism,” said Sarkozy, “… the decline of organisations, the end of companies… that the city would spread, break up, and with it social cohesion, human relations and community … Basically, it looked as if citizenship would dissolve in the global market. But it has found new springs in the ordeal of the crisis. In the world of tomorrow, we must again reckon with citizens.”
