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Acting responsibly must once again become the norm.

Toespraak | 03-09-2009 | Amsterdam, Minister

Toespraak gehouden door minister Bos op 3 september 2009 bij de opening van het academisch jaar op de Duisenberg school of Finance in Amsterdam.

Ladies and gentlemen,

Whenever I find myself in the esteemed company of economists, I can’t help thinking of a joke I once heard in London: an economist visits the finance minister and says: ‘I’m here to tell you what to do.’
To which the minister replies: ‘No you aren’t.
You’re here to watch what I do and then explain to me why I do it.’

This of course, ladies and gentlemen, is something I would never dare to say to Dr. Hertz.
And the quality of her speech just now has proved why I shouldn't even try....

Over the past year, thoughts and deeds, analysis and action, have been closely interlinked.
Like Alice in Wonderland, we had to keep running to remain in the same place, and to believe six impossible things before breakfast, all while the Red Queen kept shouting: ‘Off with his head.’
Fortunately, a crisis of these proportions, with such far-reaching, global effects, doesn’t happen very often.
A crisis that begins in the financial sector and ends in almost every home, from New York to New Delhi, from London to Lutjebroek.

Next week I will be presenting my budget.
I will set out in detail what must and will be done to mitigate the impact of the crisis on people and society.
I will try to present a picture of the Netherlands after the crisis, a society and an economy that will have to deal with high unemployment and high deficits much longer than we would like to.

Today, in the present company, I will stick to the financial sector.
Not so much what we have already done, since you already know that, but what we are going to do.
Not only to solve the acute problems and shore up financial institutions at risk of collapse, but to restore public confidence in the financial sector, and make sure that this never happens again.
It must never again be possible for infectious greed to cause a global economic recession, for a group of Gordon Gekkos to take risks for which taxpayers end up footing the bill!

Last month the Dutch government sent parliament our vision of the future role and organisation of the financial sector.
Next week those plans will be debated.
Today I would like to discuss the most far-reaching ideas with you – the future leaders in finance.

The central message is that the sector must once again focus on providing businesses and private individuals with reliable financial services, based on acceptable and transparent risks.
Acting responsibly must once again become the norm.
The financial sector’s activities must be subject to proper supervision again and growth must be based on a sound, long-term strategy.
This is primarily the responsibility of the financial institutions themselves. They must act responsibly and transparently.
This means that national and international supervision needs to be strengthened and broadened, and the government needs to rethink its role.

This will undoubtedly lead to the following inevitable conclusion: banks will be smaller!

The financial sector and the balance sheets of financial institutions rose so sharply in the years before the crisis that their growth became unmanageable.
This was due to the lack of transparency of financial services and products. And ill-advised incentives and interdependence.
The risks had not been properly recognised.
Either by lawmakers, supervisory authorities or bank executives.

So we are now exploring ways of changing that risk profile.
That will of course have an impact on sustainable business models.
For example, by imposing stricter capital requirements on high-risk products, by ensuring that capital buffers reflect the true state of the economy, and by setting limits on leverage.
Requiring banks to properly manage their risks will result in smaller banks.

To avoid any misunderstandings, let me stress that I don’t mean that banks will be smaller in strength or power, or should only operate nationally.
Not at all.
A Dutch bank must remain able to serve the Dutch business community and Dutch-based multinationals at home and abroad.
A Dutch bank must be a mouse that roars!

There is another reasons why I believe it is good that banks will become smaller.
We have experienced that some banks grew so big that they became too big to fail.
Governments couldn't afford to let the bank go bankrupt and the taxpayer had no choice but to pay the bill.
That is an undesirable situation, as was also pointed out by Chancellor Merkel this week.
In addition, we have not only experienced what happens if banks become too big to fail, in the case of Iceland we also saw what can happen if banks become too big to save.
And both examples lead to the same conclusion: banks will have to become smaller.

We will also impose more stringent capital requirements and ensure a comprehensive system of oversight to prevent the kinds of vulnerabilities that have been caused by the shadow banking system with the help of hedge funds, special purpose vehicles and conduits.

As Noreena Hertz has already said: global problems call for global solutions.
That is definitely true when it comes to comprehensive oversight of an international sector.
So the Dutch government will continue to press for a broad, vigorous international approach, within the EU and worldwide.
More specifically, I want to see stricter capital requirements, compulsory guidelines on remuneration, a more systemic perspective, the strengthening of financial reporting, and an all-embracing, more international system of oversight.

Clearly all this can best be done through international coordination.
I therefore welcome the moves being made by president Sarkozy and Chancellor Merkel to move towards international rules on bonuses and compensation schemes.
A level playing field at a European or even global level would be great, was never thought of as realistic but may now actually happen!
And that is good news.

The Netherlands has made moves on moderating bonus payments in the financial sector well ahead of what other countries have been willing to do.
In doing so we were always vulnerable, because it could imply that other countries with less strict regulations would become more attractive to financial institutions.
That competitive disadvantage may now disappear.

But even more interesting is that I now note amongst my European colleagues a willingness to move on in this direction even if other countries do not move along with us.
It would be great if they would but if they wouldn't, well, that's not the end of the world.
The competitive disadvantage we would then continue to have does no longer outweigh the advantage of running less public risks because of a misbehaving banking sector.

But whatever we do, we need to do it quickly!
We seem to be losing momentum.
Old practices seem to come back.
It is as if we can no longer quite remember what went wrong, or even why we want to change things.

There was a similar warning from Paul Krugman, writing in The New York Times last week:
‘It’s hard to avoid the sense that a crucial opportunity is being missed, that we’re at what should be a turning point but are failing to make the turn.’
Krugman notes with surprise that ‘zombie’ ideas like Reaganomics refuse to lie down and die.
That efforts to strengthen bank regulation appear to be losing steam. That critics are even saying again that more regulation will mean less financial innovation and that therefore maybe after all we shouldn't go for better regulation.

Now that the prices of oil and metals like copper are rising again, traders are making demands again.
The most talented traders are again getting million-dollar bonuses from Wall Street firms.
The US financial sector, having axed 300,000 jobs following the collapse of the credit market, is now recruiting again.
Firms are fighting to attract the traders with the Midas touch, so the bonus culture is back.
It’s the same story in London and Paris: bonuses are back, having hardly been away.
Under pressure from the industry, proposals to curb bonuses have been watered down significantly.
Greed has not been vanquished.
The lure of streets or mountains of gold is being felt once more.

I'd like to issue a warning today.
I will always defend bankers and banks as important and indispensable to any economy and to an economy that needs to work its way out of a recession in particular.
But bankers will have to realise that public support for them is still fragile. And if in the coming years all governments will have to turn to their citizens and ask them to accept difficult measures and make contributions to bring government finances back in order again, and at the same time bankers are partying as if it is 1999, they forget it is 2009. They will lose public support and they will lose political support. Politicians who have to sell tough choices to their citizens do not have much leeway towards bankers who persist in making the same mistakes all over again.
And bankers should understand it is in their own interest not to test the margins.

If we let such ideas come back to life we will be missing a vital opportunity to change what is wrong and improve what is imperfect. Whether you call it infectious greed or Gucci capitalism, the financial and economic crisis we have been living through for a year now is about more than just facts and figures, dollars and Euros.
It is also about moral standards and values.

It is a moral crisis or, as Herman Wijffels puts it, a cultural crisis.
A crisis caused by excessive consumerism, excessive greed, and paying too little regard for limits and risks.
Not just among bankers, but also among private investors and savers.

Bankers were no longer focused on serving the customer and society at large, but on being able to make money quickly.
Because as investors we wanted high returns, and as savers we wanted the highest rate of interest.
Maybe, with Robert Reich in mind, we occasionally had our doubts about where we were heading, but they weren’t enough to make us hit the brakes. G
oethe’s Faust laments a similar moral conflict:
‘Zwei Seelen wohnen, ach! in meiner Brust,
(Die eine will sich von der andern trennen)’;
For those of you that don’t speak German, that’s,
‘Two souls, alas! reside within my breast, and each withdraws from and repels its brother’.

Faust was lucky, he had only two souls in his breast.
We have at least four, being consumer, deposit holder, shareholder, citizen, all at the same time.
All I am trying to say is that yes there was a lot wrong with banking and bankers but we played the game just as much, in many roles, with many souls if you like.
In our case, the soul with the moral scruples always lost out.
But the crisis has shown that there is a price to pay.
The unbridled pursuit of wealth carries big risks.
And if big risks turn into reality, they can cause big problems.

Looking at the financial crisis as a moral crisis also makes you understand how difficult it is to deal with it.
Steering the discussion quickly towards a bit more regulation here and a bit more supervision there is the easy way out.
Much more fundamentally it is about rediscovering the balance between modesty and greed, long term and short term, stakeholders and shareholders, public interest and private interest, and fair shares and excessive accumulations.
Governments can make a difference there, but the major contribution will have to be made by individual people taking responsibility for their actions.

A final remark about the moral nature of the crisis.
Basically the crisis has shown us we were unsustainably living beyond our means.
That view opens up a parallel with the other great crises of capitalism: the energy and climate crisis and also the food and trade crisis.
What’s more, these and other crises may be far more fundamental and difficult to resolve than the financial crisis.
At least we know that the financial crisis will pass sooner or later.
The climate and food crises are just getting worse.
Another reason to be more downbeat about the climate and food crises is that there seems to be far less urgency behind international action in these areas.
Think about the billions now being thrown at the financial crisis all around the world – not to mention the speed at which this is being done – and compare that with the spending to tackle climate change and hunger. The contrast is startling.

Yet this combination of crises also presents opportunities.
Let me focus on one of them.
I hope that the world is never again faced with simultaneous financial, energy, climate, trade and food crises.
But the scale of the problem makes the momentum I talked about even greater, and makes it even more important that we act now.
Because now everyone is sitting around the table. And this offers us unique opportunities.

 After all, countries that are asking for something at one negotiating table have something to offer at another.
We want China and India to take more account of the climate as they strive for greater economic growth; they in turn want better access to world trade from us.
We want a number of developing economies to amend their interest and exchange rate policies; they want a stronger voice at institutions like the World Bank and the IMF.
We want a fair distribution of oil; they want a fair distribution of food.
Now is the time for leadership on the world stage, to break with the past, to link the global problems of our age together, to abandon traditional positions and, working together, make whole what was once divided.
We have little choice.
It’s got to be done now and it can be done now.

It is clear that any solution, any attempt at a solution, must contain three elements: sustainability, social responsibility and international cooperation.
Only in a social market economy, where markets are anchored by strong governments, and where companies are collaborative ventures geared to the long term, can we solve the big problems of the modern age.

If at all I sometimes dare to be critical of Dr Hertz, it is because I believe that although markets in the financial sector have clearly failed en clearly fail elsewhere, we shouldn’t run from one extreme to an other.
The art of good political leadership these days is about finding new balances.
And one balance we should try to find is the one between markets and governments.
We should not move from too little regulation to too much regulation, we should not move from market failure to government failure.
There is a serious need and a serious opportunity for redesigning entire systems at a global level but I am still convinced that the key for future prosperity can be found in how markets and governments can work together in making our societies more sustainable.

We live in historic times and they provide historic opportunities to learn and do better.
Some of course have foreseen all this: “Owners of capital will stimulate the working class to buy more and more of expensive goods, houses and technology, pushing them to take more and more expensive credits, until their debt becomes unbearable.
The unpaid debt will lead to bankruptcy of banks, which will have to be nationalised, and the State will have to take the road which will eventually lead to communism”

This quote is said to be not from Noreena Hertz 10 years ago but from Karl Marx 150 years ago.
On the internet there is a blogwar going on about the question whether it is authentic or not.
Let’s just suppose it is.
And let’s credit him for the first bit of his analysis and predictive powers. But let’s make sure his conclusion will never become true.
You can do it, you are the future leaders in finance. 

Show us.

Thank you