What We Can Learn from Germany: How Countries With Publicly Owned Banks Do Better Than America
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While the large private banks were betting on the casinos of the financial markets, lending to businesses and the "real" economy was left to the public Sparkassen, which were more efficient in serving average citizens and local business because they were not stock companies that had to satisfy shareholders' hunger for ever-larger dividends. Today, the market share of private banks in Germany is only 28.4 percent, and Deutsche Bank AG dominates the segment. But with its 7 percent market share, it is still well behind the public banks owned by municipalities and communities.
Neimeyer says the private banks wanted to break up the market dominance of the public banks to get a bigger piece of the pie themselves, and they used the European Commission to do it. The Commission had been lobbied since the early 1990s by German private banks and by Deutsche Bank AG in particular to attack the German government over the country's "inflexible" public banking sector.
The International Monetary Fund, too, had long demanded that any competing public monopolies in the German banking market be broken up, citing their "inefficiencies." When the German public Sparkassen and Landesbanken were reluctant to turn to investment banking with its skyrocketing profits, they were branded as bureaucratic and "unsexy." When they were pressured to increase their returns for their government owners, the German Landesbanken did get sucked to some extent into derivatives and collateralized debt obligations (fraudulently rated triple A). But while they "lost billions in the Goldman Sachs, Deutsche Bank and Lehman Brothers Ponzi scheme," Niemeyer says the extent to which they became involved in highly speculative transactions was "laughable in comparison with the damage done by private banks, for whom taxpayers are now providing guarantees."
It was the public banks and Sparkassen that supplied the real economy with liquidity, and that stepped in for the private banks when they withdrew to bet in the financial casino; but it was on the failings of the Landesbanken and Sparkassen that the media focused their attention. The real motive, says Niemeyer, was that the large private banks wanted the public banks' market share themselves:
In order to win back this important market share, it has become a prerogative to destroy public banking in Germany completely. This unpopular move could never come from the German government itself, so that's why the [European] Commission is being employed for this dirty job.
The Price of Success
The German public banks were brought down by knocking their public legs out from under them. Previously, they had enjoyed state guarantees that allowed them to acquire and lend funds at substantially better rates than private banks were able to do. But in 2001, the European Commission ruled to strip the Landesbanks of their explicit state credit guarantees, forcing them to compete on the same terms as private banks. And today, the European Banking Authority is refusing to count the banks' implicit state guarantees in their "stress tests" for banking solvency.
The upshot is that the German public banks are being stripped of what has made them stable, secure and able to lend at low interest rates: they have had the full faith and credit of the government and the public behind them. By eliminating the profit motive, focusing on the public interest and relying on government guarantees, the German public banks were able to turn bank credit into the sort of public utility described by Professor Hudson.
The example of Germany shows that even success is no guarantee in the face of a relentless onslaught of propaganda by large privately owned banks interested only in making money for their CEOs, wealthiest clients and shareholders. But peering behind the propaganda, the public banking model that helped underwrite Germany's economic success might be the fast track to a US banking system that serves Main Street rather than Wall Street.