10 January 2009


Global Downturn 'Is an Earthquake, not a Tremor'

Former World Bank President James Wolfensohn talks to SPIEGEL about the global financial crisis and his hope that Barack Obama will be the right president to lead the US out of recession.

SPIEGEL: Mr. Wolfensohn, you are known to be an advocate of socially responsible capitalism. How do you view the Wall Street community these days?

Wolfensohn: Well, I think the Wall Street community is preoccupied by survival. We're having a downturn of unprecedented proportions, and so it's not surprising that issues of global social responsibility are pushed to the back. That doesn't mean that it is correct and it doesn't mean that we are still not better off in this country than in many other countries.

SPIEGEL: By the way, did you take part in this wild game? Did you lose a lot of money?

Wolfensohn: Personally?


Wolfensohn: The answer is no because when I got out of the World Bank and became special envoy to the Israeli-Palestinian negotiations in the Middle East for a year, I got very liquid, and I've never gotten into debt since then. So I've had a very balanced portfolio. Having said that, I learned today that one of the investments that I made with quite a trustful and elite firm is being affected because that firm made an investment in the gentleman who lost $50 billion. And so I had never heard of him, and I never was informed that the investment manager that I had given money to was doing business with him.

SPIEGEL: The gentleman you are talking about is Bernard Madoff, who is alleged to have run a $50 billion Ponzi scheme. You never met him?

Wolfensohn: No, but I was given the good news today that unknown to me I had a small part of my investment in assets at that terrible firm.

SPIEGEL: German President Horst Köhler, former head of the International Monetary Fund. ...

Wolfensohn: ... I know him extremely well ...

SPIEGEL: ... asked bank managers to apologize for their role in the financial crisis.

Wolfensohn: Horst Köhler is a remarkable man, and a very close friend, and it's exactly what I would expect him to demand because he has a very high moral standard. I'm not sure that the people that he is talking about would feel it was necessary to do that. It would be a sort of catharsis but in this country they would have to word their apology very carefully for fear that they would give grounds for legal action.

SPIEGEL: Our former Chancellor Helmut Schmidt says it's all a matter of so-called predatory capitalism. Do you agree?

Wolfensohn: Well, it's not the system, the system did not drive it. It was driven by individuals, and the individuals created a capitalist system that was full of excesses and not regulated. So it wasn't because there was a system; it was because individuals took advantage in the absence of appropriate regulation.

SPIEGEL: Has it to do with the American way of doing business, the American way of life, the American dream?

Wolfensohn: Well, your banks -- also in their international activities -- engaged heavily in this practice and had substantial losses as a consequence of this crisis.

SPIEGEL: But they didn't invent this business.

Wolfensohn: Avarice is not contained only in the United States. So if something is making money here, it's very apparent from the reports of your financial institutions and your investors, as well as other foreign banks, that sophisticated investors were investing very heavily in this system. So I give you that it was invented here, but I must say that there were some willing buyers and participants in other parts of the world.

SPIEGEL: Europeans love to feel morally superior to Americans. You grew up in Australia, you became an American citizen…

Wolfensohn: … I'm an American citizen, I ran Carnegie Hall for 20 years, the Kennedy Center for five years, and I've done lots of things for social causes here and abroad. And there are many like me. The perception in Europe of these money-hungry Americans is wonderful, but it's not true. I don't think you hear people in the United States talking down Europe. I hear more criticism in Europe of the United States, but I don't think it matters. We're in the middle of a crisis now which is global.

SPIEGEL: You're right, of course.

Wolfensohn: It's hitting China, it's hitting India, it's hitting the Middle East.

SPIEGEL: And it is hitting Russia, where you just returned from.

Wolfensohn: They lost $150 billion in reserves in six weeks, which is a quarter of their reserves, so the ruble is under intense pressure. There are frailties in many parts of the world, and a lot of the people that lost money are not innocent victims of the activities of the United States and Alan Greenspan. They are active participants in the markets. You have a few examples in this country and a few examples in your own country of institutions that have been more sophisticated. Take (German private bank) Metzler Bank, which I happen to know very well. It was not in any of this stuff, but that's because Fritz Metzler is very conservative and smart, and there are a few people here that are equally conservative as well.

SPIEGEL: Our government-owned banks are heavily affected.

Wolfensohn: That's what I'm saying. They still have not determined what is the extent of the loss.

SPIEGEL: You are personally focused on the emerging markets. How will China or India feel the pain?

Wolfensohn: I think pain is widespread. We had here just a few days ago the visit of a Chinese delegation that was meeting with a few people in this country, both to inquire and also to project an air of confidence and competence, which certainly exists in China. I think you have extremely good management teams in China. But the scope of the problem is just enormous. For years it has always been the assumption that if you drop below 7 percent growth in China, the country will be in trouble in terms of civil disturbances and they will not be able to hold it altogether. Now they're talking about 5.5 percent growth for next year in China. There was a three day meeting in the Politburo to consider this challenge. They have the capacity to re-stimulate, of course, because they have $2 trillion of reserves.

SPIEGEL: What about India, which has less room to maneuver?

Wolfensohn: The mind of the public in India has been taken off the economics at the moment by the Pakistan confrontation. This does not diminish economic pressure but gets the population angry at the country next door. My biggest worry I think is the 53 countries in sub-Saharan Africa that have depended significantly on natural resource exports and where the prices in everything from iron ore to bauxite to oil have dropped hugely. And you do not yet have the internal market in sub-Saharan Africa. It produces maybe 1.5 percent of global GDP at the moment, with 800 to 900 million people, but by 2050 it'll be 2 billion people.

SPIEGEL: Do you expect a human crisis on top of the financial crisis?

Wolfensohn: Well, the best estimates put out by the World Bank, and they've drawn on other research, is that by 2050 the average per capita income in sub-Saharan Africa, in today's dollars, will grow from $700 per capita to $1,700 per capita. In China and India, in 2050 the per capita income will be above $40,000 per capita, and in Germany and the United States it will be $98,000 per capita. So you have this enormous gap between Africa and the rest of the world.

'It's Not the Government's Responsibility to Bail Out all the Banks'

SPIEGEL: Do you expect an anti-American mood as a fallout of this crisis?

Wolfensohn: What has surprised me is that we had a $100 billion forgiveness of African debt done largely by the Europeans and by the Americans significantly. So far as I know, there has been no thank you for that. And immediately China and India come in, China with a $10 billion program and India with a much smaller program but a visible program.

Three years ago, if you remember, the African leaders went first to Beijing and the African businessmen went to New Delhi. And at the same time as all the debts were being forgiven, they're claiming that their new best friends are the Chinese and the Indians, who are pushing also to build political relationships between the East and Africa as well as access to natural resources. And so you see this new dimension, but the amount of money which they're putting up is still significantly less than what the West is doing and what western NGO's do.

But we're losing the battle down there because the Chinese and the Indians are just better at it. They're better publicists, they are building the president's homes, soccer stadiums, they're building roads and hospitals and you now have 750,000 Chinese living in sub-Saharan Africa.

SPIEGEL: To contain the crisis there are numerous stimulus packages, and rescue and bailout plans. The financial crisis is still not under control, though. What do you expect next?

Wolfensohn: Well, I think you've got about $9 trillion of announced packages, from which about $3 trillion have been drawn down.

SPIEGEL: Worldwide or only in the US?

Wolfensohn: Just the United States. We've got in addition to that $6 or 7 trillion in Europe and other parts of the world. What I expect is that we need to understand precisely what this is for. Governments cannot buy all the bad assets of banks because the shareholders have to suffer, and it's not the responsibility of government to go and bail out all the banks. They get nationalized typically before that with the shareholders wiped out.

SPIEGEL: Are governments taking the correct action?

Wolfensohn: What they've done this time is what they did not do in the 30's. In the 1930's they did not provide liquidity to the banks, so the banks went under very quickly. This time, Ben Bernanke, the chairman of the Federal Reserve Bank, is an expert on that area -- it's what he did his thesis on -- and he has provided liquidity to the financial institutions. The government is trying in some elements, notably mortgages, to try and rewrite the mortgages, to stretch them out, to make them sustainable for individuals so that you neither have a human crisis in terms of housing nor a bank crisis. So all that seems reasonable, but if we were to have a crisis in credit card debt or a crisis in loans to industrial companies or loans between banks, it is not the responsibility or the authority of the federal government to come and bail out every financial institution.

It was thought when they had the $700 billion package that the banks would re-stimulate, they would increase their lending. Quite the contrary happened. What the banks have done is to try and strengthen their capital ratios. And so every bank that I know in this country is looking inwards to try and see how they can strengthen the capital of the institution because what they're worried about is the next wave of disasters and bad debts.

SPIEGEL: You sound very skeptical. But is it not a good idea for banks to ask their clients about their business plan and whether they will be able to repay the loan?

Wolfensohn: Even good companies that have previously had credit lines are being restrained because they have to pay back some of their credit lines because the banks are contracting. In that event, the good companies become more limited in what they can do. The companies that are marginal probably go under or are weakened, and the companies that are bad get nothing. So you have this downward pressure on economic activity as a result of very necessary conservativism on the part of the banks. Now President-elect Obama is trying to put a trillion dollars out there to re-stimulate economic activity. This is what was done by FDR during the period of reconstruction in this country, and it is what was done in your own country after the Depression -- governments have public works programs, to put people to work.

SPIEGEL: Will it work nowadays?

Wolfensohn: Well, it will get some people to work, and it keeps them off the streets.

SPIEGEL: But will it be a sustainable business model for all countries?

Wolfensohn: I personally am not smart enough to know how long it will take for confidence to return, both to the consumer, which is what is necessary, and then to the companies.

SPIEGEL: Can one buy trust in the market?

Wolfensohn: No.

SPIEGEL: But that's what governments are trying to do.

Wolfensohn: You create a situation where you can rebuild a certain measure of trust. It's easier to do that with 8 percent unemployment than with 12 or 13 percent unemployment.

SPIEGEL: Everybody in the United States is talking about Obama taking taxpayers' money. But isn't it foreign money -- Chinese money, Indian money?

Wolfensohn: He is not going to be able to raise a trillion dollars in extra taxes. But it's very conceivable that the federal deficit will move from $11 trillion to $12 trillion or maybe more.

SPIEGEL: The Fed is said to be determined to print as much money as needed to stimulate the US economy.

Wolfensohn: I saw that headline in The New York Times, and I hope that no one said it. There is a very good financial team coming in. Tim Geithner as secretary of the Treasury is first rate, Larry Summers in the White House is first rate. You've got Paul Volcker who was my partner, in a sort of advisory capacity with a bunch of other people. Everybody that has got anything to contribute intellectually is around and ready to help. But it's not just an intellectual game. It is a game that is now being played out at a level of uncertainty that we've not seen since the 30's. This is not another adjustment as we had in the 80's. This is a shift in the earth. This is an earthquake. It is not a tremor.

SPIEGEL: How long is it going to take to get out of this mess?

Wolfensohn: I don't think anybody knows, frankly.

SPIEGEL: And there's no alternative to the government's attempt to do everything which might be helpful in order to solve this crisis?

Wolfensohn: No. To the extent that private sector will do it, the government would be thrilled, and I'm sure that they will come up with every conceivable incentive for individuals to spend and for the private sector to grow because that's the nature of American capitalism.

SPIEGEL: Are you confident that Obama is the right president in this period of time?

Wolfensohn: First of all, I don't think any single man could do this whole thing, and so you have to look at the cabinet that he's put together, and I think his choices have been, from what I can see, very admirable.

SPIEGEL: But he's the one who has to make the decisions after all.

Wolfensohn: He does, and that is a challenge that he faces, and the reason he was elected is because people think he has the balance and the judgment to do it. Just as John F. Kennedy was elected at a young age, and I think in retrospect people would say to his period as president he performed pretty well.

SPIEGEL: Do you know Barack Obama?

Wolfensohn: I've met him, but I don't know him.

SPIEGEL: Will a new form of capitalism arise when the crisis is over?

Wolfensohn: I would hope that we come out of this with a free enterprise system continuing without a lot of trade barriers and with a more enlightened government in terms of control of excesses. That will work for a while, and then there'll be some other set of excesses which hits the next generation, and that's the way it works.

SPIEGEL: Mr. Wolfensohn, thank you very much for this interview.

Interview conducted by Gerhard Spörl and Gabor Steingart.


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