Switzerland is reeling from the collapse of its second largest bank, Credit Suisse, and its takeover by its largest bank UBS. While the collapse of Silicon Valley Bank has sent tremors in California and elsewhere, the failure of Credit Suisse is being felt here like an earthquake. On the political/economic Richter scale in Switzerland, this was a Big One, bigger than the grounding and bankruptcy of the former Swiss national airline Swissair in 2002. The irony of the collapse and takeover is that the very banking community which continually calls for more freedom and less government regulation is the very one most relieved that the Swiss government and the Swiss National Bank (BNS) stepped in with emergency relief so that UBS could acquire Credit Suisse.
The current crisis, like the one in the United States, shows the limitations of deregulation and the inconsistent logic of bankers and their political parties. It is one thing to speak on behalf of greater freedom, individualism, and less government intervention, it is another to cry for help from the public sector when the ship is sinking. Those who preach the Protestant ethic of private initiative, individual dynamism, and the pre-ordained success of the Chosen were the very ones looking to the communal/national to bail them out with cash, loans, and guarantees from the public BNS. In the Puritan City of Calvin, Geneva, as well as in the Swiss financial center Zurich, the Credit Suisse debacle has shown that the emperor is shockingly without clothes.
The Swiss taxpayer and shareholders were not consulted on the merger of the two largest banks or how their money was being spent. There was no time for the traditional referendum or initiative that are so dear to Switzerland’s direct democracy. The emergency was so desperate that the Federal Council met in special session without including people’s representatives from the Parliament. Without consultation, the Federal Council decided that the Swiss taxpayers’ money would be spent for guarantees and loans to the tune of CHF 259 billion.
The fact that the past Credit Suisse leaders had gotten huge bonuses and golden parachutes in the tens of millions of dollars running the bank while the ship was adrift further enrages. One could add corruption to the outrage if one lists the number of fines Credit Suisse has paid for illegal activities. (There are movements to force Credit Suisse executives to repay their bonuses.)
Why wasn’t the bank more closely monitored? Switzerland has its oversight banking authority, the Swiss Financial Market Supervisory Authority (FINMA). “FINMA was useless in this case,” said a well-known Swiss economic journalist. Three days before the collapse of Credit Suisse, FINMA said in a joint statement with the BNS: “There is no risk of direct contagion between the problems faced by some banks in the U.S. and the Swiss financial market.”
To try to establish accountability for the crisis, the Swiss Parliament will hold an extraordinary session in mid-April during which it will question the finance minister, the head of FINMA as well as the head of the BNS.
The understand why there wasn’t closer bank supervision involves understanding a simple philosophical/political ideology. Switzerland, like the United States, is based on a capitalist ethic that prioritizes private industry over public government intervention. Much of this divide goes back to the Russian Revolution and the fear in the West that government intervention will lead to centralized government, socialism, and communism. The International Labour Organization was founded in Geneva in 1919 to improve social justice so that the workers of the world would not unite.
The fear of government involvement in the free market continued after the Revolution with the added fear of creeping totalitarianism under fascism. Opposed to socialism, communism, and totalitarianism, laissez-faire capitalism is the cornerstone of free market fundamentalism. As described by Naomi Oreskes and Erik M. Conway in the The Big Myth: How American Business Taught Us to Loathe Government and Love the Free Market, this foundational myth is based on “a false dichotomy between laissez-faire capitalism and communist regimentation.”
In the United States, this false schism has been publicized through regular campaigns against big government, historically highlighted against Franklin Delano Roosevelt’s New Deal in the 1930s and 1940s by organizations such as the National Electric Light Association (NELA), the American Liberty League, and the National Association of Manufacturers (NAM). It is a continuing leitmotif in arguments against effective public regulation in the name of private freedom.
While one could argue indefinitely about different types of freedom – Isaiah Berlin’s freedom from and freedom to – there should be no question that there is no absolute freedom today except perhaps on Robinson Crusoe’s imaginary island. The only question today is the degree of limitations on freedom, the degree of government control.
California has been preparing for a major earthquake for years. Even Switzerland has small tremors and earthquake warnings. Like the Boy Scouts, Switzerland claims it is prepared for a natural disaster. If Switzerland properly prepares for some major natural disaster, is it too much to ask the public sector to try to prepare for some banking disaster? Is the banking lobby so powerful and the fear of socialism/communism/totalitarianism so determinant?
Banks and bankers profit when the good times roll; average citizens bail them out when the ship is sinking. The banks have it both ways. They preach freedom, laissez-faire, and the efficiency of the market only to cry for help when their ship starts drawing water. If the lesson of the current banking crisis is a special socialism for private bankers and a public capitalism for those with no guarantees, then the general narrative and its consequences must change. The myth of loathing government and loving the free market, so trenchantly described by Oreskes and Conway, must be demythologized. It is the common good that is too big to fail.