| Global
capitalism has now entered a new phase, one that is
unprecedented in its history. And the core of the capitalism
– the US economy - has certainly entered uncharted territory
particularly in the financial sector. The still-unfolding
financial crisis has already gone way beyond the predictions
of even relatively pessimistic observers, and now threatens
actually to cause a financial collapse at the heart
of the international economy.
Of course, much of this could easily have been predicted
even by policy makers in the US if they had not so strongly
been in denial about the very dubious and fragile foundations
of the recent boom on the US. There is now no doubt
at all that the financial deregulation of the 1980s
and 1990s, aided by the incentives to finance provided
by successive US governments, is essentially responsible.
This financial liberalisation allowed banks and other
financial institutions not only to behave in completely
irresponsible and greedy ways, but to do it in such
a non-transparent manner that they themselves were unaware
of the full extent of their own exposure and vulnerability.
But US officials and market analysts all tended to underplay
this, arguing that finance companies would be efficient
at regulating themselves simply because they stood to
lose in the event of failure.
This argument even determined the new codes of conduct
of the Bank for International Settlements, in its “Basel
II norms”, which effectively put the onus on banks to
assess their own risks and thereby regulate themselves.
So the malaise spread beyond the US to other countries,
such as the UK and even developing countries in Asia
and elsewhere. Thus, in India too we have our own potential
problems in terms of an over-extended financial sector
that has tried to disguise its exposure to problematic
debt by converting them into securities.
The bubble in the US attracted savings from across the
world, including from the poorest developing countries,
so that for at least five years the South as a whole
transferred financial resources to the North. And now
all this is also under threat, as the list of creditors
who directly and indirectly have transferred funds to
troubled US financial institutions includes workers’
pension funds from developing countries as far apart
as Malaysia and Chile. The current Chairman of the US
Federal Reserve (the US’ central bank) Ben Bernanke
actually argued that this financial flow from South
to North reflected the innate and continuing real strengths
of the US economy, rather than a search for speculative
gains during a bubble.
All that is now history, as more banks, mortgage companies
and insurance providers reveal their problems and it
becomes evident that this enormous and dynamic financial
structure was mostly rotten. The declared losses are
already huge, and major institutions have already collapsed
or had to be rescued with enormous bailout packages.
Already, the Bush administration and the Federal Reserve
have spent unbelievable amounts – estimated to be more
than $600 billion in the past year and more than $200
billion in the past two months alone – to help bail
out some of the most respected institutions in American
finance. Yet this may still be only the tip of the iceberg,
as the crisis is far from over and more institutions
will definitely face problems. The former Chief Economist
of the IMF, Kenneth Rogoff, has said that “it is hard
to imagine how the US government is going to succeed
in creating a firewall against further contagion without
spending five to ten times more than it has already,
that is, an amount closer to $1,000 billion to $2,000
billion”.
Even that may not be enough, in the bottomless pit that
is now being created by financial fragility. So, quite
apart from the problem of moral hazard generated by
such large bailouts, there is the problem of financing
these large outlays from the government budget. On 17
September, the Fed actually asked the US government
to sell debt on its behalf, in order to finance these
huge bailouts.
There is more involved here than the cost to taxpayers.
Even if the bailouts are financed through debt, the
prescient Mr. Rogoff has noted that “A large expansion
in debt will impose enormous fiscal costs on the US,
ultimately hitting growth through a combination of higher
taxes and lower spending. It will certainly make it
harder for the US to maintain its military dominance,
which has been one of the linchpins of the dollar.”
The most recent evidence suggests that the crisis in
the US is now entering what the economist Charles Kindleberger
called “the revulsion phase”, whereby credit dries up
as investors seek more safe ways of holding on to their
wealth. After the middle of September, many credit markets
stopped working normally, as investors all over the
world tried to move their investments into safe areas,
such as buying gold or US Treasury Bills. Indeed, by
18 September the yield on US Treasury Bills, at 0.06
per cent, was lower than it had been for more than 50
years, as terrified investors scurrying to “safety”
bid up the price. Globally, stock markets fell, sometimes
drastically and the stage seemed to be set for a move
from revulsion to the next stage of crisis - panic.
Then on 19 September, the US government announced a
set of moves to save the financial system, which would
have seemed unthinkable even the previous week. One
entirely justified move, which undid just one of the
measures of financial deregulation that had already
created so much chaos, was to ban the “short selling”
of stocks, which is the practice whereby investors,
who anticipate a fall in stock prices, borrow shares
and sell them, hoping to buy them back at lower prices
and profit from the difference. Hedge funds and other
speculators had been engaging in this especially in
the past few months, thereby contributing to the declines
in share prices and forcing several companies to the
brink.
But the more extraordinary action was the US government
declaring that it would take what it described as “toxic
mortgage debt” off the troubled banks and refinance
the system, in an open-ended scheme that could cost
as much as $1 trillion. This is not only hugely expensive,
it is also a huge gamble, because it presumes that the
US government can simply buy its way out of crisis.
Of course there are issues of fairness and equity, because
the same government that has refused to come to the
aid of small borrowers who are being thrown out of their
homes because they cannot repay their loans, has quickly
summoned all its power and financial resources to bail
out the financial elite that has created the mess with
its greedy and irresponsible practices. Instead of a
progressive nationalisation that would seek to direct
finance to serve the ends of the real economy and the
working people, this is basically the socialisation
of the risks of capitalists, to be borne by taxpayers
in the US and by developing countries. The class bias
of the Bush government could not be more apparent.
And of course the ability to bail out at all stands
in stark contrast to the way the same administration
has treated financial crises in other countries, where
it and the IMF have forced governments to let banks
and other companies fail, causing unemployment, falling
living standards and depression as the “necessary pain”
of adjustment. The lesson is not lost on the developing
world that once again the US government has set different
rules for itself and its own friends, from what it imposes
on others.
But the more serious problem for the US government,
and indeed for the international financial system that
underlies contemporary capitalism, is that even these
desperate measures for desperate times may not be enough.
It is true that stock markets in the US and elsewhere
recovered sharply in the initial euphoria after the
announcement. But the fundamental problems have not
disappeared. As long as house prices keep declining
and businesses continue to face problems, more and more
debt will become unpayable. And the extent of financial
entanglement in the system is now so extreme that no
one really knows the full extent of any one institution’s
liabilities, or how fragile the assets are. In such
conditions, the required bailout amount is also unpredictable,
creating an enormous black hole into which financial
resources will have to be poured.
Anyway, who is going to pay for this already huge bailout?
In the first instance, the US government will issue
debt in the form of treasury Bills, which are likely
to be dominantly purchased by central banks or sovereign
investment funds of governments in Asian developing
countries, including India. So we in the developing
world will be paying for this bailout. Over time, of
course, this debt will have to be repaid by American
taxpayers, which has huge implications for the economic
power of the US in future.
So it is clear why we are moving to a different world
economy: in which predatory finance has got itself into
such huge problems that it must be rescued with huge
resources by the state using taxpayers’ money; where
that state itself is weakened and its ability to continue
as the dominant imperial power and provide a stable
international regime is under question; and most of
all, when the economic paradigm that underlined all
this is finally being rejected even by many of its own
practitioners.
This is a tremendous opportunity to reinstate a more
progressive international economic order. We in the
Left should not waste it.
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