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.