The Praful Bidwai Column
Dealing with the global meltdown
WHEN the US investment bank Bear Stearns was rescued from collapse by the Bush government this past March, the Financial Times' neoliberal commentator Martin Wolf lamented this as "the day that the dream of global free-market capitalism died." The Western world's self-regulating financial system broke down amidst "an epic crisis."
Six months on, the US government seized America's two largest housing mortgage companies, Fannie May and Freddie Mac. Then, Lehman Brothers filed for bankruptcy; and the financial management company, Merrill Lynch -- with the logo, "We are bullish on the future" -- was sold at bargain-basement prices.
With what metaphors beyond dreams and nightmares would Wolf describe today's meltdown?
Consider this. Huge commercial banks Washington Mutual and Wachovia have collapsed. Goldman Sachs and Morgan Stanley have given up their investment-bank status. Insurance giant AIG had to be rescued.
Countless banks are failing. People's savings have been wiped out. Stock markets are plumbing new lows.
Last week, the US government prepared a $700 billion bailout package -- the largest in American history, and equivalent to 70 percent of India's GDP. It was rejected by the US Congress. But it wouldn't have stemmed the meltdown.
Even $1,000 billion may not!
The crisis is likely to snowball. IMF economists, who have analysed 124 banking crises over 27 years, say the average fiscal cost of managing a crisis is 13.3 percent of GDP. The $700 billion only represents 5 percent of US GDP.
The proposed rescue measures have triggered a debate in the US. On one side are bankers with their obscenely fat salaries, who want their junk assets bought at a premium.
Then, there's a tiny minority of market fundamentalists, who oppose any state intervention. They're supremely unconcerned about the enormous losses ordinary people have suffered -- for no fault of theirs.
The third side consists of politically conscious working people who don't want their money to be wasted on bailing out corporations -- without these being punished. Many US Congressmen had to defer to this sentiment.
Filmmaker Michael Moore voices this well. He describes the bailout as "the biggest robbery in the history of this country […] After stealing a half trillion dollars to line the pockets of their war-profiteering backers […] Bush and his cronies […] are looting the US Treasury of every dollar they can grab…"
Reported The New York Times: "Even as policymakers worked on details of a […] bailout […] Wall Street began looking for ways to profit from it…"
Wall Street firms are looking to enormous fees to evaluate bad assets. As Nobel Laureate and former World Bank chief economist Joseph Stiglitz says: "[E]ven Wall Street's best and brightest do not exactly have a credible record in asset valuation; [or] we wouldn't be where we are…"
Following their recommendations, Stiglitz says, "we'll wind up […] with the absolutely lousiest mortgages…. [W]e the taxpayers lose, and Wall Street gains."
The present crisis was precipitated by reckless bank lending to "sub-prime" (unsecured high-risk) borrowers, particularly in housing. Banks concealed the risks of loans in the hope that hiding and distributing them would somehow minimise them.
This has blown into a market failure. Instead of reducing risks through prudence, bankers --driven by blind faith -- continue illogically to rely on market-driven accounting.
This becomes extremely dangerous when markets fail. A bank shouldn't depend on market prices to protect itself from a failure of market signals!
Yet, bankers did exactly that. They lent to borrowers that everybody else was lending to. That further enlarged risks to a point where banks became insolvent.
Then, in shameless inconsistency with their professed commitment to markets, bankers lobbied and begged for multibillion-dollar bailouts.
However, the bankers' error didn't lie in violating the rules that govern global banking. These rules are flawed and promote what analyst Susan Strange has called "Casino Capitalism."
The rules are set by the Basle Committee of Bank Supervisors, representing only 11 OECD countries. The "Basle Consensus" disfavours banking regulation by public authorities and advocates "market prices"-based self-regulation.
But with business cycles and market failures, this can lead to disaster.
That's what we're witnessing. The crisis is all the greater because the separation made in US law after the Great Depression between commercial banks and securities firms/investment banks stands abolished. Indeed, the meltdown has amalgamated the two.
The financial crisis is hitting the real economy, with a slowdown in the US and European Union. The question's no longer if there'll be a recession, but how severe it will be
Two conclusions follow. First, we're seeing an unprecedented crisis and discrediting of the finance capital-dominated Anglo-Saxon neo-liberal model, which has ruled the world since the 1980s.
This calls for a political fight against neo-liberalism and for humane, egalitarian "social economy" alternatives with prudent state intervention.
Second, the crisis will inevitably provoke debate and action. The question is how governments will act. Conservative politicians, markets-obsessed regulators and, of course, bankers, want bailouts, followed by tinkering at the regulatory margins, but no change in the neo-liberal paradigm.
This would only perpetuate "Casino Capitalism" and the cycle of destruction, restructuring, concentration and destruction.
A radical solution would demand structural changes in the global financial system, including strict public regulation, capital controls, coordinated monetary policies, and restructuring of banking as part of an equitable economic reconstruction program.
An excellent example of this is Franklin Delano Roosevelt's New Deal, launched in 1933 with the Emergency Banking Act, in response to the Great Depression.
FDR went way beyond straightening out the "bad banking situation" caused by "incompetent or dishonest handling […] of people's funds…"
Under the New Deal, the government undertook public-works projects, building 40,000 public buildings, 72,000 schools, 8,000 parks and 80,000 bridges.
The entire cost of these programs (in today's dollars) was about $500 billion. They produced dramatic results in reducing poverty, putting purchasing power into the people's hands, promoting equity, and energising growth. It's ludicrous to spend twice as much just to temporarily stabilise the financial system.
The whole world, including South Asia, today needs a new New Deal.
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