Going Deeper
Meltdown
THE recent US meltdown has caused global disquiet and resulted in a variety of political and economic responses from the leaders of developed countries. Germany, the engine of growth of the European Union, has assumed responsibility for deposits in all banks to reassure the people that the US virus can be staved off. Britain's plan includes £250 billion for inter-bank loans to be treated as a contingent liability, raising Bank of England's special liquidity scheme to £200 billion pounds, and a £50 billion pounds bank recapitalisation fund to strengthen banks' capital position.
Despite the support extended by Obama and McCain to the Senate bailout bill, and subsequent approval by the House of Representatives of its own version of the bill, it is unclear even after the second presidential debate how assured the American public will be with the bailout of Wall Street despite some "sweetener" given to the people at large because the crisis in the first place was caused by the inadvertent or deliberate misguidance by the banks and sub-prime lenders of people who just could not have possibly paid up their debts.
Professor Nouriel Roubini of NYU Stern School of Business was one of the first to predict US recession (defined by the IMF as global average growth below 3% for two quarters while for individual countries growth has to go backwards for six months).
After the Great Depression of the 1930s, world leaders are wary of using the term "depression," which has been defined as involving growth contraction by 10% or more. Roubini's doomsday scenario includes "a vicious circle where a deep recession makes the financial losses more severe; house prices will fall by 20% to 30%, wiping out $4,000 to $6,000 billion dollars; about 60% of all mortgages originating between 2005 and 2007 having 'reckless toxic features' would impair the capability of banks to offer credit, leading to 'credit crunch' spreading from mortgage to consumer credit with a total loss in the financial system of more than $1,000 billion and the economic recession will become deeper more protracted and severe."
The tax cuts promised for the middle class in the bill and the increase to $250,000 deposit to be secured by the Federal Reserve System, albeit a kind of sop to Main Street who blame Wall Street for the financial mess, may not be enough to halt the US and consequent global meltdown. Though some developed countries have injected huge amounts into the banking system and secured deposits of the people to prevent a run on the banks, developing countries may not be enthusiastic enough to buy US Treasury bonds (China reportedly has billions of dollars of US bonds).
German Chancellor Angela Merkel appears to be in the minority who are asking for accountability from the top management, who have failed not only their creditors but have also brought the world to this stage. The US Congress bill authorises the treasury secretary to inject billions of dollars into the money market and ailing banks, and also ensures US citizens that the bailed out firms will not be allowed to reap the benefit of their failure. It is despairing to note that some CEOs would take back home millions of dollars in benefits and severance pay for running the firms they led to the ground.
The meltdown also has effects on democracy and development. Nobel laureate Joseph Stiglitz, distinct from his fellow travelers Arthur Lewis and Simon Kuznets who believe that inequality and consequent savings by the rich would eventually lead to higher growth and have trickle down effect to the poor, did not believe that market economy would necessarily lead to social justice or even economic efficiency.
The US meltdown may raise questions about the efficacy of unbridled capitalism due to lesser role of the government in line with the conviction of Adam Smith that economies work best when government does not interfere with the free market's "invisible hand" or the alternative of greater state intervention that while ensuring fairness may affect the sustainability of democracy that both Stiglitz and Benjamin Friedman think could be a byproduct in poor countries.
Since governments are elected to provide social goods, and given Marxian criticism that the right to private property has an inherent contradiction with greater welfare of the general people, the "visible hand" in the form of governmental intervention in the market mechanism to control the greed of the capitalists has to be present. Lax supervision in the case of the US has brought immense grief to the largest economy in the world, and beyond.
If the $700 billion proves to be insufficient to enthuse US consumerism, then exports from developing countries, already suffering from adverse terms of trade, will suffer, with multiplier effect on employment, reduced sale of domestic products, less remittance by migrant labour (an important foreign exchange earner for Bangladesh that received 27% remittance from the US and European countries in the last fiscal year), lower capital inflows from developed economies, tightening of loan conditions in developing countries, reduction in domestic investment, etc.
Beyond the obvious economic losses the world will sustain, the financial meltdown will perhaps cause greater damage to Reaganism/Thatcherism that had dominated global economic policies for decades. Francis Fukuyama sees "a more intangible, yet potentially much greater cost to the United States." He argues that Reagan era of low taxes, though the policies were appropriate for that time, had outlived its utility with the onset of the Asian financial crisis of 1997-98, and the staggering and unsustainable US trade deficit -- $700 billion a year by 2007. The vanishing of $1 trillion in the stock-market in one day, and the scale of the Wall Street crack up, has strengthened the critics' branding of American prosperity as "cowboy capitalism."
The other US idea, democracy, has certainly taken a hit due to the Bush administration's invasion of Iraq under false pretences, and the despicable atrocities committed at Abu Ghraib and Guantanamo Bay. Making international law subservient to domestic US law will, in all certitude, bring to an end US "soft power," universally admired for such a long time, a point emphatically made by Barack Obama in the second presidential debate.
In the final analysis, the US meltdown is unlikely to be replaced by the Chinese or Russian model of strict regulation and governmental oversight because a global meltdown, should that happen, is not expected to be selective by sparing some and punishing others.
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