Let's learn from the US financial disaster | Nilotpal Basu

Published on 03-10-2008 In General

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Let's learn from the US financial disaster

For the neo liberal mandarins of the North Block and the Yojona Bhawan a reading of the latest Guardian column by the Nobel Laureate Joseph Stiglitz would be very much in order.Stiglitz has candidly observed on the refusal of the US Congress to approve the bailout package of the Bush Administration –"A sad day for Wall Street, but it may be a glorious day for democracy ".He has reasoned" In environmental economics, there is a basic concept called the polluter pays principle. It is a matter of fairness, but also of efficiency. Wall Street has polluted our economy with toxic mortgages. It should now pay for the cleanup".

Prognosis of the current financial crisis in the US financial system is also fairly simple. There have been large losses, as loans have been given to people who did not have a capacity to repay. The value of the collateral was inflated by a speculative bubble which has now nosedived with bursting of that bubble.

However, the meltdown of the US financial system and its ramification go far beyond such simple symptomatic explanation. The sheer magnitude of the crisis is humongous and is consequently provoking parallel to be drawn with the great depression of the 30's.All the five behemoths of the banking sector who redefined the paradigm of the sector itself- from regular commercial banking to investment banking. It is the status of these -Bear Stearns, Lehman Brothers, Merrill Lynch, Goldman Sachs and Morgan Stanley- that leads the trajectory of the meltdown. Some have disappeared into bankruptcy; some have been sold for a pittance and the last two have announced their intention to revert back to conventional banking. The crisis obviously is not restricted to investment banks. The second largest insurance company-AIG has been bailed out by the Bank of America at $85 billion. The mortgage companies Fannie Mae and Freddie Mac have been nationalized. The reverberations of the crisis are felt practically all over the developed world and the emerging economies- in the share markets and the currency markets. All these raise the specter of a global recession which threatens to draw virtually every part of the global economic and financial system into its vortex.

But ahead of the collapse of these US financial giants, the signals were loud and clear. The global crude oil prices had reached astronomical heights with no correspondence whatsoever with the actual cost of production. These, obviously, had its debilitating impact on the global food prices. The world had become a victim of this adverse course where 100 million people were added to the existing 850 million who went hungry. There is no point in reiterating that this was the inevitable outcome of the rapacious speculative profits that some of these financial giants were involved in reaping.

Does this really come as a surprise? By the very nature, the changes in the contemporary capitalist economy to one which is defined by neo-liberal globalisation – the very principal function of capital has undergone a metamorphosis.

Capital's main function today is to be invested for short term speculative gains. The degree of such financialisation of the global economy can be gauged from the fact that in 2007, the global FDI is estimated to be $ 50 trillion, while that in the global equity markets approximately $ 100 trillion compared to the global derivative markets attracting $ 516 trillion. The impact of such a massive degree of financialisation is obviously devastating. The growth of inequality – both across the countries and within them has never been as accentuated as it is now. The global magnitude of such financial transactions has also led to the growth of unemployment of an order which is unprecedented in the days of conventional capitalism. The circle has now come about to complete a full circle. The US financial system which was spearheading this phenomenal concentration and mobility, pulling down regulatory barriers across nation states have now become a victim of its own deregulatory offensive.

Unfortunately, our own advocates of economic reforms do not seem to be learning from the gravity of the crisis in US. Chidambaram was almost nonchalant when he claimed in the wake of unraveling of the melt down "having regard to context, having regard to international situation and having regard to our ability to keep regulation one step ahead of innovation" that India will escape the fall out. He is still insisting that the UPA government will push the reforms which were stalled by the Left in the past.

Chidambaram was reassured that the Tata-AIG will have no payments problem. But had his proposal to enhance foreign equity in insurance companies from 26 per cent gone up to 49 per cent, but for the Left's resistance – what would have been the impact? The same holds good for the entire gamut of financial sector reforms from banking to pension fund which will definitely remain to certain extent insulated from the melt down of the global financial system led by what is happening in the US.

His Finance Minister, notwithstanding, it appears that some sense has dawned upon the Prime Minister. On his way back home from Paris, he has observed that his government's foremost priority was to insulate the Indian economy "to the maximum possible extent" from the global melt down. He is, of course, aware that "we are not immune from what happens in the outside world". Yes, the illusion that integrating national economies with a neo-liberal global order is the panacea for making rapid progress now stands shattered. Let us celebrate this conjuncture and initiate a new discourse on re-defining our national interest and priorities.

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