Free market ‘farce’

Let’s get the facts right. It does look as if the foundations of US capitalism have shattered. For the past 144 years, American Banks - whether commercial banks and investment banks, dominated the global dollar market. But now that’s changing. Bear Stearns, Lehman Brothers, Merrill Lynch, some of the biggest names on Wall Street have disappeared into thin air.

Goldman Sachs and Morgan Stanley are the only giants left standing. Recent news indicates that even they have been hurt by the slumps in prices, (at least in Morgan Stanley’s case) and have prepared themselves for the end.

Many economists are drawing comparisons with the Great Depression in 1929, the national trauma that has been the benchmark for everything since. “I think it has the chance to be the worst period of time since 1929,” financing legend Donald Trump told CNN recently.

But what’s really happening? What exactly went wrong? Experts have so far been unable to agree on any conclusions. Is this the beginning of the end? Or is it just a painful, but normal cycle correcting the excesses of recent years? These are questions asked by everyone.

Our gaze might be on the markets melting down, but the upheaval we are experiencing is more than a financial crisis, however large. Here is a historic geo-political shift, in which the balance of power in the world is being altered irrevocably.

Impunity

You can see it in the way US dominion has slipped away in its own backyard, with Venezuelan President Hugo Chávez taunting and ridiculing the superpower with impunity. Yet the setback of US standing at the global level is even more striking. With the almost nationalisation of crucial parts of the financial system, the US free-market creed has self-destructed while countries that retained overall control of markets have been vindicated.

In a change as far-reaching in its implications as the fall of the Soviet Union, an entire model of government and the economy has collapsed.

Ever since the end of the Cold War, successive US administrations have lectured other countries on the necessity of sound finance. Indonesia, Thailand, Argentina and several African states endured severe cuts in spending and deep recessions as the price of aid from the International Monetary Fund, which enforced the American orthodoxy.

China in particular was pushed around relentlessly on the weakness of its banking system. But China’s success has been based on its consistent contempt for Western advice and it is not Chinese banks that are currently going bust. How symbolic recently to watch those Chinese astronauts take a spacewalk while the US Treasury Secretary is on his knees.

What Next?

According to conservative analysts the U.S. economy faces four cascading threats: First, the sharp decline in consumer spending on houses, autos and other durables, following the sharp decline in lending to households, will cause a recession as construction of new buildings and production of consumer durables nose dive.

Second, many homeowners will default on their mortgage payments and consumer loans, especially as house values fall below the mortgage values. Third, the banking sector will cut back sharply on its lending in line with the fall in its capital following the write-off of bad mortgage and consumer loans.

Those capital losses will push still more financial institutions into bankruptcy. Fourth, the tightening of lending now threatens even the shortest-term loans, which banks and other institutions lend to each other for working capital.

The fourth threat is by far the worst. If the short-term money markets were to break down, the economy could go into a severe collapse because solvent and profitable businesses would be unable to attract working capital.

Recession

The third threat could cause a severe recession. Unemployment might rise, for example, up to 10 percent from the current 6 per cent, which would create enormous social hardships. The ongoing fall in bank capital as the housing boom turns to bust is already forcing banks to cut back their outstanding loans significantly, because they must keep the lending in proportion to their now-shrunken capital base.

Major investment projects, such as acquisition of new buildings and major machinery, will be scaled back. Some major nonfinancial companies will likely go bankrupt as well.

The second threat, the financial distress of homeowners, will certainly be painful for millions of households, especially the ones that borrowed heavily in recent years. Many will lose their homes; some will be pushed into bankruptcy. Some may see their credit terms eased in renegotiations with their banks.

The first threat, the cutback in sales of housing and other consumer durables, is the Humpty-Dumpty of the economy that cannot be put back together. The inventory of unsold homes is now large; housing demand and new construction will be low for many years. Consumer spending will eventually come tumbling down.

A deadly sin

If you analyse in simple terms, greed is the cause of the current crisis. It was the greed of those who took easy money to buy houses beyond their means and the greed of bankers who lent to people borrowing beyond their means.

The depth of this depravity can be seen in the Wall Street bankers who were collecting salaries over US$100 million per year even as their banks were collapsing.In the 1930’s many thought that Capitalism was the barrier for development. Many looked to Communism as an answer.

As the economy crashes around us some are questioning Capitalism again. We know that Communism did not work either. In the same vein, Capitalism seems to be not working either.

Communism wrapped itself in the language of the people and the public good. In the same way, large companies tell us that they serve us. They tell us that they are good stewards. If they are pushed, they tell us that they act for their shareholders. Communism made all the key decisions in huge central bureaucracies. No power was allowed to escape to the edge or to the local. Planning and power control at the centre was everything. Is this not the same for large companies today?

Communism was in effect bureaucracy. Decisions were divorced from the reality of life as they were taken only in the context of what is right for the bureaucracy - that it that all must defend the institution and its top leaders.

Is this not the same for large companies today?

While communism used the language of community, comrade and the patriotism, the elite lived a completely different life from the people. In large companies the same is true. The CEO maybe called Siva or Sugi but he is an autocrat and he lives like a king.

The Soviet Union collapsed in 1989 because such a system could no longer cope with the complexity of the modern world - it could not deal with its energy needs and keeping up with the consumer and military spending.

The disparity between what was promised and what was delivered became too much for the people to accept the doctrine any more.

Having created the conditions that produced history’s biggest bubble, political leaders of USA appear unable to grasp the magnitude of the dangers their country now faces.

Caught up in their forefather’s American dream and the free market concept, they seem oblivious to the fact that US global leadership is fast ebbing away. A new world is coming into being almost unnoticed, where USA is only one of several great powers, facing an uncertain future it can no longer shape.

by Lionel WIJESIRI