Introduction
Today’s column looks at some of the ironies and contradictions in the response to what started as a domestic crisis in the mortgage sector in the US and the prospects for the developing countries arising out of the Obama victory. The effect of the crisis has been wide, deep and pervasive and demanded action.
On November 15, 2008, the Group of Twenty (G20) held an initial meeting in Washington to try and arrive at a common position and to seek solutions to the daunting challenges facing the world as a result of the cataclysmic turmoil that has shaken the belief in the way the capitalist system works. The meeting had been called by US President George W Bush, once considered the most powerful man in the world but whose performance during the entire period has been embarrassingly unconvincing and whose public pronouncements almost invariably coincided with further deterioration of the stock market. Bush’s obvious discomfort and lack of understanding of the problem did not instil any confidence in the US or world markets and his advisers thankfully and sensibly had stopped his effete television appearances which had been a regular occurrence when the crisis unfolded in September.
By contrast, Gordon Brown, the embattled British Prime Minister heading for defeat at the next UK elections, has come out − at the international level at least − smelling like a rose for his decisive response to the situation. On October 8 his government unveiled its plan which saw the first steps in an unprecedented scale of government intervention. The British banks received an injection of funds and government guarantees that are tantamount to nationalization, but it was this action that may have averted at least temporarily, financial Armageddon worldwide. The Brown plan seemed to be the blueprint for other countries which quickly followed suit in recognition of the extreme gravity of the world economic crisis. At the Washington summit, it was evident that everyone realised that coordinated effort was needed and that these economic powerhouses, if they could still be called that, had to work together to reform the financial system which had become inextricably intertwined as a result of globalisation.
Revival of socialism
But despite the critical and unusual steps that have been taken in various countries to stabilise the situation and provide support to the global economy, much more is needed. The financial markets are in a crisis of confidence and unless some assurance is received that there are matching reforms in addition to the support measures, the wild swings in the stock markets of the world will continue. The G20 leaders in their statement issued after their meeting acknowledged that reform of the financial system is a priority and must be so far reaching as to insulate the world financial system from a recurrence of these calamitous proportions in future. This is no easy task since the coordinated response that these reforms require will necessitate subjugation of self-interest for the common international good. Many critics will decry this as the revival of socialism but that is what seems to be inevitable if the world as we know it is to survive and hopefully achieve some semblance of prosperity going forward.
The alternative of retaining capitalism in the mould of Thatcherite-Reaganite economics in which the market is supreme, is too frightening to consider. Even the right-wing voices in the Republican Party in the US have been muted, perhaps an admission that those who want to hold on to outdated philosophies and beliefs do not truly appreciate the magnitude of what has occurred. One recalls that only days before the implosion in the US market, defeated Republican candidate John McCain had said that the US economy was “fundamentally strong.” Cruelly for him, the speed of the unravelling was as dramatic as it was mind boggling.
The collapse of three of the top financial houses in the US that were the public face of capitalism, adjustments in the European Union that could cost hundreds of billions of euros, the easing of credit arrangements in China all demonstrate a realisation that it is no longer business as usual. Indeed there probably have been more pro-socialism articles published within the past three months than in the past three years. Seventy-five years after his landmark work, renowned economist John Maynard Keynes must be gratified that the policies he recommended to avoid a slump are now accepted wholesale for introduction at the international level.
Questioning the US bail-out plan
Not lost in all this is the irony of the headlining role US Treasury Secretary Henry Paulson and his 35-year-old assistant Neel Kashkari have been playing in crafting the US rescue plan.
Both men are alumni of Goldman Sachs, another one of those once highly regarded US financial institutions that benefited tremendously from the financial engineering that has dominated and perhaps bears responsibility for the crisis, and which itself is now under threat. Paulson is former chairman and Kashkari is his protégé and more irony here, has immigrant roots in one of the emerging world economic powers, India. The latter has significant responsibility for oversight of the much publicized US$700 billion bailout that was supposed to be the silver bullet solution but which has not had even close to the desired effect. With President-elect Obama having taken effective charge of the public debate on crisis resolution and the Bush administration coming to an end in about seven weeks’ time, it is hard to see how much these men can achieve.
Indeed even before its implementation, the US bailout is now being questioned as the typical American approach to a crisis: throw tons of money at it and it will go away. This emphasises the stark reality that traditional prescriptions will no longer be effective and that while the preservation of market principles may be a laudable objective, French President Nicolas “L’Americain” Sarkozy’s assertion that laissez-faire is dead, does not represent irrational pessimism at all. What is clearly evident is that the days of reckless abandon in financial and economic dealings must come to an end and that the requirement for asset values to be based on realistic underlying worth can no longer be panned as antediluvian esoterica.
Obama for change
Obama started his incredible campaign for the presidency of the US perhaps to the left of the liberal wing of the Democratic Party, but he is pragmatic and was quite willing to shift positions in response to changed circumstances. So far he has been concentrating on putting his team together rather than pre-empting and second-guessing the incumbent. He campaigned on a slogan of ‘Change’ but the striking feature of his economic team has been described by the Economist as “centrism,” comprising real economists, many of whom served the Bill Clinton presidency of 1992-2000, another irony of sorts. The team is studded with economics PhDs, such as Larry Summers, Tim Geithner and Peter Orszag, all of whom would be top of any class. Thankfully, Obama is an intellectual heavyweight in his own right and he will certainly be able to arbitrate any competing views these stars may offer.
What will have to wait for clarification is the role Obama and his team will play in helping the developing countries weather the international financial storm that will still be raging on Inauguration Day on January 20, 2009. For decades the countries of the developing world have been led, dragged, coaxed and cajoled by the economic mantra of the IMF and the World Bank. The irony is that following the adjustments and rescue packages proposed by the G20 countries, the economies of those countries will have more direct government intervention than all the developing countries combined.
We will have to wait too, to see whether the Obama team will seek to bring about any change to the free-market capitalism promoted by the IMF and World Bank, who for decades have been forcing countries, in exchange for aid of any kind and value, to liberalise trade barriers, deregulate financial and labour markets, privatize national industries, abolish subsidies, and reduce social and economic spending.
That would be more than a vindication for all the support and good wishes Obama receives from the people of the developing world.