Back to the state?
The basic tenets of this gospel whose mecca has been Washington proclaimed that market is always good, government is always bad; deregulation is always good, regulation is always bad. Now these tenets lie in tatters in the Wall Street where its leading protagonists are helplessly seeking what has always been bad – government’s help. So, the state is back and the market is on the run.
As aptly observed by Joseph Sglitz, the Noble laureate economist, “the fall of Wall Street is for market fundamentalism what the fall of the Berlin Wall was for communism – it tells the world that this way of economic organisation turns out not to be sustainable. In the end, everyone says, that model doesn’t work. This moment is a marker that the claims of financial market liberalisation were bogus.”
Free market economy or neo-liberalism was the brain child of economist Milton Friedman and some of his colleagues at the University of Chicago who came to be known as “Chicago Boys”. In early 1970s, they argued that laissez-faire capitalism could be revived only by tax cuts, reducing public spending, deregulations, and privatisation of government-owned enterprises. Their philosophy became the favourite economic policy of the Republican Party in the US and the Conservative Party in Britain and was widely prescribed to the Third World countries and East Europe by the World Bank, International Monetary Fund, and the World Trade Organization.
The US banks have long been the flagships of American economic power and Washington has always urged other nations to adopt its kind of free-market financial system and do away with state control on their banks. Today, the financial turmoil in the Wall Street is exposing the hollowness of their claims as it threatens to put America’s prestigious banks and other financial institutions into the hands of the government. Europe is poised to suffer the same fate, at least partly.
So, the only remedy that Bush administration has come up with in the immediate terms is a partial nationalisation of some banks by buying a part of their shares to restore their confidence, as part of its $700 billion bailout package. And there are no regrets that the very notion of government ownership in the financial sector, even as a minority stakeholder, is a negation of what market fundamentalists has always believed is the foundation of the American system. While Bush’s extremist beliefs led him to underestimate the importance of government, it also led him to underestimate the limitations of markets.
But he has been left with no choice. Credit, the lifeblood of capitalism, has come to a halt and an economy based on the free market cannot function in the US under the circumstances. The state’s intervention is not limited to the banking industry. It is asserting itself in the lives of citizens in ways that were unthinkable hitherto. With the takeovers of major lenders, Fannie Mae and Freddie Mac and the bailout of AIG, the US government is now fully responsible for providing home mortgages and life insurance to tens of millions of Americans. This raises the question how much the United States remains a free market economy if the government is so deeply enmeshed in the financial system.
Since the United States sees itself as a model for others, the current changes taking place in the management of its economy could shift the balance of how governments around the globe should conduct free enterprise. Over the past three decades, Washington has spearheaded the “crusade” to persuade the world, especially developing countries, to deregulate their economies, lower their tariffs, taxes and bring to an end governmental supervision over their finance and industry. But the return of a strong role by the state at home has robbed Washington of the moral authority to spread the gospel of laissez-faire capitalism.
”People around the world once admired us for our economy, and we told them if you wanted to be like us, here’s what you have to do – hand over power to the market,” says Joseph Stiglitz, “The point now is that no one has respect for that kind of model anymore given this crisis. And of course it raises questions about our credibility. Everyone feels they are suffering now because of us.”
The repercussions of the crisis that began in the United States are global. In Britain, the government last week moved to partly nationalise the ailing banking system. Across the English Channel, European leaders are calling for broad new international codes to impose scrutiny on global finance. To some extent, the same is being urged by the International Monitory Fund, an institution dedicated to the promotion of free markets overseas in the name of helping troubled economies in the Third World.
It is interesting to note the double standards practised by the IMF. While it preached that less government was good government during the economic crises in Asia and Latin America in the 1990s, it is talking about the need for regulation and oversight today, seeing America is in trouble. “Obviously the crisis comes from an important regulatory and supervisory failure in advanced countries . . . and a failure in market discipline mechanisms,” the IMF’s managing director, said on October 9 before the Fund’s annual meeting in Washington.
Shortly afterwards, World Bank President was questioned by reporters about the “confusion” in the developing world over whether it should continue sticking to the free-market model or do what Americans have started doing. He replied, “I think people have been confused not only in developing countries, but in developed countries, by these shocking events.”
In most of the developing countries, financial systems are governed by the state despite pressure from the United States to hand over them to the private sector. China had been resisting Washington’s pressure to introduce the same kind of investments and derivatives that have contributed to the crisis in the West. In recent weeks, Beijing has made its position clear, saying it would not permit an expansion of complex financial instruments. “If you look around the world, China is doing pretty good right now, and the US isn’t,” said C. Fred Bergsten, director of the Peterson Institute for International Economics. “You may see a push back from globalisation in the financial markets.”
The globalisation agenda, mainly pursued by Americans, has been closely linked with the ideology of free markets. But in the present crisis, one finds the market-oriented institutions in the United States failing which has led to the revival of the state’s effective role in the economy. This would compel the countries outside the West to have rethinking about how globalisation process should proceed.
According to Joseph Stiglitz, economic theory and historical experience had long ago established the need for regulation of financial markets. But ever since the Reagan presidency, deregulation has been the dominant religion. A few times when the so-called free banking has been tried — most recently in Pinochet’s Chile — the experiment has ended in disaster. Chile is still paying back the debts from its misadventure.