Partial nationalisation of banks not helping
And where are those whiz kids from Harvard, Yale and MIT etc., who had turned the international banking sector into one big gambling casino while passing it off as a legitimate business of risk management?
Unpardonably, they gambled with other peoples’ money and before it was time to show their hands they left the table scampering on golden parachutes.
And all that seems to have been left on the spinning wheel to show for the lost trillions are the sub-prime brick and mortar of slumping value.
How did this gambling casino worked? House prices were going up, interest rates coming down. Manufacturing was being outsourced. Rich were getting richer on perpetual credit. They took out mortgages four times their incomes without bothering about default.
The rich took higher risks because they found this activity more profitable—the more you risked the more you gained, a typical gambler’s creed. And the law-makers were forced by the lobbyists of these rich –getting- richer to keep liberalising laws that governed these ‘gambling casinos’ ultimately turning pleasure into business by law.
Every one from bankers dealing in off the balance sheet business to the private equity managers to hedge fund owners were looking for windfalls and they were getting them in plenty.
And every one was running after something for nothing. And miracle of miracle they are getting it. Financial speculation had become the name of the game. And every one felt he was just about to hit the jackpot.
But now things have taken a U-turn. The very champions of ‘less government’ who did not want law makers to interfere in any way with free market and did not even allow them to properly monitor and regulate the market, are now asking these very the people to do something urgently to save the collapsing financial sector which threatens to take down along with it the real economy as well. Those who used to ask for less taxation are now asking the government to bail out banks with tax-payers’ money.
Part nationalisation has clearly failed to restore enough confidence in the banking sector to start its normal function of lending and advancing. This had already led to further slump in the world equity markets. And this, in turn, has adversely impacted the real economy.
Despite the billions pumped into their systems, banks have kept increasing the cost of overdraft for the businesses. Customers are delaying payment. Suppliers are demanding urgent settlements. Resultantly cash flow is worsening. This has led to across the board reduction in demand for strategic raw material like steel, copper, nickel and zinc.
The Economist weekly (October 15) quoting the Baltic Dry Index (BDI) said it was the most spectacular reflection of failing activity. The BDI is a leading indicator of international trade and, by extension, of world economic activity.
It traces prices for shipping bulk cargoes such as iron ore from its producers in Brazil and Australia to markets in America, Europe and China. This index has plunged by 85 per cent after hitting a record high of 11,793 points in late May.
This massive slow down in the world economic activity has seriously dented the job market at least in Britain in the immediate run. The number of people out of work in the UK shot up in the last three months to August by 164,000 compared to the previous quarter, the biggest rise in 17 years. The rise took the jobless total to 1.79 million and the unemployment rate to 5.7 per cent up from 5.1 per cent in previous quarter.
A nasty recession seems looming. The severe stresses in the financial system over the last month and the downside news from the real economy have certainly increased the risks of a bigger and more sustained downturn. The UK seems to be in for a situation that it has not experienced for 16-17 years.
Public borrowing and debt are already set to rise sharply as a result of the slowdown in the economy already seen. These extra developments merely increase the likelihood that, at some point in the future, very heavy tax increases or spending cuts will be required to get the public finances back into a sustainable position.
What does all this mean? One view is, Thatcher buried Keynesian economics and the current crisis shows just how wrong she was. It is widely being felt here that government intervention is not only necessary in the financial services but intervention on a wider scale is necessary to protect jobs and the economy in a recession.
But what should be the scope and the limits of this intervention? Nobody has any idea about it. And by the time one reaches some kind of a balance through trial and error on this front one could have ushered in complete nationalisation of the national financial sector and facilitated the advent of what is now derisively being called financial socialism.
Philip Stephens in his article ( Crisis marks out a new geopolitical order) in the Financial Times (Oct.9) has invited the attention towards one more very important dimension of the outcome of the current crisis.
Advising that sometimes it is worth looking through the other end of the telescope, he says that the wreckage of the financial system holds up a mirror to the changing geopolitical balance, “it offers advice, and a warning, as to what the West should make of the emerging order…The West’s debtors cannot any longer expect their creditors to listen to their lectures. Here lies the broader lession.
The shift eastwards in global economic power has become a commonplace of political discourse. For more than two centuries, the US and Europe have exercised an effortless economic, political and cultural hegemony. That era is ending.”
He percieves a new world financial order in which countries like China, India, Russia and Brazil would be weilding the whip hand and not the US and Europe.