Irresponsible caretaker and financial crisis

Nature, extent and causes of the crisis:

K. Abeywickrama

The economies of the riches and most powerful countries that created the current global financial and trading system have taken a massive direct hit, and the world is in shock.

The indirect repercussions of this are affecting the developing countries whose economies are linked to these rich countries and their financial and trading networks.

Most of the biggest and most powerful corporations of the world were humbled in 2008 and many would have collapsed without government supports: Citigroup (the world’s largest banking/investment corporation), AIG (the world’s biggest insurer), Goldman Sachs, Blackstone, MasterCards, Bank of America, Wachovia Bank, Barclays Bank, Indy Mac Bank, Royal Bank of Scotland, Lehman Brothers, Washington Mutual, Fannie Mae and Freddie Mac (the world’s largest housing credit corporations), Northern Rock, Bradford and Bingley, Merrril Lynch, Bear Sterns, General Motors, etc. The list of troubled gilt-edged corporations runs into thousands and the list is expanding.

Corporate Giants

The USA and the EU have allocated trillions of dollars worth of Government Funds to prop up ailing private sector transnational corporate giants and help debt-ridden consumers. The US alone is allocating $ 1.65 trillion for corporate bailouts and additional public spending to save the economy.

To give Sri Lankan readers a perspective of these colossal sums, it must be remembered that the entire annual Gross Domestic Product (GDP) of Sri Lanka is $ 42 billion. The so-called stimulus package in the USA exceeds the GDP of the huge nation of India ($ 1.24 trillion).

The nature, extent and the causes of this crisis have been obfuscated by the mainstream corporate-owned media in the West using TV talk show hosts, TV panel discussions, media articles by experts, etc.

While problems in developing countries can be magnified, a crisis at home needs to be down played with reassurances to their own public and the rest of the world. After all, these same countries have been advising, and often demanding, that developing countries should follow their guidance in organising their economies and political systems.

While the USA and the EU are in the eye of the storm, it is astonishing to see television shows and the mainstream media discussing the possible collapse of the Chinese and Indian economies without confronting the egregious problems in their own domestic economies.

The UK-based Economist had a recent issue featuring a possible economic downfall and consequent social unrest in both China and India without a hint of the dire situation in the UK which, according to a recent IMF review, will be the worst affected country.

Visible causes

The roots of the current problem lie in the US economy and financial system that dominates and dictates most of the world economy. Because of this dominant role, the rest of the world is affected, either for the better or the worse by its performance.

And it is because of this same dominance that the rest of the world has to find accommodation to US needs, If by some remote chance (in reality, an impossibility), a developing country was able to cause anything close to this level of distress to the entire world economy, it would probably have been invaded and its assets seized as compensation, and its leaders probably tried by international courts.

When the US housing bubble started collapsing in 2008 the public were initially reassured that this was the usual pattern of capitalist economics with long periods of growth and prosperity followed by a short periods of decline for market corrections, something that had to be endured for a while.

President George Bush kept reassuring the world that “the fundamentals of the US economy are sound” till it was obvious that they were not. As the crisis deepened with the collapse of US housing credit corporations, Fanny Mae and Freddie Mac and several Wall Street giants, the story changed a bit and corporate chiefs were accrued of incompetence or greed.

Some top officials in the USA administration blamed China, accusing it of under-valuing its currency to flood the market with cheap Chinese products and undermine US industry. But reassurances continued that these hurdles could be overcome by massive government bailouts and subsidies.

The deeper causes of the crisis are rarely discussed publicly.

The main assets of a US citizen are his house and his retirement benefits. The US housing market, which was valued at US$ 13 trillion in 2006, lost 30% by end 2008. The retirement benefits, worth US$ 10.3 trillion, declined by 25% during the same period. It was then announced that the US economy was in recession since end 2007.

Analysis

I heard the first academic media analysis of the current financial crisis in November 2008 on Japanese national TV, NHK, featuring a professor from Tokyo University. The catalyst that triggered the crisis was the huge US sub prime mortgage housing loans that went bad.

Why did financial institutions act in this seemingly irrational manner by giving risky loans? There are several reasons. One was that there was excess liquidity because the US Federal Reserve was flooding the system with easy credit.

precisely to encourage the housing market bubble which was propelling the expansion of an otherwise slackening US economy.

The other was that the Government was dismantling even the existing weak regulatory controls on speculative financing to encourage market expansion. Another was that lenders felt they could escape the consequences of sub-prime loans by leveraging the risks through a form of derivatives known as Credit Default Swaps.

To be continued