[Marxism] More on Financial Meltdown

[Sukla Sen <suklasenp@xxxxxxxxxxx>]

[After dominating the international scene for about a
short quarter century gradually overwhelming
Keynesianism, neo-liberalism is now set to go down the
drain. The change in regime in the US, apart from the
obvious and compelling trigger in the form of a global
economic downturn graduating from the sub-prime crisis
via financial meltdown, has unmistakably set the
stage.

 

It is, however, far from clear what is going to be the
outcome in the coming days. How profound are going to
be the changes.

Whether the revolt in Athens is just a flash in the
pan or a forerunner of something far more drastic.

Of course, the changes in "objective" reality, in so
far as the human society is concerned, do not take
place unrelated to conscious and "subjective" human
intervention which in turn while enjoying its
considerable, even if fluctuating, autonomy is also
linked to the unfolding interplay of various
"objective" â?? and less "subjective" - forces.]
 
 
Sign of systemic crisis
US companies too big to fail but failing
by Arun Kumar

The Tribune, December 13, 2008.
TILL early 2008 it was believed that certain economic
entities are too big to fail, hence safe. Companies
like, Fannie Mae and Freddie Mac, AIG, Merrill Lynch
and Citibank each with assets running into hundreds of
billions or trillions of dollars were supposed to be
in this category. Their turnover was larger than the
GDP of most countries in the world. Each one of them
has failed since August 2008 and has been bailed out
by the US government or bought over by other
companies. General Motors, another giant, has been
pleading for help.
Earlier, even if such companies faced financial
problems they could stay afloat for years before going
under. Now these companies have collapsed in a matter
of months. Citibank with reported assets of $ 2
trillion and operations in 100 countries was
considered to be healthy and was to take over
Watchovia bank in early October but in the third week
of November, it has had to be bailed out by the
government. Fannie and Freddie were supposed to be
healthy in May 2008 but had collapsed by September.
Governments the world over are pumping in trillions of
dollars to shore up their economies. The mega package
on offer from the US government amounts to $ 7.8
trillion. $ 1.7 trillion is being offered as loans to
companies whose hard to sell securities are being
accepted as collateral. Since there is substantial
chance of failure in this, it could amount to a dole
to these companies. Investment worth $ 3 trillion is
being poured into buying stocks, corporate debt and
mortgages. $ 3.1 trillion is the amount of guarantees
on offer to corporate bonds, money market funds and
money in specified deposit accounts.
Britain, China, Germany, Japan, etc. have also offered
their own packages, each running into hundreds of
billions of dollars. The Indian government has pushed
liquidity and additional budgetary provisions of $ 100
billion. Thus, the total amount committed world over
has swelled to above $ 10 trillion (eleven times
India's national income). For a world economy of $ 65
trillion, this is a staggering amount of money and
most of it is committed since September. Yet, things
seem out of control even though the pace of the
collapse maybe slower compared to two months back.
Rates of economic growth have plummeted. In August
2007, the US economy was slated to grow by a healthy
rate, by mid 2008 marginally and now a recession has
been declared since 2007 (anticipated by this author
in these columns on Feb 6, 2007). An even sharper
decline is expected in the next quarter. European
zone, Japan, Taiwan, etc., have been declared to be in
recession whereas they were supposed to have positive
growth till early 2008. Chinese economy has slowed
down considerably since mid 2008 and so has the Indian
economy (whatever be the government's claims of
healthy growth).
Demand is plummeting everywhere and companies are
laying off people many of whom were anyway losing
their houses in the US due to foreclosures. There are
reports of people living in their cars in parking lots
and also of worried banks requesting some people not
to vacate their houses till they find a buyer.
Temporary employees are losing jobs and the permanent
workers are working fewer hours because of plant
closures. Failure of banks and companies is rising in
the USA. This could spread to other countries too.
Nationalisation and government intervention have
suddenly become acceptable. Minimum government is no
more the desirable state of affairs. The kind of
liquidity being released into the markets in a short
space of time would have resulted in massive increase
in demand and possibly hyperinflation if the situation
was normal. Yet, in the present scenario, these steps
are neither able to stem the decline of the financial
institutions nor demand in the economy.
Can the governments go in for even larger packages of
intervention? The US Fed has said that it will print
whatever notes would be required, to prevent a
collapse of the US economy and that seems to be the
stance of most of the Central banks in the world.
Investment is falling everywhere since companies are
not only facing a collapse in consumer demand but also
are not sure of their own financial situation and
would like to strengthen that before going in for
fresh commitments. This is aggravated by drying up of
credit since everyone is suspect in the eyes of
others.
Exports have collapsed as demand has fallen and
nations are buying less from others. Thus, all the
major components of demand â?? consumption, investment
and exports â?? have declined drastically. Only the
government is left. This is the reason that the
various economies are headed into deep recession and
possibly a depression. So much spare capacity is
emerging in each industry that it will take a while
for this to be depreciated and for new investment to
become worthwhile. It is only then that growth can
pick up.
The nature of the crisis being faced today is
different from the ones in the last 75 years. Hence
analysts are groping for answers and specially those
in policy making who led the world into this crisis.
Governments can try to keep demand going by spending
more on infrastructure (both physical and social).
However, that may have limited effect unless it is on
a massive scale, something that the present policy
makers seem to be uncomfortable with.
The US financial system as it existed till the
beginning of 2008 has now failed and a new one is
needed to replace it. The moot point is since it was
such an integral part of the US economy does it not
need revamping instead of just the financial sector.
The nationalisation/government takeover of major
institutions and the introduction of regulation in the
hitherto unregulated parts of the financial structures
is itself changing the economy in fundamental ways but
even this maybe mere tinkering and more basic change
maybe required.
The failing mega institutions located in the US
commanded huge amounts of the world's resources and
not just those of the US. This is what capital does;
it enables control of institutions and resources in a
few hands. So, failures on this scale will lead to a
collapse of major economic structures in the world and
will affect production world wide (as is already
happening).
When those entities that were thought of as "too big
to fail" actually fail, it signifies the failure of
the system of which they are a part. It is not that
the world suddenly cannot produce what it was
producing till say July 2008. It is the organisation
of that production (with control by finance) that is
failing and hence the decline in the world economy.
The marginalised who hardly benefited from the boom
are hit by the bust. Remedy requires that controls
over resources be reworked, monopolies need to be
split up and their control over resources and
political power and the resulting increase in
disparities all need overhaul.
                                                      
                                        
arunkumar1000@xxxxxxxxxxx




      

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