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Recession: When the giants fall

By A V Rajwade
October 23, 2008 13:10 IST
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Americans, or at least their political leaders, have always had a belief in "American exceptionalism, that America has greatness of purpose no other nation possesses" (Richard Stengel, Time, July 14). (The Jews are the other people who believe they are God's chosen community.)

Why God should be so partial to one country has always been a mystery to me! The present President of the United States probably believes in this exceptionalism, perhaps more strongly than many others. As his term comes to an end, however, America's version of both democracy and finance capitalism are in tatters.

Turning to democracy first, the question marks started right at the beginning: Mr Bush was not elected by the people of the United States, but "appointed" President by the Supreme Court after the controversy in vote counting in the election. (To be sure, he was reelected by the American people, prompting a British tabloid to question in a huge front page headline: "How could 62,040,610 Americans be so stupid?")

And what a record it has been for the last eight years! He thought he had a constitutional right to change regimes he did not like. He substituted Guantanamo, Abu Ghraib and "renditions" for democracy and human rights; prefers Saudi Arabia and Egypt, those bastions of democracy, as the US's allies, even while regarding elected regimes in Iran and Gaza as untouchables; and has manifested on too many occasions the irrelevance of truth to public pronouncements.

If supposedly mature democracies like the US elect leaders like Mr Bush (and a feather-weight becomes a vice-presidential candidate now), one sometimes wonders whether democracies are really the wisest form of government! (Or, as Winston Churchill remarked, is democracy the worst form of government except for all the others?)

Turning to finance capitalism of the Anglo-Saxon variety, the greatly altered philosophy and practice of regulation stemmed from Ronald Regan's conviction that "the nine most terrifying words in the English language were: 'I'm from the government and I'm here to help'.

He appointed as Chairman of the Federal Reserve, Alan Greenspan, a chela of Ayn Rand, that high priestess of extreme right fundamentalism. Mr Greenspan, in his Age of Turbulence, while praising financial markets, criticised those who called for more regulation. At one place, he asks, "Why do we wish to inhibit the pollinating bees of Wall Street?" By now the answer to that question is obvious in the $4 trn bailout of the banking industry in the US and Europe, being done at the cost of the taxpayers. (Mr Reagan must be turning in his grave!)

The hypocrisy of the US and Europe doing, in a financial crisis, exactly opposite what the IMF, controlled by these countries, imposed on the Asian economies facing crises in 1997-98 - namely tight monetary and fiscal policies - is breath-taking.

The deflationary medicine, then forced down the throats of the Asians, is obviously not good enough for the West. As a South Korean official recently told Reuters, "At that time, (IMF and US officials) behaved as if they were treating an owner of a small business just about to go bankrupt." Hopefully, they would be a little more humble now.

But this apart, the theoretical justification for deregulating the financial sector was that it would then be free to deploy the community's savings where they would fetch the highest returns. This hope has been belied egregiously at least twice in a decade: the dotcom boom and the current crisis.

Nicolas Sarkozy, the current French President, is probably the most US-friendly French President of modern times. Even he was recently forced to comment that "the idea that markets are always right was a mad idea"; that America's laissez-faire ideology "was as simplistic as it was dangerous".

It would be one of the great ironies of history if the authoritarian Chinese regime, which tightly controls the exchange rate, and does not allow free capital movements, rescues the US economy, as Arvind Subramanian of the Peterson Institute for International Economics recommended in a recent article.

The recent events also point to the need for far greater expertise and specialisation on the part of the regulators: they need to be more knowledgeable than the institutions they regulate.

Second, there is something perverted about a society which rewards somebody who develops a more complex derivative that has no economic justification, and managers of vulture funds, a hundred times more than somebody who manufactures a better mouse-trap or "makes two ears of corn grow where only one grew before". One pernicious effect of finance capitalism has been that it lured "the best and the brightest" from the real to the financial economy, to the detriment of society.

Even The Economist, as strong a supporter of Mr Bush's Iraq invasion as Mr Blair, recently bemoaned "his dismal handling of the financial crisis" and declared that his "Presidency is ending in disaster".

Less sympathetic critics have called him the worst President in American history: so do many Americans, going by his approval ratings. British philosopher John Gray, one of the intellectual fathers of Thatcherism, recently wrote in the Observer that "the era of American global leadership is over".

After all that has happened in his incumbency, nobody is going to take at face value, let alone swallow as pearls of wisdom, whatever the US advocates about democracy, or deregulation of financial markets. In 1979, Margaret Thatcher used the irresponsible actions of militant trade unions to win an election and support for her rightist agenda.

This was a turning point in the post-war economic policy consensus in the West. Will the incompetent regulators and irresponsible, greedy bankers of recent times trigger a backlash against finance capitalism and, indeed, globalisation? A recession is probably inevitable. There will be protectionist backlash when it starts biting. And that is when we need to be careful: we should not throw out the baby (of free trade and investments) with the bathwater (excesses of finance capitalism)!

Almost a century back, John Maynard Keynes replied to accusations that he changes his views, saying: "When the facts change, I change my mind. What do you do, Sir?" With governments busy gathering the pieces of unbridled finance capitalism, will our market fundamentalists learn anything from the recent experience? But it is foolish to ask the question. By definition, a fundamentalist "knows" all the answers and empirical evidence is of complete irrelevance to him.

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