Saturday, December 20, 2008

Casino capitalism and the exile of ethics

In this analysis of the current economic meltdown, John Samuel places the blame on unbridled capitalism and the lack of ethics in financial and economic policies and practices



The story of casino capitalism and deadly growth starts with the banishing of ethics from economics. It is also about lack of accountability in the political process, in corporate governance and in economic policy. Growth became the new dogma and orthodoxy. Monetarism ruled the market. Casino capitalism thrived on the subversion of politics and governance through the new power cartel -- politics, driven by media, money, markets and military.

The context of the present crisis needs to be located in the profound political transitions that occurred between 1978 and 1982 across the world. The Reagan-Thatcher formula of neo-conservative politics and neo-liberal economic policies created a policy paradigm based on military might and bulldozing finance capitalism. By cutting taxes for the rich, there was surplus money to ‘invest’ in financial markets, and the cumulative deregulation of the financial sector ensured that the surplus money of the rich then moved across the globe in search of huge profits. Speculative finance capitalism, easy money with low interest rates, and the increasing distance between the movement of finance capital and the real economy created artificial demand and artificial growth, without real assets on the ground. This is what created the bubble. Wall Street moved far away from Main Street and the financial tsunami hit with the fall of one of the biggest investment banks, Lehman Brothers. The shaky foundations of one of the biggest insurance companies, AIG, caused all inter-bank lending to come to a halt and resulted in the credit crunch.

The downward spiral was bound to happen. Many of us have warned about the consequence of neo-liberal capitalism and unregulated finance capitalism for the last 15 years.

In early-2006, in an article titled ‘American Dream at the Crossroads’ (http://infochangeindia.org/200610026715/Other/Features/American-dream-at-the-crossroads.html), I had written: “While Bush is busy fighting a shadow war in Iraq and the ‘war on terror’ globally, the shape of the American economy is far from soothing. On the surface, it looks rosy. With an estimated growth of 3.5% this year, unemployment low and fat profits, the economy looks robust. However, if we look at the other key indicators, then there is less space for any optimism. The US trade (current account) deficit for 2005 has been reported at $804 billion (nearly 7% of the GDP). Scrap metal and waste paper are two of the biggest export items. There are enough signs of an impending financial crisis on the horizon.”

Investment banks and finance capitalism have focused on economic growth at the cost of the ethics and fundamental rationale of an economic system. The finance capital market looked more like a global casino, thriving on speculation, derivatives and quick money, without having any real assets. As finance capitalism got more detached from the real assets on the ground and the real economy and wealth, double-digit returns and quick profits gave rise to even more speculation. This created short-term artificial demand, and inflated real estate and commodity prices and a high-risk credit market.

While the neo-liberal policy paradigm created a whole new generation of billionaires and new policy and political dogmas, the new conservative politics gave rise to unilateral militarism and two costly wars. The Anglo-American finance capitalism and an unethical war proved to be too costly to sustain in real economic terms. This bulldozing capitalism and militarism, presided over by the bully George Bush, also created new reactions in the form of Islamist jihad and the politics of terror.

While everyone was singing songs of “robust” growth, the health of the US economy actually went from bad to worse. Household debt rose from 50% of GDP in 1980 to 100% of GDP in 2006. Much of the new debt was invested in real estate and sub-prime lending to anyone and everyone buying a house -- without any credit rating -- creating a housing bubble which saw an annual appreciation of almost 20%. This gambling was simply not sustainable as the price of houses went through the roof -- far removed from their real value. By 2007, the debt of the financial sector was about 116% of the GDP, compared with a mere 21% in 1980. During the last few years, the top five investment banks freaked out in the market and speculators and investors laughed their way to the bank almost every day.

However, the context of this crash is different from earlier ones. Unlike in the 1930s, the active economic zones of the world have now shifted to Asia. While in 1930 most countries in Asia had stagnant markets, a much smaller manufacturing sector and less productive capacity, the situation is dramatically different today. Both China and India have a growing domestic market and productive capacity. Asian banks and the financial sector are relatively well protected. Many learnt a lesson from the South-East Asian economic crisis of 1997. Central banks of Asian countries have total deposits of around $4 trillion. The National Sovereign Funds of the Gulf countries and the savings ratio of Asian countries are still robust. While China has one of the highest savings rates in the world, and India has a savings rate of more than 25%, the public debt of these countries is also healthy. Japan, though, has a huge public debt that is more than its GDP. Many Asian companies are cash-rich so they may still invest in expansion plans and many of them could acquire new, cheap assets in the USA and the UK.

Though Asian economies will be affected in the short-term, particularly in the service, real estate and financial sectors, Asian and West Asian economies look more resilient with the potential to balance out within the next two years. China has already committed $586 billion to stimulate domestic demand and the markets. India, too, is making an effort to stimulate the economy by announcing various packages of around $150 billion.

Due to the coordinated efforts, the faster pace of communication and the internal strengths of emerging economies and markets, the situation today may not be as dire as in the 1930s. This will be a deep recession, which will affect all sectors and economies, and deeply impact some sectors, but overall the devastation will be less. It will be a long and painful period lasting upto 2012, inflicting varying degrees of pain and trouble.

The present financial and economic crisis is also located in the ethical deficit in governance, management and economy. The greed-driven and growth-oriented ideology of finance capitalism alienated governance from politics, management from accountability and economy from ecology. The fall of Enron and many other companies clearly pointed to the lack of corporate accountability and the nexus between the corporate and political elite. Citizens were transformed into consumers of credit, services and goods. Mass political leaders were replaced by telegenic technocrats who looked to the rich countries, rich corporations, and Bretton Woods institutions for ideas, ideology and legitimacy.

Such a cumulative subversion of ethics and political processes led to a deficit of accountability and legitimacy in governance and economic management. This lack of accountability and transparency and the new nexus of corporate-technocratic-political elites created the conditions for casino capitalism to thrive and grow. But the growth proved to be deadly not only for the greedy investment bankers, but also for more than a billion poor people around the world.

InfoChange News & Features, December 2008

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