Collapse of Finance Capitalism PDF Print E-mail
Economics
Written by Ac. Krtashivananda Avadhuta   

Mindless profit-making and concentration of wealth in the hands of a few has hurt the financial world across the globe. Even the remedies have not brought any relief. It is the tax payers who bear the brunt to bail out the economy while those responsible spend their stacked up millions to avert the authorities’ eyes from them.

Professor Michael Hudson of Global Research has commented in one of his articles,
“The financial wealth creation” game is over. Economies emerged from World War II relatively free of debt, but the 60-year global run-up has run its course.

Finance Capitalism has collapsed, and marginal palliatives cannot revive it. The US economy cannot “inflate its way out of debt”, because this would hit the dollar hard and end its dreams of global empire by forcing foreign countries to go their own way. There is too little manufacturing to make the economy more “competitive,” given its high housing costs, transportation, debt and tax overhead. A quarter to a third of US real estate has fallen into Negative Equity, so, no banks will lend to them. The economy has hit a debt wall and is falling into Negative Equity, where it may remain until there is a debt write-down ( written off).

It is natural to think that politicians would be willing to do the Maths and realise that debts that cannot be paid, won’t be paid. But, the debts are being kept on the books, continuing to extract interest to pay the creditors that have made the bad loans. The resulting debt deflation threatens to keep the economy in depression until a radical shift in policy occurs - a shift to save the “real” economy, not just the financial sector and the wealthiest 10% of American families.

There is no sign that Mr. Obama’s economic advisors, Treasury officials and heads of the relevant Congressional committees recognise the need for a write-off. After all, they have been placed in their positions precisely because they do not understand that debt leveraging is a form of economic overhead, not real “wealth creation.” But, their tunnel vision is what makes them “reliable” to the Wall Street. The main criteria is that one must have faith in the system. And, the system was the Greenspan Bubble.

So, the government tries to recover the happy Bubble Economy for years, thus, making the debt grow again. This, in the hope to re-inflate real estate and stock market prices. That was, after all, the Golden Age of finance capital’s world of using debt leverage to bid up the book-price of fictitious capital assets. Everyone loved it as long as it lasted. Voters thought they had a chance to become millionaires, and approved happily. And, at least it made Wall Street richer than ever before - while almost doubling the share of wealth held by the wealthiest 1% of America’s families.

For Washington policy makers, they are synonymous with “the economy” - at least the economy for which national economic policy is being formulated these days.
But, today’s economic data charts throughout the world have hit a wall and every trend has been plunging vertically downwards since the last autumn. The prices of consumer goods in the US , experienced their fastest plunge since the Great Depression of the 1930s, along with the consumer “confidence,” international shipping, real estate and stock market prices, oil and the exchange rate for British sterling.

India’s GDP growth estimate for the current fiscal (2008-09) has been downgraded from 8 per cent to 7 per cent and, for the next financial year (2009-10), to 5.3 per cent.
The Asian Development Bank(ADB) bluntly states that “very large fiscal imbalance created by the current level of subsidisation of oil, fertiliser and food, as well as other off-budget items, sets a daunting task for economic management”.

With the financial turmoil in the US and Europe showing signs of worsening since the publication of ADB’s half-yearly report, one need not be surprised if GDP growth in India turns out to be even lower than that projected by ADB -- just around 5.3 per cent or so for the current fiscal year.

In line with the falling capital markets across the world, which have already wiped out investor wealth of over $10 trillion so far this year, the Indian stock market has witnessed an unprecedented fall over the past few weeks. Not surprisingly, FIIs have been pulling out from the stock Market in a big way, corporate borrowings from the Global markets are becoming increasingly difficult, raising money for new investments through public issues is on hold, and liquidity in the Economy is fast drying up.

In USA, 67 banks collapsed and about five million people lost jobs in the last four months. In India, about 600,000 people lost jobs since December. Export fell by 22% in Jan ’09. In Japan export fell by 45%.

The global economy is falling into depression, and cannot recover until debts are written down. Instead of doing this, the government is doing just the opposite. It is proposing to take bad debts onto the public-sector balance sheet, printing new Treasury bonds, give the banks these bonds, whose interest charges will have to be paid by taxing labour and industry.

The oligarchy’s plans for a bailout

Since the 1950s, the International Monetary Fund has made loans to support the Third World exchange rates long enough to subsidise capital flight. In the United States, over the past half-year, bankers and Wall Street investors have tapped the Treasury and Federal Reserve to support prices of their bad loans and financial gambles, buying out or guaranteeing $12 trillion of these junk debts. Protection for the US financial elite, thus, takes the form of domestic public debt, not foreign currency.

It is all in vain as far as the real economy is concerned. When the Treasury gives banks newly-printed government bonds in “cash for trash” swaps, it leaves today’s high private-sector debt in place. All that happens is that this debt is now owed to (or guaranteed by) the government, which will have to impose taxes to pay the interest charges.

The new twist is a variant on the IMF “stabilisation” plans that lend money to central banks to support their currencies - for long enough to enable local oligarchs and foreign investors to move their savings and investments offshore at a good exchange rate. The currency then is permitted to collapse, enabling currency speculators to rake in enough gains to empty out the Central Bank’s reserves. Speculators view these central bank holdings as a target to be raided - the larger the better. The IMF will lend a central bank, say, $10 billion to “support the currency”. Domestic holders will flee the currency at a high exchange rate. Then, when the loan proceeds are depleted, the currency plunges. Wages are squeezed in the usual IMF austerity programme, and the economy is forced to earn enough foreign exchange to pay back the IMF.
Latvia is an example of this kind of disaster. Its recent agreement with Europe is a case in point. To help the Swedish banks withdraw their funds from the sinking ship, EU’s support to the Lativia Government is conditional, which has agreed to cut salaries in the private sector - and not to raise property taxes (currently almost zero).

The West did not help post -Soviet nations to develop self reliant economies,
but has viewed them as economic oysters to be broken up to indebt them in order to extract interest charges and capital gains, leaving them empty shells. This policy crested on January 26, 2009, when Joaquin Almunia of the European Commission wrote a letter to Latvia’s Prime Minister spelling out the terms on which Europe will bail out the Swedish and other foreign banks operating in Latvia - at Latvia’s own expense:
“Extended assistance is to be used to avoid a balance of payments crisis, which requires … restoring confidence in the banking sector [now entirely foreign owned], and bolstering the foreign reserves of the Bank of Latvia. This implies financing … outstanding government debt repayments (domestic and external). And, if the banking sector were to experience adverse events, part of the assistance would be used for targeted capital infusions or appropriate short-term liquidity support. However, financial assistance is not meant to be used to originate new loans to businesses and households”. …


Riots broke in Latvia, and protesters stormed the Latvian Treasury. Hardly surprising! There is no attempt to help Latvia develop the export capacity to cover its imports. After the domestic  oligarchies, foreign banks and investors have removed their funds from the economy, the Latvian lat will be permitted to depreciate. Foreign buyers then can come in and pick up local assets on the cheap once again.

The practice of European banks riding the crest of the post-Soviet real estate bubble is backfiring, ready to wreck the European economies that have engaged in this predatory lending to neighbouring economies as well. More than 50% mortgages of all East Bloc countries are owed to West European Banks.

Collapse of Iceland Economy pulls down the Government

In the last week of January 2009, the coalition government of Iceland collapsed after admitting the extent to which the freeze in financial markets had ruined its economy. This will add further to the pressure on a devastated economy, expected to shrink by nearly 10.0% this year and next. 

But now, the government’s plan to “save” the economy is to “save the banks,” along similar lines to the West trying to save its banks from their adventure in the post-Soviet economies. This is the basic neo-liberal economic plan, after all. 

Alternative plan to save the economy
All the countries of the world are in the phase of recession and it may lead to depression if the governments follow the outdated policy of neo-liberalism. Bailing out the banks by supplying borrowed money does not solve the problem. This because, a vast majority of people have not enough  money even to buy consumer goods. Hence, the banks may have enough cash but people will have less motivation to borrow. Most important steps will be to increase the purchasing power. Western countries can compensate the banks by simultaneously writing off the loans of the people. In that case, people may feel encouraged to take loans again. West should restructure its tax system also. Abolish the income tax of wage earners, with $25,000 yearly income. The loss of revenue can be balanced by taxing 10% richest people. This will end recession.

In country like India, yearly income up to Rs 200,000 can be exempted from tax and the income tax for the people earning Rs 10 million or more can be increased to 50% from 30%. India should also adopt a policy of decentralisation of its economy by forming block level planning committee and encouraging labour incentive industry  to generate 30,000 to 40,000 employment in each block. Both the public sector and private sector should be engaged in this task.

The main criteria of development should be that the profit motivation is to be replaced with consumption motivation. Especially, domestic market and domestic consumption should be the target for economic recovery programme in India. Considering the World Bank criteria of $1 per day income as the poverty line, 80% people in India are below poverty line. Hence the capital incentive industries, high rise buildings, shopping malls, highways, bridges cannot be the criteria of real progress. Without all-round human development that includes health care and education also, all high sounding slogan of progress is useless.

Education should not just lead to jobs, but, evolution of refined culture and emancipation of mind should also be given importance. Growth of civilization should be faster than the growth of capital and material development. Intellectual revolution, based on spiritual values, can ensure the emergence of higher values of life, countering the psychology of greed and envy, which is the foundation of liberal democracy and capitalism.