financial analysts and the reassuring noises by policy makers had lulled them
into believing till early this year that the good days would last forever
little realising that the story could go horribly wrong in six months. Such
was the euphoria, that those cautioning prudence were seen to be Cassandras of
Benarnke, the Fed chief and Paulson, the US Treasury Secretary, the two people
at the top of the heap of the global financial markets were assuring one and
all in August 2007, at the start of the sub-prime crisis that matters were
under control. Not till February 2008 did Benarnke suggest that something was
remiss. It was on September 19, 2008 that both said that the USA faced a deep
financial crisis and that the $700 billion bailout package was necessary to
save the system from collapse. But with the system continuing to spin out of
control, is there a con game all the way through?
Finance Minister and the Deputy Chairperson, Planning Commission, the two
worthies in charge of the country’s financial planning, followed a similar
path, assuring the country that India is insulated and that growth would
remain intact at around 8 per cent while it can slip to 5 per cent or less.
October 8 with international markets tumbling, in spite of the coordinated
intervention by the central banks (an unprecedented step), Indian markets also
followed suit. They stabilised because of the old game of government-induced
intervention by certain institutions. The Finance Minister came out of a
Cabinet meeting to say, that there was nothing to fear and more liquidity
would be infused into banks. He said that Indian banks have strong balance
sheets and no one need worry about the safety of deposits. The FM, a
lawyer-politician is no economist and maybe excused for not comprehending what
is going on.
the Deputy Chairperson is an economist. He is reported to have said, “ …
when normalcy is restored (in global financial markets), normalcy would also
be restored to stock markets”. He apparently added that stock values are not
a measure of the country’s economy and that stock markets are always more
volatile. What a turn around? The government was till recently suggesting that
the stock market rise reflected the economy’s performance. However, it is
the first statement that needs analysis since it is vacuous.
would normalcy be restored in global markets? It does not appear to be in
sight. In spite of the trillions of dollars being poured in by governments a
collapse has set in. In February, a tax cut of $ 160 billion was said to be
adequate and then a few hundred billion dollars to take over Fannie Mae and
Freddie Mac and AIG was thought to be adequate. Next, $ 700 billion was
thought to be adequate and then a coordinated rate cut but the markets
continue to collapse. As mentioned in this author’s piece in these columns
(February 6, 2008), this is a case of `too little, too late’.
situation is a dynamic one with matters deteriorating rapidly and faster than
anyone is able to anticipate. As argued by Kaldor, once expectations turn
negative, nothing helps and that seems to be the current world situation.
There is a complete lack of trust so that institutions are running scared, the
financial markets are in a state of freeze and liquidity has dried up.
Further, the real economy which was already slowing down in 2007 has rapidly
gone further downhill. The US has lost close to a million jobs. Now even the
IMF has woken up and predicted a slowdown/ recession. The implication is clear
that with the real economy sliding, profits all across will tumble and
businesses may go broke. Under the circumstances, all investments are
uncertain and financial markets already in turmoil can hardly revive. Even
companies and banks that today look safe may rapidly sink into losses.
recent past is a good guide to all this. Even in June 2008, the demise of WaMu,
Lehman Brothers, Merrill Lynch etc., the nationalisation of Fannie Mae,
Freddie Mac, AIG etc., and the spread of the contagion to Europe could not
have been imagined. The decline of Dow Jones to below 10,000 or that of Sensex
to below 11,000 were in the realm of impossible. One of the big Indian private
banks is 19th in a list of 36 risky banks in the world. Even tiny Iceland
faced bank failure. Not only has all this happened, much more is feared in
spite of the various packages.
projection of all this into the future is frightening and a turnaround is not
in sight. Hence when the Deputy Chairperson of Planning Commission said
“when normalcy returns” he should honestly also add that there are few
prospects of that in the near future and no one really knows when that may
happen. Was the public being conned?
of the international financial markets over the last 20 years suggests that an
unsuspecting public has been conned. Many were sucked in by greed and invested
in unsafe instruments (even the Chinese Central Bank) due to the con job
pulled off by the financial experts/advisors. The FBI is reportedly
investigating Lehman, Merrill and AIG for possible fraud. While the markets
rose, everything seemed to be as scripted but few asked what if the script
went horribly wrong as it has done now. Even the most savvy financial experts
have lost because they had also conned themselves and invested in the
instruments that are now sinking. An NRI steel tycoon is reported to have lost
over $16 billion in the last four months in spite of his battery of financial
financial sector is not buying the turnaround story and continuing to
collapse. It cannot trust others in this dynamic situation where what is
apparently safe today can be risky tomorrow so that any investment can turn
bad and they can themselves be the next victim. Hence, government bailouts are
being treated as good to clean up one’s own balance sheet and improve
one’s situation but not good enough to trust anyone else.
The nightmare of a bad script is with us but the con job continues. Rather than admit that the problem is systemic and needs an overhaul, policy makers the world over are busy fire fighting and not doing a basic reassessment which would require a change in priorities. They are attempting to shore up the collapsing financial structures which seem to be beyond repair and ignoring the real sectors of the economy which could react to stimuli much more quickly. A paradigm shift is called for but that requires a mind set change which the current breed of policy makers are proving to be incapable of because of their predisposition(s).
Arun Kumar is the Coordinator of the EXIM Bank-JNU Library in Economics.
He is teaching Economics in Jawaharlal Nehru University since 1984.
He has been the Chairperson of the Centre for Economic Studies and Planning of
JNU, Vice President and Acting President of the Indian Academy of Social
Sciences (ISSA). This article
was first published in The Tribune, October
© Globalom Media 2001-2008