By ARUN KUMAR

the world are in a state of deep crisis. The US as the leader of the world is both a cause of the problems and a possible source of solutions. Without the US being a part of any solution, it is unlikely that the world, as it is, will be able to resolve its problems. In this sense, it is said the whole world should have a vote in the US presidential elections.

The G-20 heads met under the leadership of a lame-duck US President, Mr Bush, in a largely futile talking exercise. Our own Prime Minister made noises about how he saw the crisis coming while till the other day he was saying that there is no crisis; does credibility matter. Mr Obama did not participate, perhaps due to his irreconcilable differences with Mr Bush who only talked of the free markets. Mr Obama’s presence may have given the wrong signals and made his own task more difficult when he takes over in two months. However, this delay could be very expensive.

Not only is the economic weight of the US so large that it determines world economic events but its financial and political clout sways other countries politically and socially as well. It draws the best in the world to its universities and think tanks and leads all others in research in almost all fields. Thus, it is able to set the agenda for the entire world in intellectual terms and also because it has lobbies pushing for its interest in almost all parts of the world. It dominates the multilateral agencies and that is another important source of its influence. From issues of poverty removal, research in health, agenda for the environment, nature of the financial architecture, fight against terrorism and money laundering, etc, the US moulds world events.

To be able to lead in such an extraordinarily complex world on such a broad front requires statespersonship of a high order among the leaders. This has been missing for decades. The US and, following its lead, most other governments in the world have been governed by narrowly defined short-term self-interest. One may say, what is new? But in a far more complex world, old ways will not do. Narrowness of approach is a recipe for disaster and pay-back time has now come. The world as we have known it can hardly survive.

All the above listed problems have a common source, a belief in a narrowly defined national and individual interest, based on greed and unlimited exploitation. Thus, respect for nature and other people has been at a discount. While this was tolerated earlier, today this has serious implications, especially at the economic plane and now we are confronted with a collapse for which no one has an answer.

The governments all over the world are scrambling with packages to salvage their financial institutions and their economies. Huge sums of money are on offer (capital injection, loans, etc.) — amounting to about $5 trillion. The financial bubble, which is in the process of collapse and is dragging down the real economy, was a result of deregulation of the financial markets and an undiluted pursuit of lucre and the resulting massive disparities in society.

The financial assets created (in hundreds of trillions of dollars) were a multiple of the size of the real world economy (around 60 trillion dollars) so that the latter does not have the resources to resolve the problems created by the former. Governments can neither replicate the markets nor their intervention is adequate to stop the financial bubble from collapsing.

The financial bubble consists of borrowings and lending by various economic entities. As the bubble deflates, while asset values decline, the liabilities remain. Hence institutions develop huge holes in their balance sheets. Since the various financial entities are interlinked through borrowing and lending, as one institution collapses and is unable to pay its lenders, the latter runs into problems and this ricochets to yet others leading to further collapse. A vicious cycle sets in and institutions lose trust in each other and stop lending to others and instead try to accumulate capital to cover their own declining asset base. The money given by the government goes to support their own asset base with little lent to anyone else.

While the build-up of the financial bubble is gradual and systematic, its collapse is sudden and chaotic and that is why it is beyond anyone’s control. Release of liquidity and cuts in interest rates do not spur investments and the economy enters a “liquidity trap”. In this scenario, it appears inevitable that the financial markets would collapse and nothing in the short run can save them.

Unfortunately, businesses are inter-linked, a large number of the firms dealing in real products and services also were involved in the financial markets to invest their funds or to cover their risk (say, in foreign exchange). These firms are also suffering losses. Further, they are confronted with a slow- down in demand and a tightening of the credit markets since borrowing and lending has frozen. Thus, the growth rate of the real output which had already started declining in 2007 is now in negative territory over large parts of the advanced world.

Consequently, unemployment is rising dramatically all over the globalised world. This is going to bring real pain to a vast majority of the people while the collapse of the financial world hits only a small percentage of the rich and the upper middle class populations. The collapse of the latter is inevitable but if the former collapses, it would be catastrophic. The choice before the governments is clear — should funds be thrown into the bottomless pit of the financial sector without any real benefits or should they be used to retrieve the real economy and keep it going?

The US government is an establishment run by various vested interests, and the financial sector interests are deeply entrenched in it — they have been running the Treasury and the Fed for long. Their interest is seen as the main interest. That is why the poor are not getting help with their houses or General Motors is not getting $25 billion while AIG has got $150 billion. Mr Obama would have to overcome this bias in policy and put together a radically new plan. This would require him to change his set of advisers and those in the establishment, but that is easier said than done.

Mr Obama’s win was like climbing Mount Everest, but can one do so everyday? Or, having climbed it once, can that become a habit? The world needs it to be so. Will Mr Obama, a left-leaning suspect in the eyes of the conservatives, be cautious and play safe? This would be tragic since there is no option but to carry forward a radical programme. His self-imposed limits will determine his achievements or failures and those of the world in the coming years. If he could take on the establishment in the economic sphere, there would be hope that he could also do so in other aspects of life.

Dr. 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, November 20, 2008.