The world's private-sector giants have stepped on a financial minefield. In the past six months, three of America's top five investment banks have disappeared. The remaining two - Morgan Stanley and Goldman Sachs - are gasping for breath. While Morgan Stanley is considering merger options, the stocks of Goldman have slumped.
Strong tremors were felt all over the world.
In what appears to be a classic example of 'public-private' partnership, the US government stepped in to bail out AIG by agreeing to lend US $85 billion in emergency funds in return for a 79.9 percent stake, which means effectively taking control of the world's largest insurance company. In the week following the mayhem in Wall Street, central banks in Britain, the European Union, Japan, Switzerland, Canada, Russia and India have pumped in US $600 billion in multiple rescue acts.
Ironical isn't it? The private-sector giants are ultimately rescued by the government's treasury.
In the past year, the US treasury has already spent US $900 billion in bailouts. With the IMF chief Dominique Strauss-Kahn warning that the worst is yet to come, taxpayers all over the world will eventually have to shell out more to cover up the huge losses being incurred by the private giants. It reminds me of the old saying: heads you win, tails I lose.
Sure, the markets won. The US President George Bush could not remain a silent spectator. 'Government intervention is not only warranted, but essential,' he said urgently before offering the mother of all bailouts - a US $1 trillion package. Sure, within hours the world's markets began to smile again.
The political urgency with which the US government (and governments elsewhere) came to the rescue of the financial system also exposed their double standards. The US $600 billion coughed out in just one week could have completely eradicated hunger (the 854 million people estimated by the FAO to go to bed hungry each night) from the face of the planet. The additional US $900 billion that the US has spent in the past one year could have lifted the world's estimated 2 billion poor people from poverty, and that too on a long-term sustainable basis. The one trillion dollar bailout package that George Bush is promising could have wiped out the last traces of poverty, hunger, malnutrition and squalor from the face of the Earth.
Only if global leadership was honest enough could the same amount of urgency be demonstrated in tackling world poverty and hunger. There would have been no need for the United Nations to provide a cover-up for their collective guilt in the form of Millennium Development Goals. Poverty would have been confined to history. Hunger would have already been banished.
Coming back to the collapse, this is in essence the market mantra. When the going is good, the government must step back and allow the bull a mad run. Profit becomes the sole motive, and investors lap it up. We have been repeatedly told that 'The markets will correct itself'. The investment banks have always reassured governments, regulators and investors that they have the expertise to manage asset risks.
Profits are raked in by capitalist corporate marauders. A few corporate houses make billions, present fake numbers and arguments, and walk away with the cake. Credit ranking industries provide them with the highest honours. And when the collapse comes, the losses are invariably picked up by the average taxpayer on whose savings the governments provide the bailouts.
The trillion dollar question that arises is: Why should the governments intervene? Aren't the markets supposed to be self-regulatory and self-contained? And more importantly, why should the governments try to keep the markets alive?
Before we investigate the matter any further, let me assure you of one thing. These firms were no ordinary business houses. As others have said, they represented the pride of the American financial system. They had the best of talent, attracting the highest achievers from business schools. They advised foreign governments and provided expert opinions. They have rewritten economic and monetary policies for the World Bank/IMF and the World Trade Organisation. Such has been the power of the markets that the mainline economic thinking the world over has become its mute disciple.
Privatisation has been the economic buzzword of our times, forcing the governments to open up their markets to foreign direct investment. Markets became the ultimate economic nirvana.
In India, pressure is on to disinvest the remaining public sector companies, and now pressure is also building up to privatise the nationalised banks. The arguments are the same as we have heard before, and every mainstream economist worthy of his title will argue in favour of privatising the nationalised banks. But when the private sector goes bust or the markets explode, it is invariably the governments that are expected to nationalise them.
India managed to escape the heavy shocks thanks to the left parties, but the tremors still forced the Reserve Bank of India to pump US $18 billion into the domestic banking system through the liquidity adjustment facility. Let us not forget that the UPA government was keen to open up the financial sector, to bring in a legislation to allow dilution of government equity in public sector banks, and to reform the insurance sector. Further privatisation of banks and opening up of the insurance sector will now be on hold following the global meltdown.
Reviewing the impact of the financial crisis, Indian Prime Minister Manmohan Singh asked his ministers to 'stay alert on the global turmoil.' Without drawing any lessons from the collapse, Finance Minister P Chidambaram however remains bullish on financial reforms. If the left parties had allowed him to have his way, India would have been in the throes of a terrible economic and political crisis.
The US $85 billion bailout for AIG by the US government is the biggest nationalisation in history. Rescuing AIG was crucial because its failure posed a much bigger threat to the entire financial system. The one trillion dollar bailout package, equivalent to the size of India's GDP, is in reality what will keep the markets alive. If nationalisation is now justified and it is the government which actually keeps the markets thriving, I fail to understand how the government was considered 'bad' in the first place. Why was it ever branded as a remnant of the bygone socialist era?
In the days to come we will see more and more of such bailouts - meaning more companies and firms being nationalised. It is no wonder that Prof Nouriel Roubini of New York University's Stern School of Business once called it the 'privatisation of profit and socialisation of losses.'
We come down heavily on the police intelligence when the terrorist strikes do not stop, to the point that even the Home Minister becomes a target of ridicule. But when the financial intelligence fails us, and that too with the brightest of the money managers from the best of the business schools in control, we refrain from even pointing a finger. We don't ridicule the chiefs of the corporate world, nor do we mock what the so-called prestigious business schools produce.
The reason why is very simple. We are all implicated in a system of greed, which in one word defines the reason behind the financial meltdown. Let us accept, in other words, that we are all beneficiaries of a corrupt financial system - forcing us to refrain from standing up and calling a spade a spade.
However hard we may try to reform a financial system based on greed, let me assure you that it cannot ever be unclogged and truly regulated. The hypocrisy shrouding the success of the market economy must therefore come to an end. Let the market operate freely and survive on its fundamentals. Let the market learn to manage its own risks, without the government coming to its rescue. Let capitalism sustain itself, without lifesaving intravenous injections from government treasuries. Then let us see for how long the markets will survive.
Until then, we don't need to shed any tears for the estimated 24,000 hungry people who perish with each passing day in an endless wait for their next morsel of food. They have been told bluntly time and again that the governments have no money to feed them. Their legitimate right to food has in reality been snatched by the markets to fill our pockets - a small price that the poor must pay to sustain our dreams.
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