There’s none so blind as those who refuse to see, taught my financial markets mentor as he warned of ‘the coming financial crash’ (Khaleej Times, January 1, 2007) long before investment giant lehman brothers went belly up, sending the international financial system into a tailspin. Yet right up to the credit crunch, market pundits continued to preach and practice wall street’s new mantra, that steroid shots of leverage into speculative investments, with risk priced virtually at zero, underpinned unprecedented financial growth, the new century’s assured capitalist nirvana.
The following market rout was a sobering reminder that “every boom contains the genesis of its own bust”. But its aftermath also proved that modern western democracy is incapable of catering to such crises. Politicians need to bankroll campaigns, a tactical gap often filled by corporates. In return, of course, for privileged positions for their blue-eyed. Remember former goldman sachs CEO Hank Paulson as treasury secretary? Little surprise, in hindsight, that his watch saw the largest-ever bailout package, in response to the greatest financial tsunami on record, directed to his wall street patrons whose moral hazard was at the heart of the great crash. In the world’s strongest democracy, billions in taxpayer money were deliberately channeled towards reckless institutions that had just caused the worst financial glut in main street history. Yet no manner of public concern could shift the narrative to the real economy. No bailout was engineered for manufacturing and industry. No fed presses printed overtime to keep consumers solvent, the life and blood of the modern economy. The change of guard in Washington only brought more of the same (QEII), with increasing sings of QEIII, the rationale being the same. There is but one policy at play in the home of modern capitalism, save the neoliberal financial system.
Strangely, the unwinding of the capitalist doctrine has also led to a collapse of the left, predominantly in Europe. Political heavyweights long associated with the moderate left are facing angry agitations against themselves. In Greece, socialist international president Papandreou is implementing harsh troika-prescribed austerity – privatisation, civil service cuts, etc. In Spain and Portugal, public agitation against draconian cuts is directed as much against their socialist governments as the IMF. Far from producing an adequate response to the crisis, as in the days before the fateful fall of the Berlin Wall, the European left seems increasingly capitulating to the forces of neoliberalism, sacrificing social equality for balanced budgets even as the free market system enters its endgame. Of course, it helps when ratings agencies immediately downgrade entire economies at the first sign of a hard left turn. In Europe, just as in the US, regardless of the government in office, policy focuses on preserving the economic order.
In both cases, the power structure is subservient to financial nerve centres, relying simply on pumping more money into a hemorrhaging system. Yet doing so reflects a failure to understand the evolution of a new paradigm. The rapid growth of speculative finance spiked income disparities right across the economic north. The rush to safeguard this structure has now led many to revolt. First in Europe, then in the US, public opinion has swung sharply against quantitative-easing-politics as people refuse to be subject to extreme austerity so banks are flush with liquidity every time they crash the system. The intertwined worlds of international politics and economics are seemingly on the threshold of a new way of functioning. There will be no more miraculous money making from non-productive speculation. And there will definitely not be public funded giant bailouts for reckless institutions whose negligence has been repeatedly proved criminal. In resisting this change, capitals on both side of the atlantic only delay the day of reckoning, making eventual default that much more painful, with spill-over effects that much more profound. Years of throwing good money after bad has turned toxic institutional debt into existential sovereign dilemmas. With the system not half-way solvent enough, and people refusing to be milked further, the immediate future can only bring systemic collapse. I feel an eerie echo of my mentor’s words again as Washington and Berlin throw their lot behind wall street dogma. There’s none so blind as those who refuse to see.
The writer is Business Editor, Pakistan Today
