Six Years after ‘Lehman’
Sanmatha Nath Ghosh
The collapse of Lehman
Brothers on September 23, 2008
triggered the 2008 global financial crisis. In this age of globalization, it took no time to lead it to a global financial recession. Lehman Brothers is a lending bank which made huge lending in housing sector. Massive loans were given to house owners who could not pay for the economic downturn of USA. Then the loans were securitised and sold to unsuspecting investors, derivative magnified the proportions of the crisis while the bankers made billions selling very risky financial products as very credit worthy investment.
Lehman was actually the tip of the iceberg. Below the surface were many contributory elements. They include (1) Financial deregulation (2) Conversion of finance from serving the real economy into a beast that thrived on speculation (3) Creaming layer off the productive sector (4) Selling of toxic financial products to unsuspecting consumers through new manipulative instruments.
The crisis is the product of policies of financial liberalization and the deregulation persuaded by successive US Administrations since 1990. Founded on quasi religious belief that the market knows best and is capable of regulating itself, such policies entail the repeal of laws and regulation governing financial markets and firms. Finance according to the dogma can only work its magic if it is free from such onerous regulations.
In this congenial liberalized environment the financial firms soon became the dominant players in the economy. They embarked on frenzy of financial speculation involving huge leverage and short term loan. They claimed that the new financial instrument, they have devised to package these loans, as security to be sold on financial market reduced the danger of financial crisis spreading the risk.
This crisis also exposed the deep deficiency of the global financial system. However, the dangers of the deregulating financial market had already become evident in 1997, when the markets of South East Asia were flooded with Yen but the Yen was withdrawn at a stroke, the Asian financial crisis broke out first in Thailand and then in other nearby countries. Crisis also erupted in USA in 2001 when speculation on internet company shares created a dangerous bubble (dot com bubble). The Deregulation of capital flows causes booms and burst in the emerging economy (especially BRICS countries) that received inflows and then suffered reversal. The lack of stable economy system of currency rates result in big fluctuation. On 23rd September, 2008 lending organizations like Lehman Brothers and others literally reached the brink of collapse.
To rescue the collapsed or collapsing bank, money was supplied to them at zero interest rate by the governments of developed countries, to the extent as follows: USA 85 billion per month for which it had to increase the treasury note (from 800 billion to 2.08 trillion). In Eurozone, it is 489 billion Euro, in England it is 375 billion pound, Japan 1.3 trillion Yen. But the cheap money was not utilized to revive the economy. The money went straight to the share market of the BRICS countries for quick and profitable turnover. It is needless to say that the beneficiary is greedy irresponsible banker.
In the aftermath of the crisis there was much talk of financial reform. Dodd-Frank Act initiated by two US senators to tame the financial beast may be mentioned here. This is an honest attempt to the ‘reform’ but it is a weak response to the crisis which, worse still, is withering in the poor follow up.
The Indian economy has been in trouble for quite some time—output growth has been decelerating for several years. Private investment has fallen. Industrial production is declining but consumer price inflation is still double digit, stagflation (rising price with slowing income growth) is continuing. In external sector, exports are limping while imports are ballooning including all kinds of nonessential imports like gold, so both trade and current A/c deficits are at historically high level which is largely financed by volatile short term capital. But it could not create any problem so long the flow of capital is continuing. These have been the result of internal and external imbalances that have been building up for years.
The Indian economic boom was based on a debt driven consumption and investment spree that mainly relied upon short term capital inflow. This generated asset boom in areas like construction and real estate rather than traded goods. This boom was not utilised for the improvement of the lives of the majority people. It was garbed by a few who made their fortune.
Seeing the boom Indian leaders flattened their chest and declared with pride "India is shining", "Indian economy is based on solid foundation". But boom did not sustain long. Inflow was mainly in the share and bond market. Inflow with its gain became outflow whenever scent of crisis was apprehended. It would flee in the safer zone for better return.
Recently, US Federal Reserve Chairman Bernanke declares that the supply of money at zero interest rate will be withdrawn in phases. Immediately Bankers allowed interest on their deposits. External flow started, in the last June, more than twelve-billion dollar was withdrawn by the portfolio investors alone causing the burst.
This is not something accidental. This is the outcome of the policies followed by the Government of India since 1991 (Narashima Rao Government). Import was liberalised and customs was minimised. Imports have replaced domestic production in the urban market for many fairly standard goods (pen, soap, household articles and so on). It attacked the productive capacity of the country and wiped out lot of employment in 1991. Small and medium industries are the producers of these goods. Most of them were closed or were being closed for unequal competition. This closure is not a loss of producer and workers alone. It means a loss of knowledge, production capability and synergies that are absolutely necessary to build up manufacturing prowess.
Indian policy makers are pursuing the same policies which are the causes of the global crisis and become partner of world capitalist order (crony capitalism). Crisis associated with hot money flow cannot be resolved by begging more hot money. They also failed to understand that growing Current Account Deficit financed by essentially short term capital flow could never be a sustained strategy. Then they argue that there is no other alternative.
During the last South East Asia economic crisis, Malayasia restricted non-essential imports, imposed conditions on inflow and outflow and, the crisis was controlled within a short while. These steps, were initially criticised but finally highly appreciated. But Indian policy makers would not like to learn from history.
Vol. 47, No.9, Sep 7 - 13, 2014