19 Sep 2008
Confronting the Worst Financial Crisis since the Great Depression
All along, those of us living in the Third World have always been lectured about the virtues of unrestrained capitalism. Our governments have been encouraged and even compelled to sell strategic companies (that define sovereignty) to the private sector. In Cameroon where I reside, our government, prodded by IMF and World Bank ceded banks, the railway, water and electricity companies and a host of other strategic companies to the private sector.
The United States that is generally viewed as the centre of world capitalism has been compelled by circumstances to embarrassingly take decisions that run contrary to its capitalist doctrine. It is even more stunning when such decisions have been taken by a conservative right wing administration that had vowed never to intervene to rescue private sector corporations that are going bankrupt.
The Bush administration did not only reverse its policy but it did that in a massive and unprecedented manner. When speculators on Wall Street and elsewhere in the US ‘gambled’ and lost billions of dollars belonging to Americans and foreigners alike in risky ventures such as the subprime mortgage, the ripple effects spread throughout the international financial system and sparked the worst crisis since the great depression eight decades ago.
Just a recap of what has transpired so far. The crisis started from the US subprime mortgage sector (see earlier article on this at this link http://www.njeitimah-outlook.com/articles/article/2076046/91213.htm) before spreading and sucking many giants of the financial world into a bottomless abyss. In the above article written in November 2007, I had quoted Michael Mayo of Deutsche Bank as saying, in reference to the subprime mortgage crisis that; "This is one of the slowest moving train wrecks we've seen”. Indeed, the train wreck has produced an unbelievable number of casualties so far. Thanks to the spirited rescue of some of them by the US and British governments, the scenario would have been very catastrophic. Bear Stearns was the first of the big five US investment banks to crumble. The US government had to hurriedly facilitate its purchase by J P Morgan during a weekend. Lehman Brothers was to follow into bankruptcy in a spectacular way. Merrill Lynch had to be sold to the Bank of America to avoid bankruptcy while Goldman Sachs and Morgan Stanley are still standing albeit with some question marks. The mortgage firms Fannie Mae and Freddie Mac (forget their funny names) were bailed out by the US government when they were at the brink of bankruptcy. William Poole, former head of the St. Louis Fed, was quoted in Time Magazine as estimating the cost to taxpayers of bailing out the creditors of the above pair at $300 billion. The latest bail out of a failing corporation took place a few days ago when the US government pumped in $85 billion to take over the collapsing insurance giant AIG. That was before the US Federal Reserve coordinated with the European Central Bank, the Swiss National Bank, the Bank of Japan, the Bank of England and the Bank of Canada to inject a whooping $180 billion into the troubled international financial system.
This action and other planned measures by the US government to take care of “toxic assets” in the financial books of some firms has, at least for now, instilled some confidence in Wall Street and calmed the nerves of investors.
Analysts generally agree that the intervention by the US government has prevented a cataclysmic meltdown of the international financial system. It has also helped to prevent an embarrassing situation that was rapidly unfolding…the psychological impression that America’s financial giants were empty shells after all. It was a dangerous impression that would have negatively influenced future flow of foreign capital into US financial institutions. Those institutions badly need that money so as to satisfy the insatiable appetite of Americans that like to live on borrowed money.
What we have learnt from this crisis is that the rules governing capitalism can be modified (like in George Orwell’s Animal Farm) to suit the strategic interest of any country threatened by the very practice of capitalism.
Before anybody wears his three piece suit to come and lecture the rest of us how the free market works, he should remember to mention this type of exception
Njei Moses Timah