Random Thoughts

Intellect explorer begins to unwind the Episteme here: 

Capitalism and the Paradise lost

Economic Crisis! for whom?

An economic crisis is not made in a day; not in a month or not even in a year. It heaps up gradually; gaining momentum when everything else slows down. Once it is accepted as arrived, it will be a rather late confession. The recent economic crisis is also not different.  The 2008 economic crisis hunted down the once almighty financial institutions of United States of America. Lehman Brothers, founded in 1850 became its first famed victim. It was a primary dealer in the U.S. treasury market. Mortgage companies Fannie Mae and Freddie Mac were the next in the queue. This list includes the insurance giant AIG in the US, Northern Rock in the UK, and Fortis and Dexia in Belgium. 

After a lot of pandemonium, they were royally bailed out. But none gave any importance to the many voiceless who were out of their payrolls all of a sudden. The millions of jobless just became mere percentage numbers of little interest. The unemployment index in the US kept ticking up again and again. 

There is a line of thought that names the economic crisis as a result of credit crisis. They attribute the crisis to the sub-prime mortgage business. The subprime mortgages typically came with a low interest for the first few years, and then a drastic increase. The risks were usually not fully explained, and many borrowers were told they could easily refinance the mortgage in a few years to keep their interest rate low. But in 2005-2006, it came time to pay the piper. 

Interest rates on the subprime mortgages shot up. Many new home owners were unable to pay or refinance. The crisis should have been confined to the US home owners. Unfortunately the banks and lenders making these loans had sold the debt to investors. The debt assets had been diced up and sold to other investors and banks around the world, in complicated financial packages that few people seemed to fully understand.

During 2007, nearly 1.3 million US housing properties were subject to foreclosure activity, up 79% from 2006. Nobody seemed to have any ideas who owned these ‘worthless’ debts, spread out throughout the whole worldwide financial system. Suddenly banks weren’t willing to lend to each other any longer, resulting in a ‘credit crunch,’ a period where there is little liquidity (or money) in the system because nobody is lending. The losses started to roll in. By July 2008, major banks and financial institutions around the world reported losses of approximately $435 billion.

This simply means that U.S. banks were blindly giving away the loans to people with poor credit histories. But they don’t have any complaints at the gargantuan sum of money that fills up the bourses of the Wall Street hedge fund managers. Even after being bailed out, banking monoliths like Citigroup were paying their top echelons with hefty sums of money. 

Only a few analyse the pitfalls in the US risk management system based on the use of financial derivatives, which exacerbated the crisis. It demands a deeper enquiry in to this angle. 

The capitalist economists are trying hard to find out an intellectual remedy to the trouble that has engulfed the world economy at large. But they fail to acknowledge the inherent nature of objective contradictions in the capitalist system that breeds crisis and economic slumps time and again. 

The subprime mortgage crisis and the credit crunch aren’t the only factors in the 2008 economic crisis. Oil prices shot up to a record high, driven by the increasing energy needs of China and India and other emerging economies. This has dramatically affected consumers in North America and Europe in two ways. Consumers have been forced to pay much higher prices for fuel to fill their cars and heat their homes, and at the same time the increased food cost has driven up food prices dramatically, because it takes fuel to produce and transport food. Food has become so much more expensive in the developing world that it has resulted in food riots in some instances.

The current decade has seen a significant commodities boom, after a commodities depression in the 1980s and 1990s saw prices at extreme lows. By 2008, oil had reached a level that people could no longer afford, going above $100 a barrel for the first time in history in January 2008. But even this high seemed like nothing by the time July rolled around, when oil reached $147 a barrel. There has been a rapid slowdown in North American and European economies. On 30 September the UK revealed that it had zero growth for the past quarter. This analysis into the commodity boom explains the housing bubble-bust theory partly. 

The role of the international finance capital (its peculiar and speculative nature) and the vicious cycles of dollar hegemony in this mayhem cannot be minimised. The finance capital in US economy got upper edge over the industrial capital even as early as 1960s. We can trace the seeds of the present economic crisis there itself. US industrial giants transferred their capital into the risky streams of investment banking. The giants like General Electric and Citibank entered the finance capital arena with their full throttle. Apparently, the US money economy expanded by leaps and bounds though the real economy was lagging way behind. The consumption in the economy also risen sharply reaching 70% of the US GDP. Out of this amount, a large sum was credit money in nature. Thus the credit economy dwarfed the real economy by many orders of magnitude. 

The contradiction between the international finance capital and the national sovereignty is worth mention here. The dollar hegemony over other currencies was a need for the international market forces too. The US imperialism and its proxies like International Monetary Fund (IMF) and World Bank tweaked and twisted the national governments to facilitate this spread of dollar umbrella. Thanks to this, the US finance capital with all its infectious diseases penetrated into the world economy. 

The rest is history, full of sound and fury and panic in the golden corridors of wealth. The further grim side of this event was that the very same crisis was used by the wealthy to exploit the downtrodden masses. Trillions of money was pumped into the bourses of the rich, all out of the shrinking pockets of the millions of poor.