Overriding considerations
Except by pure chance, ultimately the effectiveness of the actions proposed by the G20 Summit held on November 15, 2008 would depend on the accuracy of its diagnosis of the present financial crisis and credit crunch that are engulfing the global community. In this regard, I would argue that, from the perspective of the developing countries, three over-riding considerations should guide the summit’s responses.
First, the need to confine as far as possible, the crisis situation that has erupted, only to those countries it has already engulfed.
Second, the need to prevent the spill-over of negative occurrences in the financial system to the real economy, where goods and services are produced and consumed for the private benefit of those concerned.
And, thirdly the need to preempt, if possible, future recurrences of such crises.
Regrettably, as globalisation has developed over the past three decades, one of its most distressing manifestations has been the periodic recurrence of serious financial crises of global proportions. Like now, each of the past crises has rocked the very foundations of private market-based capitalism on which the global economic, social and political order is predicated.
From the perspective of these over-riding considerations readers can appreciate the depth of uncertainty presently facing the global economy. To take an example, the domestic-based auto companies in the United States are blaming the present financial crisis and credit crunch for much of the immediate difficulties they face and are calling on the US government for “bail-out” support to the tune of several billions of US dollars. If help is provided to these US-based auto makers and not to the “transplant” auto sector (mainly Japanese) in the US, which has not called for a bail-out, this could be seen by the rest of the world as naked protectionism. In which case, history has shown that such inward-looking policies are always the worst policy choices from a global perspective, as they limit the spread of competitive global market capitalism.
The concern among many is that during the Great Depression (1929-33) such policies are now widely recognised as the main contributors to its prolongation over so many years.
Diagnosis
A good idea of how the G20 interprets the present crisis situation and therefore, might wish to proceed in dealing with it, can be gleaned from the causes of the crisis as they have identified them in their communiqué. Seven such contributory causes are indicated.
First, the G20 Summit blames the crisis on the under-appreciation of risks in the financial system by portfolio managers of financial institutions, particularly the banks and mortgage-lending firms.
Second, they blame the failure to exercise “due diligence” on the part of those financial firms that extended credit to borrowers.
Third, they further observe that this failure reflects a situation where financial standards were not being maintained, and indeed, they were falling.
Fourth, the decline in financial standards is reflected in crucial failures in the operations of the regulatory and oversight bodies established to prevent this from happening.
Fifth, as all this was taking place, they noted that poor management practices became apparent. And, sixthly, financial institutions got involved in excessive leverage as new instruments for structuring loans were introduced.
As a final cause, they have identified greed. This greed was exhibited by both lenders and borrowers. Lenders became involved in what was clearly “predatory lending.” At the same time, borrowers were accepting loans well beyond their means of possible repayment, based on their savings and likely future earnings.
As these causes helped to generate the crisis, insufficient global coordination of the macroeconomy, central bank actors, and trade policies allowed its rapid transmission around the world.
The G20 Summit communiqué makes the observation that between November 2001 and December 2007, the world economy went through an expansionary phase. In this period the growth of global output and incomes was strong. Capital flows around the world and among the emerging market economies (like China and India) as well as the leading industrial powers were robust. By and large, this was a period of fairly prolonged global economic stability, despite terrible political, cultural and geo-strategic conflicts.
Systemic concerns
The analysis of the causes of the crisis coming out of the November 15, G20 Summit fails to identify the systemic bases of the financial crisis and credit crunch. While each of the reasons indicated by them, as listed above, has indeed played a part in the evolution of the present crisis situation facing the global economy, these are in turn systemically related to underlying defects in the regime of private market-based capitalism, in an era of intense globalisation.
The blame for what has occurred has been placed by the G20 Summit squarely at the feet of actors and participants in global financial markets, rather than the systemic pathologies infecting the relation between the financial system, which is a product of market capitalism, and market capitalism itself.
Because of the rather superficial diagnosis of the situation, the proposed measures of the G20 Summit would not be able to prevent the recurrence of periodic crises, as globalisation proceeds. For this reason the interests of countries like Guyana would be best served if a means can be provided to de-link the defective operations of global financial speculation from the management of their external finances.
In this regard activist scholars and more progressive political leaders are calling for the creation of Regional Monetary Agreements and Exchange Rate Regimes tailored to the needs of developing countries. These mechanisms can provide for 1) external reserves pooling 2) securing temporary short-term assistance when balance-of-payments problems emerge and, 3) to reduce the need to use US dollars as the exclusive transactions medium for international trading.
Next week I will continue the discussion from this point and seek to examine some of the real economy effects of the financial crisis and credit crunch.
