International financial palpitations

03.OCT.08

As we go to Press, much of the world awaits with bated breath the outcome of votes in the Congress of the United States of America on a bailout package proposed by the Bush Administration to rescue the US economy from its gravest crisis in seventy years. The crisis, which has seen the collapse of some of the most sacred names in international finance, has shaken the very foundations of the US economy and poses the danger of bringing about a grinding halt if a solution is not found quickly.{{more}}

Given the position of the USA in the international economy, the crisis has profound implications which go way beyond the shorelines of that country. With huge banks and investment houses holding trillions in mortgages and loans, collapsing or having to be bought out, swift and decisive action is clearly needed if a major economic catastrophe is to be avoided. The scale of the crisis can best be appreciated when one realizes that the US Congress has foregone a break, met all weekend and is attempting to find a bipartisan solution. Even the Presidential contenders Barrack Obama and John McCain have taken time out from their respective campaigns to try to win Congressional support for the rescue plan.

It is truly amazing to witness the US Federal Treasury going counter to its own conservative economic orthodoxy in proposing sweeping interventions in the free market economy, including nationalization of some of the giant financial institutions. But it is said that desperate situations call for desperate solutions. This is certainly the case now, hence the approach to Congress to fund a US$700 billion package. The first proposal was rejected by the House of Representatives, and an amended version is being put before the Senate.

The rescue proposals have caused huge controversy in the US, with outrage from free-marketers and many American citizens faced with unpaid mortgages and possible loss of homes and jobs. Some see it as merely a bailout for the big corporations and investment houses, but the reality is that urgent action is necessary if an even greater calamity is to be avoided. With the repercussions already being felt in Europe and the Far East, the governments of several of those countries have already intervened to shore up their stock markets and prevent financial collapse.

The financial crisis or “credit crunch” in the USA has huge implications for the rest of the world as well. Developing countries will certainly be taking more than a passing interest, given the interlocking nature of finance capital and the possible effects on investment and economic growth. The downturn is sure to further hit the services sectors on which many of these countries are pinning their hopes. What many of these governments will find intriguing is the direct state intervention, including nationalization. Such measures are considered taboo by the economic gurus who head the international financial institutions and who have been preaching the contrary to the governments of developing countries. Does the size of the crisis and a government’s assessment of its likely economic impact justify such drastic measures?

The debate is sure to rage on.