Fear of the control freak
After a gap of a decade, the spread, depth and intensity of the global financial crisis has again occasioned critiques of capitalism. A full-blown recession in the world’s most-powerful economy, the US; slower growth elsewhere in the world economy; a global food crisis, have triggered renewed fears that the system is beginning to unravel. From an era of laissez faire policies of allowing market forces a freer rein in economic activity, there is now a perceptible shift towards greater regulation and oversight by the State.
When the likes of George Soros, billionaire financier, warn that the current financial crisis is the worst since the Great Depression of the 1930s or that the global capitalist system was coming undone, matters must be really serious. Financial instability is integral to capitalism. Crises have been recurring periodically: Asia’s financial woes of 1997 that spread to Russia and Latin America. Bursting of the technology bubble in 2000. The post-Enron deflationary scare in credit markets in 2002, to name a few instances.
What is different this time round is the fact that the “current crisis marks the end of an era of credit expansion based on the dollar as the international reserve currency. The periodic crises were part of a larger boom-bust process. The current crisis is the culmination of a super-boom that has lasted for more than 60 years,” argues Soros. Of course, this financier has issued dire warnings before — his prediction of a global economic collapse in his book The Crisis of Global Capitalism, published in 1998, never materialised.
Even if Soros’ forthcoming book The New Paradigm for Financial Markets cries wolf again for the third time, the undeniable fact is that the pendulum is moving back again towards greater regulation and oversight by the State. The activism of the US Fed in bailing out banks like Bear Stearns; the stimulus package to revive the US economy, including cuts in interest rates and so on are clear indications of interventions that will not allow the system to go under as it did during the 1930s.
US Treasury Secretary Hank Paulson’s recent proposals for a modernised financial regulatory structure to make it more flexible and effective to deal with inevitable market disruptions exemplify this shift in emphasis. Whether or not these proposals finally become law before the next change in administration, laissez faire policies of yesteryear in allowing the markets to function unhindered by government interference or regulation are fast becoming passé with the current prospects of a financial meltdown.
Reflecting this mood, dirigiste interventions even by reformist governments in the developing world remain very much in place to contain the spread of the global crisis to their economies. Although the US financial crisis may not disrupt the India growth story, policy-makers are not taking any chances to allow capital inflows to destabilise the system. If the country’s caution towards full convertibility saved it from the Asian turmoils in the late 1990s, there is no tearing hurry to head in that direction at present.
At this juncture, the Indian government is concerned over speculative inflows flooding in and out of the system. Their quality also worries the regulators, which is why measures were taken earlier to regulate participatory notes, the main instrument through which portfolio inflows have come in. Curbs have been imposed on external commercial borrowings, with tighter prudential norms and modified end-use restrictions. These haven’t been relaxed as yet. The buzz regarding capital controls refuses to go away although the government hasn’t mentioned imposing such measures till now.
At a different level, the exigencies of combating the global food crisis and inflation have also occasioned dirigiste responses across the developing world. To check rising food prices, policy-makers in India, for instance, have already banned exports of rice and are cracking down on hoarders and speculators. Even though the price rise has somewhat eased of late, the government is thinking of banning futures trading on almost all farm products. The railways will henceforth only load wagons carrying grain from the Food Corporation of India than private traders. More such measures are likely.
The growing suspicion of allowing markets a freer rein is also reflected in the recent rhetoric of policy-makers bearing down hard on steel and cement producers to lower prices. In a bid to talk them down, the latter have been warned of tough measures — which hark back to the earlier economic regime when prices were controlled — if they did not desist from cartelisation or concerted moves by dominant producers to jack-up prices. Interestingly, barely a day after this tough talk, Parliament was also informed that no evidence of cartelisation has been brought to the notice of the Steel Ministry.
Manmohan Singh, for his part, has categorically stated that there is no going back to “blind controls” to combat inflation. At a time when members of the government and Left parties share a desire to ‘fix’ prices instead of allowing markets, Singh has also emphasised that ‘hands-off’ policies have been followed with regard to the economy. But with an agitation by the Left against the government for promoting ‘monsters of market forces’, it’s most unlikely that statist interventions will be rolled back, at least as far as food prices are concerned.
The upshot is that allowing market forces greater rein has fewer takers at the moment the world over. An important characteristic of the global market economy — in which goods, services, capital, and even people move around quite freely — has been the dominant belief in the magic of the market place, or what Soros terms market fundamentalism. Market fundamentalists believe that markets tend towards equilibrium and the common interest is best served by allowing participants to pursue their self-interest.
However, to Soros, all of this is an obvious misconception, because it is the intervention of authorities that prevent financial markets from breaking down, not the markets themselves. There is no inherent self-correcting mechanism within market forces — which pass through boom-bust cycles — that ensures financial stability. The current capitalist crisis clearly has forced a re-examination of this dominant ideological stance of the Reagan and Thatcher eras of the 1970s and 1980s.
The zeitgeist of our times thus has shifted to greater intervention and regulatory oversight over markets. Blind reliance on market fundamentalism has run its course as the world economy hovers on the brink of a generalised depression. Not surprisingly, parallels are being repeatedly drawn between the current end of the 60-year super-boom and the 1930s when radical critiques of capitalism surfaced till the Keynesian revolution saved the system from breaking down completely.
With no such revolution in the offing, the world economy is passing through its gravest crisis. Each country is left to fashion its own policy response to save itself from the turbulence all around. Perhaps a better mix between statism and reliance on market forces may emerge in the process. Maybe the fast-growing economies of China and India can balance the relative decline of the US economy and slowdown in the developed world. But this much is certain: the capitalist system is under threat as never before.