Thursday, October 2, 2008
MARKET SAVES, IF SAVED ITSELF
By Sharad Joshi (Member of Parliament, Rajya Sabha, India)
President Bush addressing his nation on the evening of September 24 made it clear that the financial crisis that America was facing was serious. He took pains to inform the nation about the action he proposes to take to meet the situation. The help line package may come to over $700 billion!
The United States government has already extended a last-minute $85 billion lifeline to American International Group (AIG) – the troubled insurer. Lehman Brothers, Frannie Mae and Freddie Mac will also benefit from the helpline.
That means Washington has turned away from decades of rhetorical about the virtues of the free market and the dangers of governmental intervention. This was not the United States government or the International Monetary Fund that had advised Asian countries a decade ago.
Will the United States be able to show itself off as the beacon of unfettered free-market capitalism?
State intervention can take various forms – outright nationalization, subsidies, welfare measures, Keynesian type of pump priming, budgetary and monetary policies are some examples of state intervention. The rescue job of the US administration was really an SOS operation.
The opponents of markets in India are hardly able to conceal their glee at the discomfiture of the United States and the native liberals. “Did we not always say that markets cannot work all the time and that they require some kind of monitoring and periodical course correction?”
The financial crisis in the United States has not come out of any imperfections of the market structure or mechanism. It brings out the cupidity of a handful of individuals who allowed themselves to be tempted into making subprime loans and citizens who are prepared to borrow beyond their means.
The trouble came because the bankers and the financiers for a moment allowed themselves to drift from the course of prudent bankers. This has happened in India and it can happen anywhere else in the world. Does a “South sea bubble” mean that free markets cannot work on their own without state intervention?
A prinicipal reason why the Bush administration was forced to act quickly and throw a helpline to the sinking companies was that it faces the prospect of elections just around the corner.
The American policies in Iraq and Afghanistan have become a burden for the Republicans. They can meet the challenge of the Democrats only if the domestic economy is in order.
The famous American humorist Art Buchwald commented on President Nixon’s Watergate crisis. “the reaction of the people to the crisis is determined in function of the beef prices in the market.”
The Bush administration could have carried the burden of Iraq and Afghanistan if only there were no recession and unemployment in the American economy.
Politicians the world over cannot take a longer than five year view of any situation. They have to act and remedy the situation before it starts affecting the prospects of the next elections.
The people at large can afford to have a much longer view than the politicians. However, even the common man’s perception does not allow him to see over a hundred or 200 years.
The average lifespan of a citizen is around 60 years. The first 20 and last 20 years do not play an important role in a citizens perceptions of economic systems. He can see at the most for upto 20 years. However, his attitude is likely to be governed by what is likely to happen in the next 10 years.
It is this gap between the sight spectrum of the politicians and of the citizens which is likely to cause serious problems for any economy governed entirely by the free market.
Economic systems work very much like the human bodies. It is the basic principle of naturopathy that bodies pick up diseases only when the human brain is allowed to make decisions that is contrary to the body instincts. All excesses in food and drink come from the cerebral cupidity and not from the working of the body itself.
Most medicines tend to suppress the symptoms and provide temporary relief without addressing the basic causes of the malady.
The subprime loans in the American financial system came at a time when the Bush administration was caught by its throat. It could not afford to do what the government of South Korea did at the time of the Asian crisis and let the miscrea banks just sink. Instead it went for a hefty helpline to the embezzlers at the expense of the taxpayers.
The miscreants, certainly, did not indulge in subprime lending without some kind of personal gain. The decision of the Bush administration will give some solace to those whose jobs may be saved. But in the long run it will encourage embezzlers who will always expect the government will not fail them and come to their rescue when it comes to the crunch.
There should be no doubt that the markets are self-correcting in the long run. The celebrated Vedic verse `dharmo rakshati rakshitah’ which means `religion protects, if protected in its own turn’ and this is true of the markets as well.
Markets protect if allowed to function. It is true that the self-corrections cycle of the markets take much longer than what politicians and citizens can see. It is also true that it will be extremely difficult to convince a citizen at any given time that he needs to suffer so that his grandchildren may benefit.
It is unfortunate that the electoral contingency made President Bush decide in favour of market intervention. That he has asked other governments to follow suit will certainly take away his moral authority to preach globalization of the WTO type. The next important decision President Bush may have to make will be about the Doha Round of the WTO.
What is the lesson for India in all this? On the number of occasions when the economic results were less than gratifying, the champions of liberalization have always argued that the defect was caused by lack of reforms and not excess thereof. The opponents of the market mechanisms, on the contrary, have argued that the entire malaise was on account of liberalization and lack of regulation.
Economic liberalization and globalization are not planks that can be easily sold to a political market.
The financial crisis of the type faced in the US now will make `entrepreneurism’ politically even more impossible than it is today. Socialism of any variety is easier to put up with for an average citizen. But disasters and collapse under socialism is far worse than the recession in the market at its worst.
But a true blooded Liberal need not despair. Perhaps, India an China and Europe may provide a better economic model than the US did.
Liberals need to be determined to keep ttheir flag flying till what is politically impossible becomes economically inevitable.