The Bigger they are...

The Bigger they are…

There are now a slew of films on the “financial crisis”. It has become something of an independent genre in Hollywood and amongst independent film makers trying to make sense of the turmoil. Most of them, despite massive simplification and dramatisation, are still a little dry and difficult for non-financial people to grasp. But, fact is, the prospect of double-dip recession in Europe and America, and its knock-on effect on all parts of the world including India and China, is now omnipresent. This financial hangover will persist for several years to come and profoundly change the way the world takes its decisions.

In 2008, it began with the bail-out of investment bank Bear Stearns followed by the collapse of “Too big to Fail” Lehman Brothers, the 4^th largest bank on Wall Street. The latter, like the former, was brought down by huge real-estate assets on its books which had lost most of its value in the bursting of a long-standing property bubble.

Investment wizard Warren Buffet, the “Oracle of Omaha”, went hunting for bargains, and made some investments on Wall Street. But he was, in his gentle chiding style, critical of a developing culture in which the banks had been taking substantial trading risks using their own money. The scale and multiplier effect of such investments dwarfed the prior system of trading only on behalf of those clients keen on higher than usual returns.

AIG, one of the world’s largest insurers, was the next giant institution to wobble badly from the contagion of the investment banking excesses, and was saved only with the help of massive Government assistance on both sides of the Atlantic.

This was followed by practically every icon on America’s “Main Street”, including the largest property mortgage companies, automobile companies, engineering and appliance companies, high-street businesses, all facing considerable difficulties, even as the US economy slowed to near-negative territory.

But, looking back from 2012, America and Europe, has survived the first onslaught of a financial jeopardy so severe, that it has not been seen since the events that led to The Great Depression of the 1930s. Credit however goes to the Obama Administration in keeping the situation from spinning into a cascade of financial ruin by bold stimulation, swift intervention and nationalisation where necessary.

At the time, and since, the crisis has been portrayed as a consequence of the overweening greed on the part of the financial men which could, and would, be reined in by greater Government supervision. As it turns out, this was not quite the whole truth, because now it is entire countries and regions, including the EU, that are going down.

The entire 17 member EU is in deep financial trouble. In hindsight, it is probably because it is a quasi-financial union with no control over the financial policies and actions of the individual countries that compose it. But now, this weakness cannot be attributed to only certain countries in it that have been irresponsible, because all of them, indeed all of the Western world, has been on a sovereign borrow-and-spend spree ever since massive deregulation was introduced in the 1980s. President Ronald Reagan started the dismantling of “big government” in America and set off the trend elsewhere. So it isn’t just private greed of the finance men chasing ever bigger payoffs for themselves, but the “new normal” of national debt, several, no, many, times the annual sovereign income, that has brought about the global financial crisis.

So much so, that if the situation keeps deteriorating towards a break-up of the EU, the demise of the Euro, or a failure to prevent economic collapse of major financial institutions in Europe; it will also have a catastrophic effect on the American economy. The US, in fragile recovery presently, will also be driven into another recession.

The American presidential elections, due in November, will also be affected by international news of this order. Mr. Obama therefore, has a massive stake in defusing the crisis in Europe before it snowballs out of control. Of course, his success in doing this will be good news for everyone.

But right now, Spain, is the most recent recipient of a first tranche Euro 100 billion bail-out. Greece, Ireland and Portugal, have all received hundreds of billions to prop up their Sovereign debt servicing and banking systems.  Italy may be next in line requesting help. The world no longer even talks of the early collapse of tiny Iceland, in late 2008.

India’s own woes of policy paralysis, immense corruption, high commodity prices, inflation, huge, if not yet alarming national debt, deficits climbing ever higher, poor international trade statistics, and sharp economic slowdown, are about to be compounded further by these global developments. Chief Economic Adviser Kaushik Basu has been recently quoted as saying we won’t be “impervious” to developments in Europe, currently India’s biggest export market.

Domestically, we are threatened not only by poor productivity, stalled reform, bad infrastructure, high interest rates, dependence on imported fuel, and weak economic data; but our policy obsession with an ever growing welfare agenda that we simply cannot finance without worsening our deficits beyond already very high levels.

In addition, coalition partners with great power, such as Mamata Banerjee of Paschimbanga, are demanding a “financial package”; meaning massive aid and grants, plus a rescheduling and part waiver of the state’s accumulated debt from the Centre, just in order to stay afloat.

In the private sector too, many media groups in the TV broadcast space are in financial trouble, and have sold stake in recent months to industrial houses keen on obtaining a foot-hold in the business. The Kishore Biyani led Future Group too is selling non-essential assets and stake in its companies to retire mountains of unsustainable debt. The airline space is replete with examples, most notably Kingfisher Airlines, crippled, not just by difficult regulatory and policy impacts, but its own over-leveraging.

The moralists are fond of saying nothing comes without consequence and history is indeed replete with the playing out of unintended consequence, but the key point of fiscal responsibility cannot be set aside.  It is what has got the world in this mess. Being let off the leash cannot be taken as a licence to run amuck.

After all, regulation is just a way of having the Government play the authority figure. Introducing deregulation was intended to free entrepreneurs to exercise their initiative. Some want to go back to the old ways before all this happened, but since no one is exactly blameless, the best we can aim for is a much greater degree of self-regulation going forward.

(1,097 words)

12^th June 2012

Gautam Mukherjee

Published as "How the giants fell" in The Pioneer as Edit Page Leader on June 14th, 2012 and online at www.dailypioneer.com and in the ePaper. Also archived under Columnists at www.dailypioneer.com, home page.