But there has never been a nation in the history of the world that saw its economy decline and maintain its military superiority” — observed Barack Obama, the Democratic Presidential candidate, during the recent Town Hall debate with his Republican rival John MacCain. A profound statement that captures the unfolding societal dynamic of the world’s sole super power — the United States of America. A nation now mired in the worst economic morass that mutated from a housing bubble to mortgage defaults which drowned many financial institutions and ultimately froze normal credit lending operations among banks.
In a matter of 14 days, trillions of dollars are wiped out from the shares the world over forcing governments in rich countries and even some emerging economies to intervene in ways that were hitherto considered as sacrilege. The US alone poured over a trillion of dollars to contain the financial inferno that began with the collapse of Lehman Brothers. US Treasury Secretary Henry Paulson “was playing financial Russian roulette” when he allowed Lehman to fail... “Lehman’s failure caused the world financial crisis, already severe, to get much, much worse,” Paul Krugman, the noted economist who won this year’s Nobel Prize for Economics, wrote in his column in the New York Times.
That fire is now rapidly spreading to the vitals of the real economy in the US and else where, especially in Europe. The US administration was forced to take war-like measures that include the nationalisation of Fannie Mae and Freddie Mac as well as AIG, the world’s largest insurer. It also provided government deposit insurance to $ 3.4 billion in money market funds and for the first time, offered direct credit to companies for their commercial paper to stop the panic. And it is now getting ready to provide capital to its weak banks to enable them to start lending to their counterparts and simultaneously preparing the ground to buy up about $700 billion of so-called toxic mortgage-related assets.
US President George W Bush declared that Main Street’s future depends on the survival of Wall Street. Hence, everything must be done to ensure that the crumbling Wall Street is not reduced to dust.
On the other side of the Atlantic, nations in Europe are also engulfed by these unstoppable financial fires that originated from the US. British Prime Minister Gordon Brown announced an intervention amounting £500 billion that includes picking stakes in its battered banks. He campaigned for a similar step by all the European Union’s member states ostensibly to save the world. The next few days, said Brown in an interview to The Observer, would prove critical as the world tried to drag itself back from the financial brink after last week’s stock market panic.
But underlying these catastrophic developments is a simple truth: the market is not a “self-regulating” mechanism and the age of deregulation and low taxes is over at least for the time being. Over sixty years ago, the famous Hungarian intellectual Karl Polanyi warned in his book The Great Transformation that the free market capitalism is inherently unstable and also destructive like a thermo nuclear weapon. Polanyi suggested that the Great Depression in 1929 ultimately led to fascism.
Perhaps, that might not happen this time around. However, one cannot ignore the fact that the Nazi empire was also economically broke but militarily far superior to the Allied powers. Today, the US is facing its biggest geo-economic crisis and will be forced to look for help and support from China and other emerging economies. Indeed, “when the failed god of Marxian socialism gets replaced by the ancient god of libertarian laissez-faire, watch out,” warned the Noble laureate Paul A Samuelson nearly a decade ago. “International capital movements somehow were not led by an invisible hand,” he said, suggesting presciently that The God Of Pure Libertarian Capitalism will fail soon.
