Monday, March 31, 2008

Taming Capitalism a.k.a There's no such thing as a 'free market'

Conservative newsmagazine the Economist released a report on the possible scenarios resulting to the subprime crisis. Months later a presidential candidate says the "r" word. It is pretty much a foregone conclusion that the US and the R.O.W. is headed for economic turmoil. Michael Lim of the Inquirer provides an excellent background to the origins of the crisis. Walden Bello characterises Capitalism's 'apocalyptic' mood.
The search for profitability is capitalism’s driving force, and increasingly, significant profits can only be obtained from financial speculation rather than investment in industry. This is, however, a volatile and unstable process since the divergence between momentary financial indicators like stock and real estate prices and real values can proceed only up to a point before reality bites back and enforces a “correction.”
For a background on what is going on coming from the perspective of developing countries, here is an excerpt of a paper I wrote a couple of semesters ago. Enjoy.


Capital today crosses sovereign boundaries with virtually no regulation from sovereign authorities. These transactions are largely closed to public scrutiny, as they occur within networks of financial institutions, protected by laws on banking secrecy. Unlike the actual exchange of commodities that are readily available for purchase in supermarkets or stores, the movement of capital today is removed from the consciousness of average citizens. Nonetheless, especially in recent years, the impacts of capital movements, whether they be in form of portfolio investments, foreign direct investments or debt service payments, have increasingly been ‘felt’ in ‘emerging market economies’ of the developing world due to perennial monetary catastrophes.

The ‘Debt Crisis’ of the 80s faded into memory as banks were assured by their governments and the IMF that their loans would get paid, rescheduled perhaps, but paid nonetheless. Capital shortage for the Third and Fourth Worlds, however, would not go away. The 90s presented a different kind of crises and indebtedness. If capital was owed to banks in the 80s, today they are owed to literally hundreds of thousands of private individuals investing in ‘emerging markets’ and all kinds of funds.

Governments ‘freed’ money capital by removing restrictions on international capital movements. The very first to do so were Canada, Swtizerland and Germany in 1973. In 1974 the US did the same, followed by the Britain in 1979, Japan in 1980, France and Italy in 1990 and Spain and Portugal in 1992.

In Economic orthodoxy, the freedom of financial markets were supposed to effect a redistribution of capital world-wide. Capital was supposed to “flow from capital-rich developed countries to opportunity-rich emerging countries (Eatwell 1997: 11).” Not only that, markets were also expected to discipline governments for greater ‘efficiency.’

The IMF itself advocated deregulation of capital controls among members. Deputy Managing Director Stanley Fischer claimed capital account liberalisation would “outweigh the potential costs," hence the need to adapt “economic policies and institutions, particularly the financial system [to] operate in a world of liberalised capital markets (Singh 2003: 195).” Its sister institution, the World Bank also encouraged opening capital markets to foreign portfolio investment (Eatwell 1997: 7). Interestingly, China had not liberalised its capital account, but has maintained economic growth for the last two decades.

The result was the permutation of money into what Marx might recognise as ‘fictitious capital.’ The last thirty years has seen the creation of credit and wealth never before witnessed in Capitalism’s history. From 1975 to 1994, the stock of international bank lending from grew from $265 billion to $4200 billion despite crises. This is perhaps because of the nature of the debtors themselves. Unlike businesses or individuals that can declare bankruptcy, Sovereign states will always be able to pay as long as tax payers are born every day.

The Bank of International Settlements (BIS) estimated the value of exchange traded derivative products at $13.5 trillion in 1999. Over-the-counter (OTC) transactions, i.e. private transactions between institutions was estimated at $72.6 trillion.

Increasingly, investments have moved away from the “bricks and mortar” kind to short-term portfolio investments, the kind that can pull out quickly at the first sign (imagined or not) of trouble. The most obscure, highly ‘conceptualised’ capital circling the globe today such as swaps, options, derivatives and futures, are perhaps better explained by mathematicians than the space in this discussion allows. Indeed this ‘electronic herd’ of money managers, armed with computers, use algorithms and pure mathematical formulae to ‘read the mind’ of the market.

Nevertheless these innovations in finance have favoured big businesses instead of small businesses. Strange writes, “Unequal access to credit is certainly a feature of the international financial system…Big businesses is favoured by the innovations of finance…big businesses has an increasing influence on state policies and uses it to serve its own interests.

Increasingly, the way these highly liquid forms of capital move have little to do with the real economy. Investors wanting a quick return would prefer portfolio investments over FDI because they are easily recoupable with a few strokes on computer keyboard.

Surreptitiously, the phrases ‘economic fundamentals’ or ‘the real economy’ as distinct from the weird world of high finance…Indeed the financial sector is now often dismissed as a casino society where speculators play out their compulsive habits (Hoogvelt 1997: 81).

The past decade has seen one financial crisis after the next as rogue capital chase profit opportunities across the globe. Like the tide, money instruments ebb and flow in the developing world with the whims of the market. Their flow triggered imaginary ‘prosperity’ in the hands of local capital and there was some growth due to increased local consumption. Their ebb triggered crashes in Mexico in 1994, Asia in 1997, Brazil in 1998, Russia in 1999 and Argentina in 2001 (Held et al 1999, Kindleberger 2005).


It would be interesting to see what the United States does in the coming months. So far it is the biggest victim of speculative capital. (See, Third World countries don't really matter). It also has the most power in taming the beast its foreign economic policies have unleashed since the 1990s. Obama likes the word 'regulation.' Finally.


stuart-santiago said...

good stuff the excerpt. easier to read and understand than walden bello's jargon, thats for sure. what does the rest of the paper say? it's stuff like this that we should be disseminating to our so-called political leaders who continue to believe in gma and her freemarket ideology, never mind that the results are in and it's a big flop.

sparks said...

Hi Anna,

Thanks. The rest details the new conditionalities IFIs (international financial institutions) put on debtor governments. They're called 'governance conditionalities'. I have nothing against these per se - if only IFIs were also subject to the same principles, i.e. that they be just as accountable and transparent.

Cocoy said...

I'm not a huge fan of regulation but I recognize that there must be some degree of accountability to check greed.

I find the market today to be... predictably crazy. it's a crisis of confidence. on one hand, even as the markets pound, there are stocks and companies that are still producing and doing things right and often makes me wonder why their stock isn't performing.

Anyway, "fortune passes everywhere" and there is always someone who makes money even in this bear market.

you might also like to watch Lindsay Campbell's take on Bush's stimulus package, aptly titled "Stimulus Package, My A**" --- I think you can guess what she's driving at but her opinion is quite interesting. Will Americans see the light... and by extension the rest of the world? Who knows?

Anonymous said...

Futures, derivative, schmerivative...just ought to worry more about growing that $600 in your St. George savings account.