The world financial institutions are in turmoil. On Monday, 15 September 2008, Lehman Brothers, one of the bluest of the blue chip banks, filed for bankruptcy, having lost over 98% of its value in a matter of days. About the same time, another giant of US Investment banking, Merrill Lynch managed to avoid similar fate as Lehman Brothers by allowing itself to be taken over by Bank of America, a commercial bank. In continuation of this trend of global financial meltdown, on Tuesday 16 September 2008, the US government decided to rescue another mammoth of the finance sector, AIG, in a staggering $85bn bail out.

It has certainly been a terrible last few months for financial institutions in the West and the ambivalent reactions of the US and British governments to these crises indicate their confusion on how to deal with the problems. Since the collapse of communism and its economic model, the capitalist system has come to the fore as the global economic model. During the Cold War era, the intellectual economic battle was whether a regulated economy {the communist model} was more beneficial and efficient than the laisses faire economy of the capitalist West. Since the collapse of communism, capitalism has attained a status of financial beatification and has become the domineering economic model of the world.

The most crucial aspect of capitalism is its reliance on the implicit ability of the market to correct itself without the intervention of the government. In a perfect free market economy, it is the individual players who take major decisions in the market and not the government. These decisions are informed by market forces, which instinctively decide the right prices for products. Thus, in a free market economy, the government should not to interfere and should let market forces determine success or failure of an enterprise, and organisations like AIG etc should have been allowed to collapse. The trouble is there is no such thing as a perfect free market economy and in the last few months, the governments of the US and England have been taking decisions that run against the spirit of capitalist purism.

Let’s start in England. The Northern Rock was the biggest provider of mortgage funds in the UK. However, by mid-2007, as a result of the crisis in the sub-prime mortgage lending in the US, Northern Rock ran into difficulty and needed financial bail out from the UK government. The UK government initially would not countenance this and, in the spirit of the free market principle, asked the bank to seek private sector led bail out. When this was not forthcoming and bankruptcy was inevitable, the UK government had to interfere and renationalise the bank. It remains a nationalised company.

In the US, under the incumbent right-wing Republican government of George bush, there have been a number of financial decisions taken that go against the spirit and letter of a free market principle. In the summer of 2007, when there was uncertainty in Wall street, the US Federal Reserve bank pumped money into the banks at a cheap rate to ensure funds were easily and cheaply available for inter-bank lending; similarly when the US economy was suffering its worst credit crunch, the bank again intervened by cutting the interest rates in spite of concerns and complaints by laisses faire purists who argued such action would trigger inflation. On the 8 September 2008, the US Government announced a plan to rescue the two critical players of the US mortgage industry: the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, both colloquially known, respectively as Fannie and Freddie. The two organisations owe or guarantee half of the over $12 trillion mortgage debts in the US and would have undoubtedly collapsed had the government not intervene.

Although the same government has refused to bail out others like Lehman Brothers, Bears Stern etc, the fact remains that the UK and US governments are taken pragmatic policies unencumbered by ideological fixation or purism. The idea that the market can somehow mysteriously corrects itself without government intervention is clearly as impracticable as the idea of full governmental control of communism. Communism failed because, amongst others, it engendered abuse by its operators. In the same vein, unfettered capitalism inevitably leads to crass greed, abuse and arrogance. In the UK and the US in the last few years, the ‘growth’ in the property market was patently unsustainable but, in the spirit of siddon look of free market, governments did nothing about it. The hen has now truly comes home to roost and unfortunately ordinary citizens will suffer.

What then is the lesson that can be learned from the whole mess? The starting point is that monetary policies should be taken on the basis of their ultimate good to the people and not on some theoretical ideological consideration. For a long time now, investment bankers in the City of London and Wall Street have toyed with people’s fortune without government doing anything about it. The Modus Operandi of Investment banking is geared towards speculative trading {either in futures, securitization etc} in which inevitably, someone is bound to lose substantial amounts of money whilst the traders smile their ways to the banks. This cannot be right. It is hoped that once the post mortem of the present crises is concluded, the governments all over the world would come to grip with the fact that unfettered laisses faire will inevitably lead to even worse crises.

Adebayo Kareem.

Solicitor,

1-9 Romford Road

Stratford London

E15 4LJ

omoalufa@hotmail.co.uk

Robot  # 1 | 19.09.2008 01:59

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