A crisis in predictable chapters

Comfortably
cracked

By
Pablo Ramos                                                                     Read Spanish Version
pabloramos@prensamercosur.com.ar

The
financial sector once again casts dark clouds over the world’s
economic horizon. Outright free trade once again turns to state
intervention to save the shareholders’ patrimony.

"The
child is grown, / The dream is gone, / I have become comfortably
numb."

(Pink
Floyd, Comfortably
numb,
Lyrics by Roger Waters, Pink Floyd Music, "The Wall,"
1979.)

Roger
Waters composed Pink Floyd’s best theme, and the best theme of the
entire 1970s, leaving us with that unforgettable image of the child
who abandoned childhood traumatically yet comfortably. Capitalism
became worldwide in the mid-19th Century and expanded through the
principles of free trade that then dominated economic life. For
eighty years (1850-1930), the world economy expanded unceasingly and
almost without state intervention.

That
cycle ended abruptly in 1929. On Oct. 24 of that year, Black
Thursday, everything went to hell on wheels. The world was plunged in
a depression from which it emerged almost a decade later. But the
world was never the same again. Whereas the ideas of Adam Smith had
been obeyed until then, the emerging conceptual counterpart was the
idea of state intervention propounded by John Keynes.

Franklin
D. Roosevelt’s "New Deal," Adolf Hitler’s
national-socialism, and Keynesianism itself in Britain gradually
lifted the countries out of the Depression, although the greatest
promoter of growth was World War II (1939-1945). Once the battles
were over, there was an almost absolute consensus among the Western
nations on the need for state intervention in the economy. In fact,
the Bretton Woods institutions (the International Monetary Fund and
the World Bank) bore an authentic Keynesian brand.

In
the 1950s, capitalism’s 25 golden years began; Economic Science
indicates they ended in the first half of the 1970s. World economy
expanded, social differences lessened, but the world began to
stagnate and inflation increased. That phenomenon is known as
"stagflation."

This
is when old-style liberalism awakened from its lethargy, updated and
rechristened as neoliberalism. Its mentor was Milton Friedman and its
followers, most of them graduates of the University of Chicago’s
School of Economics, the so-called "Chicago boys." The
first to adopt this paradigm was the government of Augusto Pinochet
in Chile, followed by Jorge Videla in Argentina, Ronald Reagan in the
United States and Margaret Thatcher in Britain.

Why
this long introduction? Because it’s an instance where it appeared
that Mankind had learned its lesson. Not so. The week that began
Sunday, Sept. 14, demonstrated that we repeated what we did once. We
experienced an episode of dèjá
vu.

So
far this century, the world has been going through a period of "fat
cows." Most countries and regions grow, and the prices of basic
goods remain high, propelled by demand. The values of commodities
reached historic levels, which generated a huge liquidity in the
so-called Third World.

When
there is great liquidity, the money is basically channeled toward the
financial markets, especially those in the central countries. People
invest in different assets without much control. In turn, the banks
usually reduce their exigencies at the time they grant credit. The
ingredients for a bubble are placed in the bowl.

Nevertheless,
the dominant economic paradigm prevents any type of regulation, as in
the 1920s. And all the bubbles burst.

That’s
what happened. As this article was published, the meter was running
and nobody knows the value of the rescue performed by the U.S.
Federal Reserve, the European Central Bank, the Bank of Japan, the
Bank of England, and others. It is a figure that already exceeded
half a billion dollars, or 25 percent more than Argentina’s gross
domestic product.

In
other words, the free-marketeers had to be rescued (once again) by
state interventionism.

Now
what? On one hand, the grave crises that begin in the financial
sector of the economy, which does not generate wealth, end up
affecting the real economy, which does generate wealth, income and
employment. Whereas the expectations were pleasing until a few days
ago, the outlook changed radically.

Because
the interests at stake are those of financiers and corporations, the
First World powers — the same that pressure poor nations to not
intervene and allow "the market’s invisible hand" —
injected immoral amounts of fresh money to rescue institutions that
they did not or could not (or didn’t want to) control.

"Risk
qualifiers" deserve a separate chapter. The function of this
type of financial institution is to study the possible objects of
investment (states and enterprises) and recommend, or not, a money
outlay to their clients. They have a measurement system, from A to D,
where AAA is the best classification.

Lehman
Brothers was one such qualifier. Lehman Brothers Holdings Inc.,
founded in 1850, was a worldwide U.S. financial-service company until
this past Sept. 15, when it declared itself bankrupt. Ten days
earlier, it had issued a report critical of the future of the
Argentine economy, which prompted President Cristina Fernández
to answer publicly.

Did
it recommend its shareholders to get rid of their shares because in
10 days the company would irreversibly head for bankruptcy?

The
next several days will be important for two reasons: to find out the
magnitude of the financial crisis and its duration, and what economic
paradigm will be used to overcome the approaching storm.

The
financial crisis perhaps will be controlled with some orthodox
measures in the next several days. But the worldwide recession, or
depression, will be harder to avoid. The same way that Pink accepted
the end of the dream "comfortably numb," the world’s
economic actors seem to emulate Bob Geldof in that icon of
cinematography called "The Wall."

Pablo
Ramos is a journalist for the Mercosur News Agency.