The severe financial crisis that has gripped the United States and engulfed Europe is the most important event of the past three month period. The onset of a global recession is imminent. The collapse of the Wall Street model of unregulated finance will have a major impact on the global dominance of the United States. This crisis has come at a time when there has been a confrontation between the US and Russia due to the crisis in the Caucasus and its resultant impact.

The US geo-political aims will be challenged by an assertive Russia. The events presage the weakening of US hegemonic influence and the hastening of the trends towards multi polarity in international relations. The United States has been gripped by a severe financial crisis which is still unfolding. This crisis has not come all of a sudden. Sometime back it was observed that:

“The collapse of the real estate bubble in the US, besides precipitating a recession in the US economy has also given rise to a worldwide credit crunch, because of the huge losses suffered by banks and financial companies. Stock markets across the world, from the Wall Street to the Asian markets including India, have witnessed successive crashes in the first few months of 2008 due to fears of a US recession.

The US establishment has been desperately trying to salvage the situation by cutting interest rates sharply, in order to help the financial system in reducing losses and reviving the stock market. Fiscal measures like tax cuts and increased spending plans are also being considered. However, these measures cannot prevent the recession in the US economy and its global impact.”

The financial crisis in the US has deepened considerably since then and has spread across the globe. The recently released IMF World Economic Outlook (October 2008) describes the crisis as “the most dangerous financial shock in mature financial markets since the 1930s”.

The bankruptcy of Lehman Brothers, the fourth largest investment bank in the US, marked the beginning of the financial meltdown in September 2008. Another investment bank Merrill Lynch was taken over by the Bank of America through Government facilitation, similar to the manner in which Bear Stearns got taken over by JP Morgan Chase some time ago. The biggest investment banks, Goldman Sachs and Morgan Stanley, have decided to transform themselves into ordinary deposit-receiving banks.

Two mortgage lending institutions, Fannie Mae and Freddie Mac have also been nationalized to prevent their collapse. AIG, the world’s largest insurance company, has managed to survive for the present through the injection of funds worth $85 billion from the US Government. Similar problems are being faced by other advanced economies like UK, Japan and of West Europe.

The US Congress has recently approved a $700 billion bailout package proposed by the Bush administration to tackle the crisis by infusing public funds to buy up the bad debt of the banks and financial institutions and prevent a financial collapse.

The British Government has followed suit and announced a £ 400 billion rescue plan for its banks and financial institutions involving direct public investment in banks, deposit guarantees and short-term loan facilities. Iceland, a small European country, has almost gone bankrupt owing to the losses suffered by its banks, which has forced it to shut down its stock market and stop trading in its currency.

The three largest banks have been nationalized by the Icelandic Government. However, the global financial markets continue to remain in turmoil despite the Government bailout packages, since the losses Accumulated by the banks and financial companies are estimated to be much higher. In an unprecedented move, Central Banks across the world like the US Federal Reserve, the European Central Bank and others in England, China, Canada, Sweden, Switzerland and elsewhere have cut interest rates in a coordinated manner in order to prevent a drying up of credit flow into the financial markets. The impact of these desperate measures to prevent the downslide remains uncertain.

These events, which are being compared to the Great Depression of the 1930s even by the IMF, have important implications. A key aspect of imperialist globalisation has been financial liberalization, which has meant the opening up of the financial sectors of capitalist economies to unregulated flows of international finance capital.

Through the past two decades several developing countries; Mexico, Thailand, Malaysia, Indonesia, South Korea, Russia, Turkey, Brazil and Argentina; have all witnessed financial crisis and currency crashes on different occasions, caused by the activities of speculative finance. Now with crisis engulfing the financial sector of the US and other advanced economies, the destabilising character of international finance has got fully exposed.

The excesses of speculative finance under the cover of “financial innovations” have played havoc with the stability of the global financial system, shattering the myth of “market efficiency”. While the multinational banks and their executives, have made enormous profits out of their speculative operations over the past few years, once they have suffered losses, Governments across the advanced capitalist countries have felt obliged to bail them out using taxpayers’ money.

It has been widely reported how the top executives of the banks and financial companies drew huge bonuses months before those institutions collapsed. Government bailout of these failed institutions without fixing any responsibility for the greed and recklessness of the speculative elements, which have precipitated the crisis, will affect the credibility of the system.

The financial crisis will also have an adverse impact on the real economy. The slowdown of the US economy has resulted in the loss of 1,59,000 jobs in August – the highest in the past five years. The rate of unemployment has climbed to 6.1 per cent.

Defaults on mortgages has rendered thousands homeless. The stock market’s decline has wiped out 2 trillion dollars in the retirement savings of the American people in the past 15 months. For more than a decade, global economic growth has been driven by the US economy. The huge current account deficits run by the US, enabled countries across the world, to grow through exports of goods and services
to the US market. While the adoption of neoliberal policies has meant shrinking public expenditure and a shift away from domestic market oriented growth in most capitalist countries, the US has provided the major market for the export-oriented growth regime under imperialist globalisation.

With the financial crisis and the consequent downturn in the US economy, the sustainability of the global growth process has also become questionable. In its latest World Economic Outlook the IMF has warned that: “On an average annual basis, global growth is expected to moderate from 5.0 percent in 2007 to 3.9 percent in 2008 and 3.0 percent in 2009, its slowest pace since 2002. The advanced economies would be in or close to recession in the second half of 2008 and early 2009, and the anticipated recovery later in 2009 will be exceptionally gradual by past standards…There are substantial downside risks to this baseline forecast.”

The global financial crisis is a result of the financing of the global economy and at the expense of real production. The depredations of an unregulated financial system which is based on the “market know-all” philosophy is now affecting the real economy. The crisis is a serious setback to the neo-liberal dogma which has dominated the world since the 1980s. The effects of the crisis on the people in different countries should provide the basis for the working class and all sections of the working people to organize the fight back to reverse the neo-liberal policies.

R.S.Dahiya