“Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a byproduct of the activities of a casino, the job is likely to be ill-done.”
– John Maynard Keynes, 1936.
The International Monetary Fund’s Global Financial Stability Report is typically very sober in its assessment of the world. The current report, released on September 21, warns that the world economy is entering a “danger zone.” The IMF downgrades its estimate for global growth from an already low 4.3 per cent to 4 per cent , with U. S. growth cut from 2.7 per cent to 1.8 per cent . “For the first time since the October 2008 Global Financial Stability Report, risks to global financial stability have increased, signaling a partial reversal in progress made over the past three years.” In other words, all the measures taken to stem the hemorrhage caused by the global credit crisis of 2008 onward have run their course, and we are back to the day when Lehman’s shutters came down.
The IMF could not ignore the continued political and economic crisis in the Euro-zone, nor could it turn away from the credit downgrade of the United States. Nor indeed could the IMF blind itself from the turbulence of the financial markets (whose most dramatic victim was UBS, where its Delta One desk got run over by its short position on the volatility of the Swiss Franc). Three processes have sharpened the IMF’s report: first, the United States has been unable to heal the acute trauma in its housing market; second, the European banks are in an adverse feedback loop between balance of payments distress in Club Med (from Portugal to Greece) and their own reserves; and third, low interest rates have moved private finance away from the surface into the furtive world of the shadow banking system (hedge funds and so on).
Both Olivier Blanchard, chief economist at the IMF, and José Viñals, financial counselor at the IMF’s Monetary and Capital Markets Department, seemed a little more nervous than usual. Viñals knows the stakes in the Euro-zone. He used to be the Deputy Governor of the Bank of Spain, where the financial reserves look as bad as the water reserves in the Town of Dirt (Rango, 2011).
The mantra of the Atlantic world has been austerity. It is assumed that if government budgets are purged of social spending to balance budgets, growth will ensue. This is a strange kind of economics. A chronic problem is the lack of effective demand (“consumer confidence”), one that is indexed in the United States to the flatness of wages with momentary transfusions of “confidence” produced by cheap credit that has created an as yet un-burst bubble, personal debt; as of May 2011 that stands at $2.4 trillion. The massive cutbacks of government spending will only flatline demand, and produce no hope for any growth in the short run. Austerity programs might not increase consumer confidence, but they do indeed create confidence among the financiers who love the idea of “sound finance.”
The IMF identifies the problem on the one hand, and then puts its other hand into the blender: the current crisis cannot be solved until the politics is managed. The “political leaders in these advanced economies have not yet commanded broad political support for sufficiently strengthening macro-financial stability.” Financial and monetary tools are strained. What is needed is a more effective communications strategy, to convince the public to go along with austerity measures to create sound finance, and to do so by bringing down the ideological rhetoric that alienates the people from what the IMF sees as apolitical Reason. If only the hoi polloi could be made to see reason.
What the IMF and the governments of the Atlantic world do not acknowledge, for political reasons, is the class power of finance capital which controls the money markets where governments and the IMF must go to borrow if they wish to conduct stimulus spending or lending to distressed countries. The confidence of the financiers is a far more important emotion than the confidence of the consumers.
In a time of crisis, the humane approach would be to extend stimulus spending until such time as millions of people are not reduced to the condition of bare life. To do so, the governments must be willing, as the economist Prabhat Patnaik put it, to “exert adequate control over the financial system to ensure that public borrowing is always financed, so that the State does not become a prisoner to the caprices of financiers.” The debate between austerity and stimulus is carried on as if these are two rational positions held by two rational sets of people. Those who clamor for austerity are rather agents of the financial class, which is loath to see the value of its wealth decrease; those who call for stimulus are ethically correct, but absent a direct class challenge to the financiers, floundering on illusions. The only real solution to the north Atlantic crisis is, as John Maynard Keynes put it, to “euthanize the rentier.”
It is this impulse to challenge Wall Street directly that shows how reasonable and necessary is the Occupy Wall Street protest movement underway in lower Manhattan (not far from where George Washington was inaugurated President). Those who have decided not to leave their tarpaulin homes, and who are being brutally treated by the New York police department, have an instinctively better solution for the country than those who want to throttle demand further by austerity (the GOP) and those who want to call for a stimulus without any challenge to the financial mandarins who would rather send the U. S. economy into a swamp than lose their own power over the world economic system (Obama).
Absent a fight against finance capital: to call for austerity is an act of cruelty; to call for a stimulus is illusionary.
The IMF and the U. S. political class do not wish to challenge the financial class. Indeed, the IMF warns against “financial repression,” “With sovereigns under financing stress and economies struggling to deleverage, policymakers may be tempted to suppress or circumvent financial market processes and information.” This is to be avoided, says the IMF. They want the saviors to come from the Global South, which, the IMF notes, “are at a more advanced phase in the credit cycle.” What the IMF would like to see is China and India turn over their surpluses to the North as stimulus, for these countries to export less and import more.
What is so strange about this is that it was the IMF that acted as the spear of international capital when it advocated for India and China to become export-oriented economies and turn away from national-development policies. China is now retro-fitted to export cheap goods to the Atlantic economies, and its own problems with effective demand make it hard for its masses to buy Atlantic-made goods. Instead of having these countries turn their stimulus toward the creation of demand in their own countries (by lifting their populations out of poverty further, by infrastructural spending, by creation of new technological means to prevent ecological catastrophe), the IMF wants them to manage their “financial imbalances” by sending their money North. Nothing of the kind was asked of the North in the 1980s and 1990s, when the financial arrows pointed in the other direction.
The Chinese now say that they might help the Euro-zone out if Europe will follow some “conditions” set by the Chinese (the IMF language in the era of structural adjustment was “conditionalities,” such as the cut-back on human spending in the South during the 1980s as a precondition for loans). The Chinese want the Europeans to stop their law suits around market infringement, which is another way of saying that the Chinese wish to dent the intellectual property regime – one of the few mechanisms left that guarantee the jobless growth that sustains the United States. Why is China in a good way now? The IMF says that it is doing well because of its “policy-induced lending boom,” also known as its stimulus in 2009-10 that took place absent the overwhelming power of finance capital.
It is far easier to give China the evil eye than to point a finger at the financial class. All the talk about currency revaluation and barriers to trade are the pettifoggery of those with no real argument to make. Down at Wall Street, ordinary Americans have decided to stand up against finance capital. They have no need to take recourse in the drumbeat of economic xenophobia or of the illusions that the Buffets of the world are the forerunners of social justice. What they want is for the jackboot of finance to be lifted off the people of the world.
VIJAY PRASHAD is the George and Martha Kellner Chair of South Asian History and Director of International Studies at Trinity College, Hartford, CT His most recent book, The Darker Nations: A People’s History of the Third World, won the Muzaffar Ahmad Book Prize for 2009. The Swedish and French editions are just out. He can be reached at: firstname.lastname@example.org