Report on Symposium: What Can We Learn From the Global Financial Crisis?
A symposium on “What Can We Learn From the Global Financial Crisis?” was organized in New Delhi on 17th November 2008 by Anveshan, Delhi Science Forum and the Economic Research Foundation. The Speaker Hall of the Constitution Club, which was the venue for the symposium, was filled to more than capacity. People from all walks of life including a large number of university students attended the programme.
The speakers of the symposium were economists Prof. Prabhat Patnaik, Prof. Samir Amin, Prof. C.P. Chandrasekhar, Prof. Jayati Ghosh and CPI (M) Politbureau member Com. Sitaram Yechury. The symposium was presided over by Mr. S.P. Shukla, former Finance Secretary of Government of India. All the speakers in the symposium highlighted the fact that the current crisis, which is the biggest witnessed in the capitalist world since the Great Depression of the 1930s, was a systemic crisis of the capitalism in the era of globalisation and free markets. It was also emphasised that in the wake of this crisis it is imperative on the part of the Left forces to intensify class struggle and politically intervene in the situation to bring about progressive socio-economic changes.
The first speaker in the symposium was Prof. Prabhat Patnaik. In his speech Prof. Patnaik made two basic points. Firstly, financial crises and recessions are part and parcel of an economic regime under the hegemony of international finance capital. In such regimes, bubbles are the modus operandi of growth. In this deregulated free market system, as Keynes had pointed out, speculation dominates enterprise, which gives rise to asset price bubbles (i.e. temporary but sharp increases in the prices of assets like stocks, property, commodities etc.). This in turn stimulates private expenditure through wealth effects, which acts as the main engine of growth. Once there is a crash in the financial markets and asset prices, this bubble ends. This leads to a situation of pervasiveness of insolvency, leading to a freeze in credit flow which reduces expenditure and a recession sets in. As opposed to this bubble led stimulus to growth, Keynes talked about an alternative stimulus in terms of state intervention and control over finance and capital flows across countries. This was aimed at achieving the objective of providing full-employment. For two-and-a-half decades after World War II, Keynesian policies were pursued in Europe and the US. The adoption of state led demand management policies was not symptomatic of any fundamental change in capitalism. Rather, these policies were pursued under the pressure of the working class whose strength greatly increased after the war. However, these policies led to massive centralization of capital, whereby an enormous mass of finance capital wanted to break free from national boundaries and search all over the globe for profit. The formation of this international finance capital again brought with it the ideology of sound finance, reminiscent of the pre-war regime where even during the Great Depression Governments refused to increase public expenditure for demand stimulation.
The second point that Prof. Patnaik made is that any discussion on overcoming the crisis must focus on dislodging the hegemony of finance capital. In this sense he pointed out two strands of revival plans for the crisis, which do not challenge the hegemony of finance capital and hence will not solve the systemic propensity to crisis ingrained in a regime dominated by finance capital. Firstly, there is the bail out plan for finance capital or the Bush plan. This essentially says that once the financial institutions are bailed out of the crisis, there will be a new bubble and growth. Secondly, there is the plan for coordinated fiscal stimulus as advocated by the Indian Prime Minister. However, any such fiscal stimulus must address three issues. (a) Stimulus for what end? Dr. Singh’s stimulus is aimed at providing more money to the private sector instead of improving the conditions of the common people of the country. (b) A pre-condition for any such coordinated fiscal stimulus is to impose control on the free flow of finance, which Dr. Singh has refused to do. (c) In this context, there are proposals for restructuring the IMF-World Bank, which consists of mere cosmetic changes.
According to Prof. Patnaik, as opposed to both these strands of responses to the crisis, the Left must argue for an alternative which is aimed at dislodging the hegemony of finance capital. It is important to fight for an alternative response to the crisis because any protracted crisis brings suffering to the workers. Secondly, such crisis and the resultant massive unemployment provide fertile grounds for the rise of fascistic forces. It should not be forgotten that fascism rose to dominance at the world level after the Great Depression. Thirdly, restructuring of capitalism always occurs under the impact of intensified class struggle. It is therefore important for the Left to actively participate in this struggle, aimed at not only a restructuring of capitalism but also paving the way for transcending it.
The second speaker Prof. Samir Amin mainly focused on the geo-political issues in the context of this crisis. The question that he raised is whether this crisis will lead to another world order towards the long transition to socialism? In this context, he said that the CIA believes that nothing is going to change fundamentally except for a marginal increase in the share of world trade for China and India. As opposed to this argument, Prof. Amin believes that this crisis has the possibility of weakening the current imperialist structure in the world, led by the USA. With the ripening of the crisis, contradictions within the imperialist block might sharpen. As far as emerging economies are concerned, China and Russia should be treated separately from the others. As far as China is concerned, the point of difference is that while the country is integrated into the globalized world economy through its export-oriented activities, it is not integrated to that extent with the globalised financial system. Secondly, the social structure in China is different from all other emerging economies. It is highly probable that China in the coming days will move towards stimulating internal demand for growth, instead of relying on exports. This, however, might also invite political confrontation with the West. As far as other countries are concerned, the crisis is an opportunity for the South to move out of the current regime of global trade and finance, which is dominated by imperialist countries. But, the ruling classes of these countries, including India, have become more comprador, their interests being closely linked with imperialist interests.
As far as the Left is concerned, the current crisis opens up possibilities for strengthening the social constituency of the Left as an alternative to the hegemonic block of the imperialists. Opportunities might open up for practicing alternative policies in terms of bilateral trade, defeating the over protectionism of the monopolies with respect to technology. At the same time, the military control of imperialism over the natural resources of the world might also weaken. The challenge before the Left lies in converting this social constituency into political reality. There will be very little change unless an alternative towards a multilateral democratic world crystallizes.
Prof. C.P. Chandrasekhar in his presentation focused on the role of the banks in this crisis. According to him, earlier the banks were strictly controlled by the Government by administered interest rates and deposit guarantees. Banks were supposed to take deposits and provide loans to people demanding them, on the basis of these deposits earning money out of the interest margins, which were quite low. However, over the last 20 years, financial liberalization and deregulation in the advanced economies like the USA has meant banks which lived on interest margins, liberalized to convert themselves into institutions which created assets, bundled them together and sold them, in search of higher rates of return. The reason for this being the fact that the extant low rates of return on conventional lending became unacceptable to finance capital. With this change in the basic structure and function of banks, they were compelled to strive for achieving higher and higher rates of return and in the process sacrificed the norms of prudence, which led to the sub-prime crisis in the first place.
This implies that the core of the financial sector, which is endowed with the job of redistributing finance and living on interest margins, cannot be left to private hands. This is because private players will never be satisfied with low interest incomes in banking while private players in the other sectors earn high profits, leading to private banks seeking higher profits through other avenues. Moreover, with private players entering into banking, pressure builds up to shift the goalposts towards a more liberalized and deregulated regime.
Prof. Chandrasekhar also pointed out in this context that there is a view that since Indian banks are largely in public hands, the above problem does not exist in India. However, of late two important developments have taken place, namely, there has been a decline in the share of public banks and the return on finance has increased. Today, 20% of total banking sector loans consists of retail loans given under the condition that the asset to be bought with the loan is itself the mortgage. Now, if there are large number of defaults in the economy, then the price of the asset to be redeemed as mortgage will decline and banks will face a crisis of solvency. In this context, one has to have a skeptical approach to the pronouncements of the Finance Minister that our banks need to be recapitalized. The point is whether this recapitalization will be done with private or foreign money. Already we have seen that even amidst the crisis the Cabinet decided to increase the FDI cap in the insurance sector to 49%. If indeed this recapitalization of the banks is done through private or foreign funds, then the core of the financial sector in India will be given to private players, sowing the seeds of systematic instability as described earlier in the context of the USA. Therefore, the role of the Left and democratic forces should be to mobilize public opinion and pressurize the Government against any such moves.
Prof. Jayati Ghosh pointed out that there is a need of even greater degree of vigilance over the Government in the context of the financial crisis. This is because the history of financial crisis in the developing countries has shown that the policy response to the crisis has led to further increase in inequality and further liberalization, which caused the crisis in the first place. Thus, it is imperative that our Government be resisted against taking any such steps. In particular two areas were pointed out by Prof. Ghosh. Firstly, the negotiations in WTO are still going on in Geneva, where India has agreed to give up its interests significantly in agriculture and non-agricultural tariffs (NAMA). It is inevitable that in the wake of the crisis, there will be significant industrial dumping, which in the absence of tariffs will cause more unemployment.
Prof. Ghosh said that the USA is in for a decline. In this context India should take the opportunity to explore the possibility of creating other multilateral trade and financial blocks. She also focused upon the role of the IMF. While the G-20 has urged surplus countries to provide finance to IMF to support emerging economies, it must be remembered that this comes with the IMF’s prescription of further liberalization. As opposed to this IMF-centric response, the progressive forces should argue for multilateral and plurilateral trade and finance institutions. The foreign exchange reserves of the developing countries have financed the US economy and had fuelled its boom. The need now is to use these developing country reserves to finance each other’s economic development and trade between them.
As the final speaker of the symposium, Com. Sitaram Yechury summed up various important points made by the previous speakers and also provided some theoretical as well as policy insights. He pointed out that the current crisis is a systemic one, which is linked to the huge accumulation of finance capital. Trading in the world financial markets has increased manifolds reaching over 40 times of world real GDP. This huge block of finance capital, in order to earn profits sought to break down all barriers and regulations that were in place. Neo-liberalism provided the theoretical justification for a regime, which promoted unregulated flows of finance capital. This was also part of a process of economic recolonization of the third world.
Com. Yechury said that the process of opening up of the economies to financial flows under the aegis of globalization was, however, unsustainable because it worsened income inequalities both across and within nations, resulted in jobless growth and squeezed the purchasing power of the masses. In order to deal with this situation, finance capital artificially created demand in the system through a lowering of interest rates and easing the norms for disbursal of loans. This in turn gave rise to the sub prime crisis. This crisis was a result of the borrowers’ insolvency (incapacity to pay back the loans). However, the financial bailouts being announced now are aimed at recapitalizing the lenders, which by itself cannot take us out of the crisis. The real solution lies not in pumping liquidity to the lender but giving purchasing power to the borrower.
Com. Yechury pointed out that capitalism would surely undergo a restructuring following the crisis. The question is the direction in which this restructuring will happen? It is in this context that popular pressure needs to be built in order to bring about a fiscal stimulus aimed at increasing the purchasing power of the common people. In the context of India the danger of the rise of fascistic forces, riding on the political discontent created by crisis, also needs to be kept in mind. Therefore, the Left forces will have to engage with this debate regarding restructuring of capitalism and sharpen the class struggle in the days to come.
He said that today, while the land of liberal capitalism, Britain has moved in the direction of bank nationalisation, the Indian Government even now is hell bent upon raising the FDI cap in insurance sector. The UPA Government is unwilling to undertake a massive stimulus package, particularly aimed at the rural areas. All this calls for struggles on the part of the Left and democratic forces to compel the Government to undertake pro-people measures. At the same time, at the international level focus should be on strengthening the BRICS (Brazil, Russia, India, China and South Africa) as a multilateral trading and finance block.
The presentations at the symposium were followed by a lively question answer session, with the audience asking a range of important questions. In response to a question on promoting green investments through a fiscal stimulus, it was pointed out by the speakers that this can indeed be a desirable option. But this will require massive investments and subsidization on the part of the Government, which can be done only when the political attitude of the Government changes, for which bigger struggles are necessary. It was also pointed out by speakers that while the crisis would not mark an immediate end of neoliberalism, it has definitely exposed the bankruptcy of neoliberal ideology and economic policy. The crisis has opened up huge possibilities for the Left in its fight against the neoliberal order and will strengthen the struggle for socialism.