THE OTHER SIDE

The year 2017 marks the 10th and 20th anniversaries respectively of two major crises in the global economy, whose repercussions continue to be felt even now. Chronologically the first was the balance of payments crisis in several countries in East Asia, and the second was the banking crisis mainly in the US and the UK. Turning to the second first, one of its fallouts was a sharp fall in interest rates. In the advanced economies, interest rates are still at historic lows (though likely to go up shortly) and output is just catching up to pre-crisis levels. The Economist, in a special report (May 6) attributed the root cause of the crisis to “a surfeit of savings in China and other surplus economies… financing an American borrowing and property binge. American and European banks, economies and taxpayers bore the brunt”. In other words, the guilty party was the Chinese saver, and the helpless American banks were the victims. Strange logic!

The real cause was perhaps far better prophesied by Karl Marx in his Das Kapital: “Owners of capital will stimulate the working class to buy more and more of expensive goods, houses and mechanical products, pushing them to take more and more expensive credits, until their debt becomes unbearable. The unpaid debt will lead to bankruptcy of banks, which will have to be nationalised, and the state will have to take the road, which will eventually lead to communism”.

The first part of Marx’s prophecy is surely relevant to the 2007 crisis. As a neoliberal economic ideology was adopted by policymakers from the 1980s in the Thatcher-Reagan era, wages remained stagnant and income inequality grew. Even today, these are the two countries with the highest income inequalities amongst the advanced economies, as measured by the Gini coefficient. It was politically desirable to give the worse off an illusion of increasing consumption. One way was a strong dollar and imports of cheap Chinese and other goods — financed by the consumer getting larger and larger loans against houses, facilitated by increasing house prices. The loans were securitised and sold in the market in ever more complex structured securities. So long as the going was good, a chain of intermediaries from brokers to valuers to lenders to structurers were feeding themselves on the gravy train — at the cost of the poor homeowner.

The house of cards collapsed when real estate prices started falling; some banks in the UK had to be nationalised and US banks needed huge public support. So far, Marx’s prophecy had come true; few economists have that privilege. As for the last part, however, he was wrong. In fact, the music had stopped playing for communism a decade and a half earlier with the implosion and disintegration of the Soviet Union. Boris Yeltsin, the first Russian President, had created a coterie of billionaire oligarchs by selling them stateowned assets cheap. This apart, the “revolt of the proletariat” seems to have taken a different form in the US — electing a billionaire president with a strange ideology and set of advisors, and an economic policy agenda of tax cuts for the rich and reduced health care for the poor, which might well increase income inequalities further. To me, he seems comparable to Yeltsin also in his erratic emotional make-up: He seems to like his tweets and tweet-size attention span as much as the latter liked his drink!

The other major fallout of the crisis of 2007-08 was the tightening of capital adequacy norms for the global banking system. In the US, this was embodied in the Dodd-Frank Act, one of the most complex legislations, and the thousands of pages of regulations framed thereunder. The “small print” in the framework was significantly influenced by lobbyists working for banks, and it is debatable how effective it is — and Donald Trump wants to liberalise the provisions further.

The crisis would have been “wasted” if finance remains the master of the real economy and income inequalities keep growing. For the Anglo-Saxons, who have dominated the world for three centuries, one unintended consequence could be the growing acceptance in the rest of the world of West European social democracy. Some straws in the wind:

In Manchester, where he lived and worked for a long time, a statue of Friedrich Engels, Marx’s collaborator, was erected last Sunday;

The surprising strength of the Labour Party in the recent UK election;

The equally surprising bestseller status achieved by Thomas Piketty’s Capital in the Twenty-First Century, a critique of income inequality.