February issue 2009

Much has been written on the fall of free market fundamentalism, which has led to the economic tsunami that has swept the world. And much will be written by economic historians and economists in the years to come. However, the most timely and scathing book on the financial crisis to hit the market has been written by two British economists, Larry Elliot and Dan Atkinson. Perhaps taking a cue from the famous writer Arthur Koestler, who once referred to communism as the “Gods that failed,” Elliot and Atkinson have titled their book: The Gods That Failed: How Blind Faith in Markets has Cost us our Future.

They have named the “free-booting, super-rich free-market operatives” as the “New Olympian Gods.” And charge-sheeted them: “They promised economic stability, and have delivered chaos and volatility. They promised an economic order based on enterprise, thrift and personal effort and have delivered one based on chronic indebtedness and wild speculation.”

“They promised a ‘transparent’ future in which all the costs and prices would be clearly laid out, allowing people to make informed choices in their lives. They have delivered a world of bizarre, occult financial knowledge, one in which everything from the true cost of a mobile phone package to the real value of billions of pounds worth of ‘securitised’ debt is impossible to gauge.”

“They promised an expanded middle class of property and share-owning individuals, a new Yeomanry of sturdy, independent citizens. They have delivered the unleashing havoc on professional and white-collar career structures, smashed up the pension schemes of the middle class and forced their children deep into debt for the privilege of attending university.”

They argue that the world economy has been reduced to this state by the “mania of speculation.” These speculators, they maintain, have “taken advantage of the gradual erosion of any serious control over their activities.” This allegation has proved to be valid, as one of the major architects of unbridled financial market freedom, Alan Greenspan, has now admitted his mistake. What were once marketed as ‘innovative’ financial products by investment bankers, were just balloons filled with hot air. According to the two economists, the bankers created a 600-trillion-dollar derivatives market, which is 10 times the world GDP. Imagine the fictional financial papers floated by these speculators.

Elliot and Atkinson have traced the development of the financial crisis starting from the fall of Northern Rock in the UK and the failure of the Bank of England to act as a regulator. A number of cases are examined in detail by the writers, which show that the present economic tsunami could have been contained, if not avoided, had the regulators not been sleeping at the wheel, secure in the knowledge that financial markets are better left on autopilot. Just a cursory look at the leading world economies reveals that where regulators were mindful of and kept a check on the unbridled freedom of market forces, the situation was not as bad as it is in the G-8 economies.

What is evident from the present crisis is that fundamentalism does not work, be it a political, religious or economic doctrine. The Chinese premier was right in observing that “the teachers have some problem” — a typically guarded statement from the Chinese leaders. But the French, who are considered to be the visionaries in Europe, were not that guarded: President Nicolas Sarkozy remarked, “Self-regulation is finished … Laissez-faire is finished.”

The November 2008 G-20 meeting also recommended closer monitoring and more regulation of the financial system. These 20 countries represented 85% of the world’s US$60 trillion economy. A closer look at the GDP of this bloc shows that the Bric countries (Brazil, Russia, India and China) collectively, have emerged as equally big economies as the 20 countries of the European bloc. Though this bloc is also showing signs of catching the G-8 flu, the reports so far are that the GDP growth rate in these countries will slow down as opposed to the negative growth in most of the G-8 countries. What saved them from the severity of the flu is that they have not followed in the footsteps of these ‘teachers’ and opted for unbridled markets.

While they say that earthquakes cannot be predicted except telling people whether they are living on the fault line or not, one knows that quite an accurate forecast can be made about impending storms. The present financial storm, according to the authors of the book, was gathering from late 2006 and the whole of 2007, but the financial world’s meteorological satellite failed to catch it on the radar. Saner economists were dismissed by the starry-eyed lovers of unbridled free markets as either socialists or anti-globalisation.

The regulators have failed in their job of protecting the interest of the common man. And so have auditors and global rating companies in looking after the interests of shareholders. Till their latest annual reports, these world giants were not reporting huge losses. The trouble is that both the regulators and the regulated around the world are the ‘Taliban’ of the same madrassa that teaches ‘unbridled free-market fiqah.’ So they went along with the blind faith that the market was sensitive enough to forecast a building storm. Unfortunately, it was not the market which raised the alarm; the alarm bells were pulled by non-profit organisations, independent economists and journalists. But their warnings were dismissed.

In the post-World War II period, the world has progressed more than ever before. But at the same time, inequality between countries and within developing countries has risen to an alarming level. Heightening inequality is tearing apart the social fabric of countries like Pakistan.

The world’s poor will be hit hard by the present financial crisis. The G-20 governments have talked about reining in the financial organisations, as suggested by Elliot and Atkinson. They have pleaded for making financial systems safer so as to give “ordinary people a bigger slice of the cake and put the New Olympians (Gods) back in their cage.” Indeed, it is time to deal with the anger-spitting inequality dragon. It cannot be wished away by the faith-healers of the ‘trickle down theory.’ It’s time for a sustainable flow of resources to the dispossessed.