WASHINGTON DIARY: Socialism for the rich
by Dr Manzur Ejaz, USA
September 26th, 2008
Courtesy and Thnaks: Wichaar.com
Perhaps US-controlled international institutions like the World Bank and the IMF will also take a U-turn and make similar attempts to save the economic elite in developing countries. But this may not halt the global economic collapse.
What were Ivy League and Oxbridge economists up to for the twenty-odd years that the American and British economies ballooned and strained towards the inevitable bust? When the entire economic matrix is inverted, what happens to the calculations of economists at international financial institutions like the IMF?
They may argue that the real world was not acting ‘rationally’, according to their basic assumptions. However, let us examine the recent, colossal financial collapse in the United States, apparently the largest since the Great Depression. The major, oldest and most revered financial institutions on Wall Street (Lehman Brothers was over 150 years old), which employed the cream of Ivy League business schools and economics programmes, seemed to have no clue that their companies were heading for disaster. The same is true for all other elite financial institutions that are about to go belly up or be bailed out by their respective central banks. This simply means that the entire spectrum of economists trained in old and new classical models had an inherent incapacity or bias in looking at economic systems.
To avoid abstract discussion, let us take the bubble in the oil and other commodity markets. Every economist and financial analyst was parroting the notion that increased demand was the main reason behind the price hikes. To build this case, the rising demand in India and China was presented as the key factor in the commodity markets bubble.
Hardly anyone stopped to ask how demand can jump by such magnitude while the major world economies were slowing down. Even non-conformist economists like Princeton’s Paul Krugman had acquiesced to the demand push theory. If they were right, then, at the time of writing, how did oil price per barrel plummet from a $147 high to around $100? Has demand come down that fast within such a short period? Have the Chinese and the Indians gone on a hunger strike?
The fact of the matter is that the poor people of both countries – more so in India’s case – had been left more impoverished by their so-called area- and sector-specific growth, and their demand had been slashed significantly. The ‘newly emerging middle class’ could not outweigh the reduced demand by the bulk of the poor.
Another reasonable argument – it seemed genuine at the time – put forth by renowned economists correlated low interest rates with high prices. The theory was that at low interest rates, oil traders can carry future contracts at reduced cost (the interest being the cost). However, the interest rate is even lower now than it was six months ago, but oil prices are down by almost a third from the $147 high.
Similar misleading arguments were common during the stock and real estate bubbles. When the shares of technology companies that only existed on paper were going through the roof, analysts were crowing demand and supply. Everyone, from housewives to taxi drivers, became an expert investor in technology until they lost their shirts. Then, similar arguments were put forward when real estate prices trebled within a short span of time. The assumed high demand for houses could not prevent the greatest collapse of the real estate market since World War II.
The world economy, led by the new American capitalist model, has been surviving by replacing one bubble with another. Each time, clueless economists, brainwashed as students by mathematical equations and theorems, provide rationales that they imbibed as clichés during their training. Having been through the rigour of economic theory, econometrics and monetary theory – all written in mathematics, like physics – I know how easy it is to start believing that economics is like any other natural science.
Economics students do not realise that mathematical structures are always perfect, but abstract. These structures can easily become meaningless if the subject matter is changed from physical phenomena to ever-changing human behaviour. This is the mean reason why economists at Lehman Brothers, the IMF or anywhere else are doomed to remain clueless. They will always find excuses and fall guys once the damage is done.
The fact of the matter is that the Reagan-Thatcher economic model, put in place during the early 1980s, was imposed or copied across the globe. The model was designed to destroy the state institutions that help the poor, and unleash a laissez-faire economic environment. It was meant to help high income groups, sometimes called the investing class, at the expense of the middle and lower classes. Consequently, wealth was accumulated by the top three to ten percent of populations everywhere. The speculative capital phenomenon, producing market bubbles, was inevitable. The Bush wars and their funding through printing money added to this trend.
Now, when the economic elite have completely ruined financial institutions, the American state has reversed its policy of so-called non-intervention of the state in markets. By pumping over a trillion dollars to save the elites, the US is practising ‘socialism for the rich’.
Perhaps US-controlled international institutions like the World Bank and the IMF will also take a U-turn and make similar attempts to save the economic elite in developing countries. But this may not halt the global economic collapse: either there will be a 1930s-like depression, or a 1970s-like stagflation where inflation and interest rates will reach the high teens.
The writer can be reached at firstname.lastname@example.org
Courtesy and Thanks: Wichaar.com