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End of laissez-faire: What next?
By Dr. D.B. Nihalsingha

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Benjamin Friedman, a one-time Professor of Economics of Harvard once said of the US economy: “we are living well by running up our debts and selling off our assets. America has thrown itself a party and billed the tab to the future…Our prosperity is false prosperity… [it is] built on borrowing…and living beyond our means.” Foreigners owned the US in 1980 and now the country is $2.6 trillion in debt. The warning of the irresponsible consumer extravagance of living beyond ones means and government profligacy came in a book aptly titled ‘Day of Reckoning’.

The year was 1989. That was the time when the Washington Consensus trio- the IMF, the World Bank and the US government, dominated the world and its financial institutions, waxing eloquent about the grand dividend of laissez-faire - free trade and unfettered markets as the private sector path way to an economic Nirvana for all the world. Slavish, unthinking governments across the globe embraced the tar baby with relish hitching their wagons to the US star.

Still, this was a system which created great wealth and brought millions out of poverty as markets around the world opened up as once sleeping economies awoke to the credit driven spending spree rampage of the US consumers. China took millions of its citizens out of poverty as did India and many nations of the world, catering to the US consumer demand.

Yet it was also a system which was at the same time careering out of control. Billions of dollars could be moved out around the world in seconds, some a trillion dollars a day in capital flows; stock markets were generating profits; a casino economy took hold, gambling for wealth without its production had taken possession of much of the US economy and of the world.

As the continual rises in prices of stocks became the definitive measure of economic well-being of a company and the ultimate economic reality, so did the scams which accompanied the stock price increases. As creation of wealth by work declined and a casino economy took hold, profit by all means possible had become widespread. Many a termite mounds were being built and some were exposed: Enron and WorldCom. After a bit of fuss, and the ineffective Sarbanes-Oxley Act, it was back to business as usual.

Twenty years after the warning by Professor Friedman, in the free market Nirvana that is the US where inefficient businesses were supposed to die according to the superior dictates of unfettered play of supply and demand, taxpayers are bailing out banks and insurance companies with the taxpayer bailout money. AIG proceeded to pay out millions in bonuses with public money making an angry President Obama looking hapless and ridiculous, being reduced to bemoaning AIG “"recklessness and greed." The bill to the US taxpayer was $3.6 trillion dollars.

How the mighty have fallen. The private sector has collapsed in much of the US economy. Buyers are not buying; sellers are unable to sell even though they are desperately axing prices as if there will be no tomorrow; trade is tumbling; businesses are folding; factories closing; inventories rising; jobless rising 700,000 a month; gross domestic product sliding; homelessness is racing at an unstoppable pace, now 2.3 million and due to reach 6.4 million by 2012. Banks are buckling; airlines flying into turbulence; once mighty super powers, dithering; China worrying about its trillions in US bills.

The vaunted laissez-faire and untrammeled economics are in ruins. The British Premier Gordon Brown placed the final nail in the free trade coffin when he said, “we are seeing … the collapse of a failed laissez-faire dogma… the old free market fundamentalism has been found wanting…Laissez-faire has had its day…"the 40-year-old prevalent orthodoxy known as the Washington consensus in favor of free markets has come to an end. Recently, the US Treasury Secretary Thimothy Geithner confessed to the US Congress “Our system failed in fundamental ways. To address this will require comprehensive reform. Not modest repairs at the margin, but new rules of the game.”

When the Asian contagion occurred in 1998, western press snootily dubbed it a result of “Asian cronyism” even though it was a product of reckless lending by western banks.

Now, the same banks had pursued hundreds of thousands of borrowers whom they knew could not repay: loans to those on welfare, loans to buy multimillion dollar houses to those who were earning $40,000 a year. Reckoning arrived when the loans which had been mortgaged via complex re-selling of the risks eventually brought down AIG.

In as much as the presumption of perpetual and increasing growth in a world with limited resources behind unfettered free markets was unsustainable, Asia’s future, with its Siamese twin link to the US, is no better.

As TIME described it “Asia’s [economic] model resembles a vast Ponzi scheme, one that is precariously perched on the expectation that Americans will continue buying more and bigger TVs, computers and cars forever.” American prosperity is based on continually expanding, massive credit; the US is now in debt to the world to the tune of trillions of dollars while its citizens are equally “debt-ridden, house-poor and unemployed.” There is an onset of something Americans never knew before- a “frugal mindset” as they cut spending, perhaps because they have no access to massive unlimited credit. Asia’s prosperity, based on US consumer and government spending recklessness, is nearing its end.

Ronald Regan who launched the US into the slide into debt, called the government “the problem.” It is now the savior, not only in the US but around the world. “End-of-government enthusiasm of globalization, which far from burying the state, now depended on states for rescue.” Larry Summers the (former) ardent advocate of free markets, now Director of President Obama’s Economic Council, in an about face is now an equally ardent supporter of state intervention.

While politicians all over are pretending that they have all answers, when they are haplessly really experimenting with public money doling out funds to the very people who created the problem, evidence is mounting that the meltdown has been accompanied by an equally sinister phenomenon which now seems to be emerging as an essential accompaniment to unfettered economics- fraud and swindling on a gigantic scale. Colossal deception and cheating, in business and in government.

Dishonesty and outright thievery on a major scale is evident not only in the US but around the world as it is closer to home, in Sri Lanka. In neighbouring India, murderers, convicted criminals and thugs are joining with politicians to run for election. Worryingly, they are voted into power as goons intimidate and coerce voters with impunity.

The 14th Lok Sabha produces alarming evidence of the numbers of crooks on the legislature: “128 of the 543 winners had faced criminal charges, including 84 cases of murder, 17 cases of robbery and 28 cases of theft and extortion. Many face multiple criminal counts—including one M.P. who faces 17 separate murder charges—and no major party is beyond reproach.” Swindlers and thieves in the Indian Lok Sabha switch sides to escape prosecution; bribery and corruption is now no longer done in secret.

How long would it take for the infection to spread to Sri Lanka?

An economic downturn bares rackets and frauds which have been going on for some time. In the deposits racket, gullible and greedy will go for the unbelievable- massive, unbelievable interest rates are promised and even paid, until it becomes unsustainable and the inevitable collapse occurs.

Bernard Madoff, who swindled billions in a Ponzi scam declared that over the years, he was waiting for his day in court and his time in prison as being inevitable. And then he offered his apologies for the pain he caused, for wiping out billions of dollars in savings of thousands, making the under-statement of the year: “I am sorry and ashamed for the damage and misery I have caused to countless people.”

Closer to home, there was infamous Sakvithi, who bilked similar billions from unimaginably gullible, greedy investors, some who had lots to hide but, like Oliver Twist, wanted ever more. Sakvithi evaporated into thin air, along with the money he stole.

Then along came the vaunted likes of the golden beings bearing the keys to the kingdom. The respected and trustworthy become fraudsters par excellence as billions disappeared into black holes, without a trace. Regulators seemed not to notice because it was none of their business.

Mug photos of ‘reputable,’ ‘dependable,’ ‘trustworthy’ top management splashed in the press looked startlingly similar to those in the police rogues gallery. Yet there was not even a semblance of the apology as Madoff made of his Ponzi scheme of ‘shame’ and ‘sorrow’ but much finger pointing and tears of innocence; vehement denial of responsibility even if there was no AGM for four long years; even if interest rate of 30% was of a Ponzi kind.

While those who had been bilked wail and breast beat, the Vishvakarma was living “in the lap of luxury” receiving distinguished visitors while refusing to talk to the investigators.

Several hundreds of companies which were into almost everything under the sun, many with overlapping businesses, had been run with the golden touch of a vishvakarama boss known for magnanimity with other people’s money; incestuous boards of directors and related party transactions by the ton were going on until one did not know one from the other.

The unraveling reveals what has been going on for decades under the very nose of the lotus eating Department of the Registrar of Companies. Sri Lanka’s experience is not isolated: it is a reflection of economies around the world gone wild; clueless regulators asleep at the wheel, when the disasters were a making under their very noses. Now the same regulators are working round the clock to foist the golden but sick companies on healthy ones, as if the latter had no other businesses to take care of.

Now the country is reaping the wind; of institutions, “grown so big that they cannot be allowed to fail.” The termites’ mounds were ‘allowed’ to grow. On that basis, the energies of the regulators are focused at seeking to palm off the sick companies to healthy ones in the hope of some magic will result and raise them from the dead.

What of the billions bilked? Can they be safely forgotten and the “healthy” resurrected companies or the taxpayer required to pay the bilked depositors?

With the meltdown sweeping the world alongside colossal swindles, bringing down wealth and livelihoods, wiping out businesses and making paupers out of hardworking people, governments are scrambling to save and restore ‘confidence” in the economy, restore stock markets, to get credit flowing again. US Secretary Geithner called for “comprehensive reform. Not modest repairs at the margin, but new rules of the game…better, smarter tougher regulation.”

British Premier Brown emphasized what was at fault was not the absence of rules but the fact that the rules were flouted with impunity, arguing that the world recession was changing the public's expectations of business values, and they no longer believe a successful economy has to be based on high levels of risk: "Most people want business to have the same values as they practice in their everyday life. People would rather reward hard work rather than risk-taking. They want to support enterprise and not excess. They want to support people that take responsibility and not run away from it".

Supercilious words and lofty ideals

But once resurrected, would the systems so restored carry on regardless until the next meltdown comes along? Or take stock of the system and put in place values, limits and regulations which will drastically reduce the dominance of these who do not produce wealth, but those who plunder by manipulations and fraud?

The British Premier in his article on President Obama’s election pleaded: “'Greed is good' is no prescription for the good society, [and] neither is it the mark of a good economy… We [should] celebrate men and women of integrity who work hard, treat people fairly, take responsibility and look out for others… rewarding hard work, co-operation, responsibility while penalizing excess and reckless risk-taking - which will ensure our market economy works efficiently and fairly…these are the principles that [should] guide and govern our economic life.”

Now will the billions of taxpayers’ money which will be spent to resurrect a wrecked world economy, be spent to raise from the dead the old ghosts of unfettered laissez-faire economic order? Will the billions milked from dim-witted investors be allowed to disappear? If the credit gets flowing again, will it again be the same old values of reckless greed and fraud or a new world of hard work and fairness?

Time alone will tell, as the world struggles with the havoc wrought by “respected” con men, irresponsible business leaders and incompetent governments asleep at the wheel.

The views expressed above are personal and do not necessarily reflect the views of d-sector editorial team.

Source: www.sundaytimes.lk

Write to d-sector  |  Editor's Note

 Other Articles by Dr. D.B. Nihalsingha in
Global Development  > Global Economy > Global Financial Crisis
 Other Articles in Global Development
Corruption Watch

The bad news is that corruption has not only sustained but has grown in size and stature in the country. With scams being a regular feature, seventy per cent respondents in a survey have rightfully opined that corruption has continued to increase in India. One in every two interviewed admit having paid a bribe for availing public services during last one year. Transparency International's latest survey reveals that the political parties top the chart for the most corrupt public institutions, followed by police force and legislatures. No wonder, India continues to make new records on the global corruption arena!

The shocking revelation is that the health and education sectors haven't remained untouched by this phenomenon. With 5th and 6th positions respectively for these sectors on the public perception chart on corruption, corruption has crept insidiously into these sectors of hope for the masses. With bureaucracy being fourth in the list of corrupt institutions in the country, corruption seems to have been non-formally institutionalized with little hope if public services would ever be effective in the country. With economic growth having literally institutionalized corruption, are we now expecting corrupt to be socially responsible - a different CSR.

Poor. Who?

Not giving 'aid' to India is one thing but calling it 'rich' is quite another. If one in three of the world's malnourished children live in India, what does average daily income of $3 indicate? It perhaps means that there is a relative decline in poverty - people are 'less poor' than what they used to be in the past. But having crossed the World Bank arbitrary threshold of $2 a day does not absolve the 'developed' countries of their obligation to part with 0.7 per cent of their Gross National Income in development aid. Should this three-decade old figure not be revised?  

An interesting debate in UK's House of Commons delved on future of development assistance by the British Government. While prioritizing limited resources has been a concern, there has been no denying the fact that development aid must be guided towards tangible gains over a short period of time to start with. There are difficult choices for elected governments to make - should they invest in long-term primary education or in short-term university scholarships? Which of these will bring gains and trigger long-term transformation in the society. As politicians continue to be divided on the matter, poverty persists!!   

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