Capitalism on the Ropes

The United States struggles against the downward spiral with a two trillion dollar economic package. Now everyone can see that Neo-liberalism is to blame for the greatest global disaster since Hitler and Stalin.

$1,000,000,000,000 – one trillion dollars. That’s how much Obama wants to pump into the financial sector. Mind you, that’s into the banking system alone; about $800 billion to stimulate the economy will be added to that. It’s an insane figure and it has a lot of symbolism attached to it. It isn’t a mere “assistance program” to relieve investors of their losses after they pocketed the profits year after year. Regardless of the details of Treasury Secretary Timothy Geithner’s plan, the government will dictate the conditions. In extreme cases some banks, in essence already insolvent, will be nationalized. The reasoning behind that decision is that when these financial houses have regained their health, it won’t be private investors who will profit, but it’s hoped the public will get something back for helping rescue them. That’s demanded by the basic laws of fairness.

Still, there are a few true believers out there who keep preaching that while it may seem fair, it’s not the right economic solution. Government is, after all, a poor businessman. That may be true, but it would be nearly impossible to find any worse than those in charge today.

Government is back. Let’s let this irony register for a moment. The “more privatization, less government” ideology slopped out of the United States and engulfed the whole Western world. Bear in mind that the term “ideology” is just a handy descriptor because it wasn’t the product of some lofty ideologue; it represented a method of governing. From the first day Ronald Reagan took office, he began incessantly preaching that government was something inherently evil. He was a ruler who ruled against ruling. Under George W. Bush the tragedy continued, but as a farce. One of the most puzzling things about this situation is that this ideology wasn’t in the least tarnished even when those in office governed miserably. That just allowed them to say, “See? We’ve been telling you for years that government doesn’t work!” Good things: markets, private initiative, the invisible hand. Evil things: institutions, regulations, governing bodies, and bureaucrats. That’s what they preached – at least up until last fall.

Then came the financial market’s massive coronary caused by the Lehman Brothers bankruptcy. True, capitalism didn’t completely collapse, but it didn’t because of one thing and one thing only: the state stepped in and saved it. It was the largest governmental intervention since Vladimir Ilyich Lenin.

Meanwhile, it was quickly discovered that the hundreds of billions of dollars pumped into the financial sector wasn’t enough nor was the concentrated action of the major reserve banks. The global financial system had been too seriously damaged. Banks’ balance sheets are clogged with bad loans and artificially inflated “assets.” Because of that, the mood has markedly soured recently. Despite all the bad news, people still cling to the hope that the approximately seventy banks and investment houses considered “relevant to the system” are also considered “too big to fail.” They try to remain confident that things will soon return to normal and credit markets will stabilize. But what will happen if the mountain of debt is simply so large that everything grinds to a halt?

Nobody has hard data so they throw horror stories around instead: two trillion euros in worthless loans on the balance sheets of German banks, 270 billion worth of outstanding loans in Austrian Banks, mostly owed to banks in Eastern Europe. Presently, “only” worthless paper like “asset backed securities,” the famous bundling of American mortgages, is creating the big holes. But this loss of wealth is starting a chain reaction that will have fatal blowback effects. Investors who lost big will move their money elsewhere in order to remain liquid. Because they’re all selling at the same time, the prices are falling and the poor economy is greasing the skids.

Even “normal” borrowers, businesses in the real economy, are going broke or at best are unable to meet their obligations. When one venture takes a hit, many more will be affected because when one goes down the hole, several more are dragged down with it. Entire nations could go bankrupt – not only those in remote Asia or near the Arctic Circle, but Hungary, Ukraine and Greece are all likely candidates. Even wealthy nations would then no longer be able to save their banks. A loss of two-thirds of GNP would overwhelm even Germany.

It’s slowly starting to dawn on people just how huge this potential catastrophe really is. Neo-liberalism has given the world the greatest global disaster since Hitler and Stalin. Nice work, guys!