Business cycles are as intrinsic to capitalism as earthquakes are to the earth’s geology. Capitalism has always had them and always will have them. Going back to its embryonic stage the Tulip mania started in Holland in 1624. Early 18th century saw the South Sea Bubble bursting in Britain (speculation frenzy on the shares of the South Sea Company that was charted to slave and fish in the Spain’s South American Colonies ended in a collapse) and the Mississippi Land Bubble in France (the focus of the attention was land values in France’s territory of Louisiana). As capitalism was coming of age the 19th century was full of financial panics that appears ordinary in comparison with the “big one” of the 20th century-the stock market crash of 1929 and the consequent banking collapse of 1930 that led to the Great Depression. That quake almost destroyed Capitalism- unemployment hit 27%.
The second half of 20th century has also seen its share of small and large financial panics. The collapse of the American Savings and loan industry during Ragan administration, a worldwide collapse in property values, the stock market crash of October 1987, one major stock market crash in a small county(Taiwan), and a very big stock market crash in the world’s 2nd biggest economy(Japan). Financial instability is to capitalism what succession problems are to medieval kingdoms or dictatorships. Both put their respective system at great inevitable risk and powers that be always appear not to notice an impending one.
If one examines financial crises, the questions is not “why did the markets crash?” but “How could market process have reached such unsustainable levels in the 1st place?” Given the absurd overvaluations, confirming to the age old adage that what has gone up must eventually come down; it is only a question of when the market falls and whether the fall is slow or rapid. Global capital markets and the existence of electronic trading system have made it possible to move enormous amounts of money around the world in a tenth of time it takes to make an espresso. On a normal day the world capital markets move $1.5 trillion, but the entire world’s exports amount to only $3.2 trillion per year. In the computing hubs of todays financial markets the sums that exchange hands little over two days are the equivalent of what the world’s economies move in a year. And on an abnormal day the world’s capital markets can move much more than $1.5trillion.
A high school educated trader for a British investment bank(Bearings) located in Singapore places a $29 billion bet on the Japanese stock market($7billion that it would go up and $22billion that it would go down). What he did was not unusual. We only know his name (Nicholas Leeson) since he lost $1.4 billion and forced his firm into bankruptcy.
Very large, electronically connected, global market increases the probabilities of having financial bubbles, but they do make them potentially bigger and they do link national markets together so that markets are more apt to crash together, just as case this time around as the global financial meltdown is slowly dragging the whole world in to a deeper worldwide recession.
Very large, electronically connected, global market increases the probabilities of having financial bubbles, but they do make them potentially bigger and they do link national markets together so that markets are more apt to crash together, just as case this time around as the global financial meltdown is slowly dragging the whole world in to a deeper worldwide recession.
In capitalism, booms lead to booms and declines feed upon declines, theoretically, capitalism should not have, like unemployment, recessions at all. As demand falls or rises, prices and wages, not output, should fall or rise. Supply and demand should ensure that all the productive factors that want to be employed are employed. Workers who are laid off should quickly find reemployment by offering to work for lower wages. Employers, if necessary, should fire existing workers who refuse to work for lower wages to make room for those who will. However, markets, especially the labour market, just doesn’t seem to quickly and easily clear by lowering wages and prices. Output adjusts more quickly than either wages or prices-exactly the reverse of what should theoretically happen. As usual, capitalism comes with recession. They are part of the capitalist system. They cannot be eliminated.
But to say that recessions will exist is not to say how often or how deep they will be, or how speedy the recoveries. To work well, the global capitalist system as it was designed after the World War II needs a dominant economic locomotive-a country that could act to help others improve their economic conditions since it didn’t have to worry about its own economic conditions. Till the 1990s fall of USSR, US held this role in the ‘free world’ but in the aftermath of the fall of USSR, US conveniently gave up this position. Another effect of these changes is the heralding of infallibility of free market anarchy; even a mention of national counter cyclical Keynesian stimulus politics were considered blasphemy according to the economic high priests of Chicago school.
With the impeding global crisis threatening to take the whole world down the drain, the macroeconomic policy anxiety on what is to be done? the world over has give rise to renewed fears of inflation, coupled with an inability to control structural budget deficits, and the growth of a global economy where one-country Keynesian policies have become impossible. Therefore, the bottom line of policy response is inaction.
With the impeding global crisis threatening to take the whole world down the drain, the macroeconomic policy anxiety on what is to be done? the world over has give rise to renewed fears of inflation, coupled with an inability to control structural budget deficits, and the growth of a global economy where one-country Keynesian policies have become impossible. Therefore, the bottom line of policy response is inaction.
The consequences are clear. Without an American global economic locomotive while the Chinese are still not quite there to take the rains and steer the global economy, without countries willing to be regional economic locomotives, and with national stimulus impossible for all but the very biggest, without macroeconomic coordination among the countries as the much fanfare and failure of recently concluded G20 summit exemplified, the world will have more frequent, longer and deeper recessions with much slower recoveries. This new reality is evident in Europe with the latest revisions in the forecasts for the year by ECB for the euro zone. This pattern should be seen as the new standard. It is only a matter of choice as to how we should resign to this grim fate; as the French does, c’est la vie! Or our noble village folk does, karume, karume(destiny)!
