Yes! Transformation is possible!!

Neoliberal era is no-more, now!

An oedipal desire of Neoliberalism to replace its predecessor (Keynesianism and Socialist economics in descriptive sense) finally failed and compelled itself to death.

The world of greedy capitalists was ‘haunted by the unspoken phrase: There must be more money! There must be more money!’ They gave a birth to ‘TINA’ (There Is No Alternative-Thatcher) and she started ‘rocking horse’ as D H Lawrence’s ‘PAUL’ did. They tried to conquer the globe with TINA’s ‘rocking horse’ (international economic integration) spreading Goebbelian propaganda that ‘luck causes to have money’ and they will bring ‘luck’ to the world.

Hiding their brutal face behind ‘Bretton-Woods’ they tried to be messiah of developing countries. ‘Luck’-less people, believing-unbelievingly, followed them because ‘their must be more money’. TINA never listened to her ‘nurse’ neither ‘spoke to any(no)body when she was in full tilt’. (“I have written repeatedly about the problems of globalization: an unfair global trade regime that impedes development; an unstable global financial system that results in recurrent crises.” Stiglitz- Making Globalization Work).

A secret tie-up between TINA and ‘Uncle Oscar’ (Uncle Sam) was observed and leg-wounded ‘Bassett’ (United Nations) got involved in. They produced more for themselves and some ‘gifts’ to ‘mother’ (the capitalism) but ‘the unspoken phrase’ became ‘a chorus of frogs’ rather stopping. "There must be more money! Oh-h-h; there must be more money. Oh, now, now-w! Now-w-w - there must be more money! - More than ever! More than ever!” Greedy capitalism went mad.

TINA’s concentration was broken by the chorus. Neither her ‘Daffodil’ nor ‘Honor Bright’ (World Bank & IMF) even nor ‘Lincoln’ (WTO) could stop her loosing. Suddenly she turned her face from ‘Derby’ (the oppressed southern half of the globe) and this turn popped up with an oedipal syndrome, ‘a secret within a secret’ to overcome even her birth givers. TINA (Neoliberalism) was absolutely gone mad without ‘alternative’ and started swallowing her own birth givers (Thatcher’s UK, Reagan US and other global north). She was already fallen in to ‘dark’ with ‘soundless noise’; before they felt the smell of her craziness as US President Bush uttered “our entire economy in danger.”

TINA (Neoliberalism) ‘felled with a crash to the ground, and’ they, ‘all’ their ‘tormented motherhood flooding upon’ them, ‘rushed to gather’ her ‘up’. ‘But’ she ‘was unconscious’. ‘Mother’ (capitalists) became worry and warned to ‘Uncle Oscar’ (US) but without giving a damn to the suggestions he continued his rascal greed in ‘Darby’ (Iraq, Afghanistan and elsewhere) riding on ‘Malabar’ (so called war against terrorism). TINA did not stop claiming her absoluteness even on the deathbed (US Congress) and finally US President Bush signed the death certificate of Neoliberalism in the form of bail out bill on October 2008.

Now TINA is no-more, goodbye TINA, ‘TATA’ (There are Thousands of Alternatives- Susan George).

Complete transformation rather reform!

We have no doubt to say the craze of ‘there must be more money’ of ‘mother’ (greedy capitalism) and the oedipal desire of TINA (Neoliberalism) are the prime cause of ‘crises’ which the world is paying now. Today World Bank is hysterically making a noise that the global financial crisis could become ‘a human and development calamity’. Fears over flu that sickened some people in North America, retreated money from East Asian share markets. Rampantly damaged economy is not able to deal with even a‘Flu’. Shame on you!

The unilateral command of ‘Uncle Oscar’ (US) on global financial and monitory institutions and week governance of global institutions including leg-wounded ‘Bassett’ (UN) are both cause and effect of such ‘craze’ and ‘desire’. It means the root of problem can be found on failure of governance of such global institutions which were largely trusted and followed by both, ‘mother’ (capitalism) and ‘luck’-less countries. The crisis caused by TINA’s death is challenging us with an opportunity to change the situation in a right direction. Rahm Emanuel, the chief of staffs of US President Obama, is right somehow that this crisis is opportunity too.

Most recently, ‘Bassett’ (UN) has called a Conference on the World Financial and Economic Crisis and its Impact on Development to review the global financial system ‘democratically and in an inclusive manner’ and ‘to stop viewing the global economy as the private dominion of such exclusive clubs as the G-8 or G-15’. (Miguel d’Escoto Brockmann, President of UN General Assembly) But it compels me to spasmodic laughter that UN could never get rid of reformism. Even today, GA has formulated a commission of exports under the chairmanship of former ‘nurse’ of TINA, Stiglitz (former chief economist of World Bank), to find out the way reforming the international monetary and financial system. Although suffering from an abandoned idea of reform since mid ‘90s leg-wounded ‘Bassett’ (UN) could do nothing for itself.

The commission recently submitted a preliminary report to the GA concluding ‘ten point immediate measures’ and ‘ten point agenda for systemic reform’. Obviously, the recommendations are around the gravity of the reform rather transformation. The report tried to cover some buzz since the Barcelona Development Agenda to most recent urge of new international currency by some countries (as China). We should wait and see till June first week, how the ‘highest level’ conference answers to the other former ‘nurses’ like Uri Dadush (former director of World Bank) who are saying "I love Joe, but it isn't going to work." (Business News)

Okay, give ‘Bassett’ (UN) a break to find a ‘new’ deal to the crisis but we should not ‘indulge in the illusions of hope’ and should not be apt shut our eyes against a painful truth’. Such so-called reforms will only support dirty capitalism to change its course and find a new ‘Derby’ for its revival to next crisis. Come on! Let’s go for finding proper alternative to transform our condition and position before greedy capitalists ‘transform us in to beasts’ (words borrowed from Patrick Henry). Without such alternative, dramatic episodes of ‘crisis’ (food crisis, economic crisis, Swine flu crisis.....) will never end.

A social justice based economy - with no entity to confiscate people’s right on resources, neither market nor state, a complete transformation of world governance to make people the sole master of his/her life-world rather a new episode of dirty capitalism - is indispensable.

Yes! Transformation is possible!!

(This article is published in University magazine 'Ajou Globe' of Ajou University, Suwon, Korea .)

Sachchidananda Joshi

Department of NGO Studies

GSIS-Ajou University, Suwon, Korea

lomo1910@gmail.com

The case for the debt-for-equity swap that Professor Stiglitz has proposed, in this article and in a Charlie Rose show several weeks ago, should be given careful thought. The underlying rationale for the debt-for-equity swap seems to have been born out of Professor Stiglitz's experience in the Council of Economic Advisors for President Clinton in the 90s. The Clinton Presidency is seen today as an era of unprecedented prosperity. Business-friendly policies provided robust growth opportunities which, in turn, ensured large increases in tax receipts, which enabled the Federal government to pay down its massive debts, and project trillions of dollars of budget surplus by the end of the Presidency. On the social front, low unemployment resulted in many benefits, including significant reductions in crime rates. In his book, "The Roaring Nineties", Professor Stiglitz explains that President Clinton had, in fact, run for office on a much broader agenda of societal well-being, during the 1992 Presidential campaign. Unfortunately, after the election, many of those goals had to be curtailed for the immediate need of balancing the federal budget, which had been deep-in-the-red for more than a decade by then. Since balancing the budget was the only issue that bi-partisan consensus could be built on, the liberals had to compromise.

Through the debt-for-equity swap that Professor Stiglitz proposes now, it appears that he wants to provide an exit-strategy for the current Obama administration. An exit from getting its whole agenda for social justice, that President Obama had proposed in his election manifesto, derailed by the necessity to fix the current financial crisis first. Getting the bond-holders who own the banks' debt to accept equity in these banks in-lieu of their debt means that any future losses or profits incurred on the mortgage securities that these banks hold would be shared proportionately between the current debt-holders and the current equity-holders. This debt-for-equity swap relieves the government and the Federal Reserve from the obligation of being permanently ready to bail out the banks whenever they get into serious risk of insolvency and illiquidity. This would allow the Obama administration to focus on its goals of social well-being -- health care, poverty alleviation, crime prevention, education, racial equality, and so on. Another feature of this proposal is that the banks now have to take responsibility for the decisions they made in investing trillions of dollars in mortgage securities. They cannot count any longer in getting bailed out by the Federal Reserve and the US Treasury.

Having already been in office for more than four months now, the Obama administration is quickly running out of time to find a workable solution for the financial crisis. In spite of trillions of dollars spent by the Federal Reserve and the US Treasury to save the banks, it is getting more obvious by the day, that the financial crisis has only been postponed to a later date. President Obama's personal charisma and popularity around the world, and the relief of seeing the incompetent George W. Bush administration leave office have been the major reasons for the recent surge of hopes for an immediate economic recovery. However, an economic recovery that does not address the financial crisis properly would be anaemic at best. So, in the end, Professor Stiglitz's debt-for-equity swap proposal might be the only way out for the Obama administration. Yet, one is filled with much trepidation, when one examines the financial crisis on a subtler level.

Firstly, who are the real bond-holders? These are the average middle-class people, from America and other advanced nations, whose life-time savings have accumulated in pension funds and mutual funds. Among these middle-class folks, the people that have accumulated significant amounts of life-time savings have been those that have worked on professional jobs for more than two decades and are getting close to retirement -- they are in their 40s, 50s, and 60s. These people are going to have to accept significant reductions in their retirement pensions and their individual retirement savings (401(k), etc). Moreover, they are going to have to accept vastly increased levels of uncertainty of income in their senior years.

Secondly, at a deeper level, it is difficult to see how the American economy is going to recover from such a serious blow to its confidence. After ten months of being mollycoddled by the Federal Reserve and the US Treasury, the finance industry would be left to deal with the same dire health of its accounting books that it was faced with in September 2008. In recent years, more than 30% of the profits of US corporations has come from the finance services sector (finance, insurance and real estate). Moreover, as early as 2005, this sector accounted for 20% of the US gross domestic product. Even if such high profits level could never ever be replicated, unless modern economic theory could provide a convincing explanation for the rationale for such profits in the past, the American economy could not possibly find avenues for growth opportunities in the coming years. What was the American economy doing in the 2000s? Was it simply playing fun-games about paper-profits made from illusory financial transactions, when all the essential goods was being provided at subsidized prices by China?

Put this way, it seems so unbelievable and crude. Yet, famous economists have been stating repeatedly in the past few months that the finance industry needs to go back to the old ways of the 1960s -- when banking was a staid and boring profession. There is a widespread misconception that this financial crisis is a crisis of solvency as well as a crisis of liquidity. If this was the case, the crisis would have been solved by now. To address problems of liquidity, the Federal Reserve is willing to provide unlimited zero-percent financing. To address problems of solvency, the US Treasury is willing to devise endless schemes to take the toxic assets off the banks' balance sheets. However, these efforts have proved insufficient to solve the financial crisis. This is because the financial crisis is concerned about the future expected profits of the financial system. The Wall Street banks are sitting on a gold mine of above 20% annual returns on over a trillion dollars of their own capital. These 20% annual returns are expected to flow in year after year for the next 30 years or so. Unless this situation is analyzed thoroughly and professionally, using tools from modern economic theory, one could not find ways for the American economy to achieve robust growth in the coming years.

Thirdly, by having the government step in and bail out their cronies during the last nine months, the captains of the American finance industry have lost precious time that they could have spent in actually solving the crisis. As I have already explained in my FAQ Q 5, a substantial step towards solving this financial crisis could be taken by establishing a direct channel of communication between the homeowners on Main street and security-owners on Wall street. Instead of this, the Federal Reserve and the government have jumped in and have kept meddling arbitrarily in this process of price discovery. By enabling the Wall street banks to provide incentives and discounts to the home-owners, a robust mechanism for price adjustment could be worked out. This would provide a natural framework for addressing the grievances of both parties involved in the financial transaction (the home-owner and the security-owner).

Fourthly, this financial crisis cannot be solved without obtaining a clear understanding about why the housing bubble of 1998 -- 2007 occurred. In my judgment, such a clear understanding is at least several years into the future. However, I must also say that a recent article by Professors Vernon Smith and Steven Gjerstad ("From Bubble to Depression?", Wall Street Journal, April 6, 2009) provides substantial insights into the causes of the housing bubble. Gaining a complete understanding of the housing bubble from a theoretical perspective could provide substantial benefits in terms of future growth opportunities for America because, although housing seems to be such a mundane activity, millions of investors around the world are fascinated by this aspect of American life.

Fifthly, a debt-for-equity swap at this point would let the finance industry avoid much needed reform. In spite of the financial crisis it has created, the American financial industry has demonstrated expertise in rapidly implementing sophisticated theories of risk management using very powerful computational infrastructure. However, one serious handicap is the centralized nature of decision making in finance. In a recent article in The Atlantic, Professor Richard Florida argued that the financial centers of the world, like New York and London, have developed their expertise in finance over the course of several centuries. A city that functions as a global leader in finance needs to develop a community of experts, including traders, programmers, financiers, economists, lawyers, journalists, newscasters, managers, scientists, mathematicians, insurers, judges, notaries, etc. Moreover, such financial centers always operate implicitly under the political and military protection of its government. As a result, it would not be easy to facilitate the creation of many more global financial centers.

Professor Florida's arguments are indeed quite persuasive. However, the current financial crisis leads one to ask whether excessive reliance on this accumulation of expertise and talent in a single city like New York, ignores the problem that with trillions of dollars accumulating on Wall street and being traded on split-second information, America is unnecessarily taking on huge risks that make its financial system inherently unstable. Wouldn't diversification of financial decision making help to disperse systemic risk? After all, the most credible information about mortgage defaults are spread throughout the local housing markets in the various states of the United States. So if the finance industry had been decentralized, it would have been in a much more stronger position to take into account the data from the foreclosures and the falling house prices around the country.

Another important reform needed in the finance industry is to find ways for it to function apolitically and secularly. If the wealth that the finance industry creates would vanish at the first hint of turbulence, even in a favorable political environment like America's, how can one expect to export American financial technology to the world? This is the great challenge for modern finance theory, to figure out which parts of the theory depend on political favors to succeed, and to investigate what degree are political favors important. These are major challenges for finance theory. The finance industry needs to address these issues in its day-to-day professional practices. Professor Stiglitz is well aware of the undue political influence exerted by the financial system. In fact, he has been writing about it for over a decade now.