The Global Financial Crisis is a Systemic Crisis of Capitalism

Kavaljit Singh

The Hague, March 25, 2009

The ongoing financial crisis began with the sub-prime mortgage crisis in the US in mid-2007. From a geo-political viewpoint, this crisis is very important as it originated in the US, the epicenter of capitalism. I have been working on financial issues for many years and have closely observed many financial crises of various kinds in Latin America, Mexico, Asia and Russia. But these financial crises didn’t receive the kind of attention in the media, corporate and policy circles as the ongoing crisis.

Undeniably, the impacts of financial crisis are grave and have disproportionably fallen on the poor living in the US and European countries. However, one wonders why the world is silent when large sections of population are living in sub-human conditions in many third world countries. In India and elsewhere, poor and marginalized sections of society have been facing not just one but multiple crises simultaneously in terms of livelihood crisis, food crisis, health crisis, water crisis, deforestation, hunger and desertification. They have been facing multiple crises not since 2007 when the sub-prime crisis began but for years, decades and some communities have been facing such crises for generations.

People often compare the current economic situation with that of 1929 depression. But, in many ways, the present scenario is worse than 1929 because at that time the threat of survival from environmental degradation was not a major issue. But now survival issues have become important. A number of deaths in third world countries are also associated with environmental destruction. One can destroy and build a new financial architecture every five years but one cannot afford to do the same with the planet as we have only one planet.

The ongoing financial crisis is not strictly a financial crisis which only affects banks, stock markets and currency markets. The crisis is much wider in its outreach. The impacts of crisis on real economy are becoming clear day by day. Many European countries (Greece, France, Poland) have witnessed several episodes of social unrest in the streets. The crisis has also led to overthrow of governments in Czech Republic, Latvia and Hungary. Many more governments fear spurt in social and political unrest in the future.

The ongoing financial crisis is essentially a crisis of capitalism. The free market policies, neo-liberalism and speculative instruments such as derivatives have only triggered and amplified the crisis but the root causes are in the contradictions of present-day finance-led capitalism.

Who created this crisis? No one can blame Hugo Chavez or Fidel Castro for creating this crisis. The crisis has been created by the “masters” of global capitalism (with their myriad faces) and their allies in the political system who allowed the system to collapse.

The crisis has shown that capitalism is inherently unstable and prone to failure. It has vividly shown that capitalism can destroy itself. It can not merely destroy financial wealth (paper money), it can also destroy jobs, social security, real economy, productive assets and ecological wealth.

The economic, social and environmental impacts of the crisis on India and other developing countries are very visible day by day. There have been large-scale job losses due to closure of businesses, people’s savings are lost by more than 50 per cent, cuts in welfare spending, sharp decline in bank lending to poor people, small enterprises and development projects and overall contraction in the economy.

A number of policy measures have been announced by the Western governments to restore stability in the financial markets. Trillions of dollars of public money have been spent to restore short-term stability in the markets through nationalization of banks and bailout packages. Given the huge amount of public money spent so far in the US, some have called the US as USSA (United Socialist States of America)!

However, it is important to note that for the US and Europe, nationalization is a temporary arrangement. If tomorrow stability is restored, these countries will switch back to same old free-market and private enterprise policies which led to the crisis. The political masters will handover the banks to private owners, just like what happened in Japan and Sweden in the 1980s and 90s. On the other hand, the concept of nationalization has different meaning for a number of social and political movements. For them, nationalization is a long-term policy tool to exert social and democratic control over the financial system and economy.

If you closely examine the rescue plans announced by the US and Europe, they are only concerned about short-term crisis-management. Their plans lack vision and strategy to make sure that such crises do not happen again. They do not address fundamental issues why this crisis happened, what are the root causes, why there is a stagnation in the real economy, how to resolve the contradictions of capitalism. Nor there is any strategy to solve global energy crisis and food crisis which are closely inter-linked with financial issues.

The Charter announced by German Chancellor, Angela Merkel, in March 2009 and endorsed by many European governments still talks about the benefits of market-driven world economy, a greater role for undemocratic institutions such as IMF and bank for International Settlements.

The Charter and other policy documents indicate the willingness among the political establishment to move away from market capitalism model to state capitalism model. For the past hundred years, one has seen that whenever one model faces a problem, the solution is to shift to other model.

When private capitalism in the US in 1929 faced a big crisis, the country shifted to welfare-state capitalism with New Deal. The purpose of New Deal was not to delink from capitalism but to discipline it. In the 60s and 70s when welfare-state capitalism faced a crisis in the Western world, they shifted to market capitalism model. Nowadays since market capitalism model is facing a big crisis, state capitalism model becomes an obvious choice.

Though one cannot deny that there are many positive features in state capitalism model, but both models have undermined people’s control over resources and people’s power. Democratic deficit is present under both models. Poor people had little say in the decision-making processes under both models. Environmental destruction and social deprivation has taken place under both models in varying degrees.

Therefore, in my view, the time has come to move beyond these two capitalism models. Rather than tinkering with the dysfunctional system, we should move towards building a new paradigm of development.

The crisis has offered an opportunity to push for a new paradigm of development which goes beyond market capitalism and state capitalism models. This is the right time for social movements and working class to push ideas for a real systemic change. The chances of building a new system are far greater now than a decade back.

Because of the crisis, the intellectual climate is changing. Many people who believed that neoliberal policies cannot be reversed, you have to work within the neoliberal policy framework should seriously review their positions.

Already some of the key demands emanating from diverse social and political movements in the West include:

* While we oppose the bailout of banks but we demand that innocent victims of crisis should be supported.

* If government can own and run banks, it can also own and run schools, hospitals, public transport, social housing and welfare schemes through democratic institutions.

* We want democratic control over financial and economic institutions.

* We want to redefine the role of governments and the international bodies in regulating the economy.

* We need a production system which sustains people’s lives and environment.

* We need to move beyond wealth accumulation and hyper-profits.

Based on these demands, a long-term political strategy towards transforming existing power relations could be built. If people’s movements are strong and united, they can push for a “New Deal” which can help in building a new paradigm of development.

The process of building new system should begin from the bottom of our society rather than by some elite grouping of economists and planners. It should be based on different power relations and social relations.

I also think that a new system cannot be purely an economic or social or environmental process. It has to be a political process. There is a need to develop new political strategies and organizations to mobilize people. After all, it is the politics which will decide the content and process of a new system.

To sum up, the crisis has offered us an opportunity to offer alternative paradigms of development and we should not allow this crisis to go waste.

Since the crisis is systemic, so our response should also be systemic. This is the real significance of the crisis.