'The end of the world as we know it'

Claude Arpi

Born in Angoulême, France, Claude Arpi's real quest began 36 years ago with a journey to the Himalayas. Since then he has been an enthusiastic student of the history of Tibet, China and the subcontinent. He is the author of numerous English and French books including. His book, ‘Tibet: the lost Frontier’ (Lancers Publishers) was released recently.

During the last leg of his foreign trip to the United States and France, Prime Minister Manmohan Singh attended the EU-India summit in Marseille. It was a Monday morning. French President Nicolas Sarkozy and Jose Manuel Barroso, President of the EU Commission, had spent their week-end conferring about what is presently the hottest topic in the West: the financial crisis.

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During the press conference that followed the summit, the Indian Prime Minister made a statement which surprised many. India was not really alarmed by the latest developments as the meltdown primarily concerned the US and the West. Sarkozy immediately intervened to say that nobody would be immune and though the crisis may not touch India immediately, each and every nation would suffer at some point.

Images: Global leaders vow to fight financial crisis

The Western nations were so worried that the next day, the French President started his daily meetings with ‘experts’ at five in the morning. A few hours later, the nuclear deal was signed between France and India. The attention on the ‘crisis’ was such that the event was hardly noticed by the French press (and by the Indian media, but that was probably due to some ‘important’ cricket match).

Since then, the world has fully entered the ‘great depression’ with stock exchanges crashing at every corner of the planet.

The Indian government has remained unruffled, assuring the public that it is a Western crisis and the Indian banks were sound. Despite Delhi’s brave face, the deteriorating situation is worrying. Though ‘the banks are safe’, the Finance Minister, P Chidambaram, lost his cool and cancelled his visit to Washington where he was to attend the Fall meeting of the World Bank and International Monetary Fund (IMF). It was an important gathering; the Finance Ministers of the countries of the G-20, the richest nations of the planet, including India, were to discuss the alarming situation.

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Chidambaram declared that he wanted to be “available for tackling any situation arising out of the spreading global financial crisis and its ripple effect on India.”

On the occasion of the IMF and the World Bank meeting, the World Economic Outlook (WEO) of the IMF released a report stating that “India's Gross Domestic Product (GDP) is likely to slowdown to 7.9 per cent in 2008 and slide further to 6.9 per cent in the next year”. It added that “countries in emerging Asia are not totally immune to the financial crisis in the US and its subsequent fallout”.

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Admitting that private consumption and export continued to do well, it pointed out: “In India, growth in the second quarter came down to about 8 per cent, on the back of weakening investment.”

A few days later, the Finance Minster had changed his tone: “This is a time of uncertainty.” But he immediately added: “Yet, even in a time of uncertainty there are some facts that cannot be – and ought not to be – ignored. The Indian economy continues to grow at a satisfactory rate.”

He later quoted the IMF report: "The Indian economy would continue to do well despite the impact of the global liquidity crunch" and stated: “The stock market indices are important indicators, but they are not the only indicators of the health of the Indian economy. The ratio of investment to GDP remains high at over 35 per cent at the end of the first quarter of 2008-09” and he then mentioned several other positive factors.”

Images: Financial crisis glossary

Speaking to ‘experts’ in the field in France, I gathered that the most serious part of the story is that nobody really understands the complexities of the financial tsunami. Only glimpses of it can be grasped here and there.

Everyone agrees that it was triggered by the sub-prime ‘game’; that the source of the problem is the United States and its wild and unregulated financial system; everybody is also aware that if the house of cards starts crumbling, the entire edifice will collapse.

Images: Stock indices at multi-year lows

But ‘experts’ point out that the system is too complicated for anyone to have any ready-made solution. It is certainly not those who created the catastrophe who can solve it.

During the last few weeks, the European governments have been on a fire-fighting exercise to avoid an immediate collapse. They have tried to restore some confidence in the system by pumping vast amounts of money into the banking system. But another question immediately arises: where are these $700 billion that President Bush is speaking about?

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On October 13, President Sarkozy presented a French plan. The government would provide €320 billion for inter-bank guarantee and €40 billion for the recapitalisation of the banks. Angela Merkel and Gordon Brown announced similar plans.

But world governments are today betting that the colossal amounts will only remain virtual. Sarkozy had to admit: “the reasonable bet that we are making while giving this [State] guarantee, is that we may not need to use this guarantee”.

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A friend of mine who knows the way the banking system has been functioning told me: “In recent years, it was like going to Monte Carlo casino and betting [or Las Vegas for the United States]. Bankers had become gamblers.” Bush or the Europeans leaders are today betting once more, this time not for personal profit, but for the ‘good cause’ of salvaging their country’s economy and employment. India is doing the same. But this is only fire-fighting.

Several months back, economist and columnist S. Gurumurthy had told me in an interview: “The American economy has survived because it was able to saddle the bad loans on to other countries. The monies lent on sub-prime basis were not American monies. The mortgaged loans of the US banks belong to banks in the Middle East, in Korea, in Taiwan or even in India. It is a US crisis at global cost. …Today, America has become a burden on the world. They have over $7 trillion debt to the world and they are borrowing at the rate of $2 billion a day.”

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One thing that seems to have being lacking in the traders and bankers around the world (including India) is common sense. How could this mad system have continued for ever?

Recently in France, a young trader called Jérôme Kerviel working for the Société Générale, one of the largest French banks, was charged for trading losses valued at nearly €5 billion. Though it was said to be the largest banking scam ever, he has not been arrested because he was trading with the knowledge of his superiors and he did not personally enrich himself. He told the enquiry officials that it was ‘current practice’ to take some risk; all banks had to do it. One day, he had been ‘unlucky’. However, in the past he had made considerable profits for his employer.

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William Engdahl, an economist and author of the best selling "A Century of War: Anglo-American Oil Politics and the New World Order”, explained thus the situation: "Power and greed are the only visible juice driving the decision-makers in Washington today. Acting in the long-range US national interest seems to have gotten lost in the scramble. …It is what happens when elected Governments abandon their public trust or responsibility to a cabal of private financial interests.” His conclusion is: “This is the end of the world as we knew it. The American financial superpower is gone. The only important question will be what and how will the alternative be.”

All serious observers today concur that “it is the end of the world as we knew it.”

Immanuel Wallerstein, a research scholar working in the Department of Sociology of Yale University, believes that it is the end of capitalism. He told Le Monde: “Today, the crisis is similar to the collapse of the feudal system in Europe between the 15th and 16th century and its replacement by capitalism. This period, culminating during the Wars of Religion, saw the collapses of the hold of the royal, seigniorial and religious authorities on the rich farmers and urban communities. During this period, unexpected solutions were found by tentative steps and errors, though in an unconscious manner.’” It resulted in the birth of Capitalism.

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Kemal Dervis, the head of the UNDP, recently declared that the crisis is going to be far more severe for the poorest nations which need foreign investments and exports to survive. He regretted that while the world public assistance is estimated at $100 billion, military budgets amount to $1,300 billion and a larger amount will be needed to salvage the system. At the same time, rich nations are reconsidering their promise to give $25 billion to Africa to cut malnutrition by half by 2015.

However, many believe that the crisis will also have positive effects: it will certainly stop the shameful practice of ‘golden parachutes’ to multinational’s CEOs who receive millions of dollars as handshakes after being sacked for mismanagement. Another practice may come to a halt: the indecent ways of living of certain banks. It was found that Fortis Bank, on the verge of bankruptcy (since then it has been salvaged by the Belgian government), had organized a ‘lunch’ in Monte Carlo for some partners costing €1,50,000.

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An interesting aspect is the emergence is old Europe as a pole of dynamism and innovation to solve the present crisis. Non-stop bilateral or multilateral summits have been held under the initiative of President Sarkozy of France (which holds the current presidency of the European Union). European leaders have shown that they are ready to compromise their national interests for the greater general good.

That has not been the case of the United States. Despite the reluctance of President Bush, European leaders are determined to totally ‘change the system’. “The role of banks is to finance development, not speculate,” Sarkozy declared in front of the banking bigwigs in New York.

In the process, it will probably mean that the predominance of the United States established after the 1944 Bretton Woods Agreement will be a thing of the past.

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