What on earth has become of the free market? Presidents and premiers, captains of industry and humble commoners, all crave state intervention. The robust fist of obtrusive government has become the fashion, shoving aside the gentle and invisible hand of the venerable free market. Has capitalism given up the ghost on laissez faire? The CPA’s bright young neo-liberal Asanga Welikala and Lanka’s other more made to order conformists have all failed to take the bait and rise to the challenge of my rude invectives and crude barbs.
The political and financial leaders of the capitalist world hop hither and thither in bewilderment, but eventually bludgeon the economy with the heavy hand of state power, eager to salvage the relics of expiring capitalism. And the knight in shining armour riding to the rescue of the ravished capitalist maid is the emerging ‘global state’. Is ‘State capitalists of the world unite!’ the motto in vogue?
Sarkozy, epitome of the French right, is ranting like a closet socialist in rut; he makes the French state to intrude and wants the whole blithering EU to pour billions of Euros into a European rescue package. Britain’s Gordon Brown, having nationalised banks, and worked himself into a Keynesian froth worth hundreds of billions of pounds, is now in a spat with the German Finance, Minister Peer Steinbrueck, who thunders against ‘crass Keynesianism’. Paradoxically, the very same Steinbrueck then declares to German lawmakers: "The world will not be the same as before the crisis. One thing seems probable to me: The United States will lose its status as the superpower of the global financial system which will become multipolar," and predicts that, "state funds and banks from Asia, the Middle East as well as Europe, with a universal banking model, will play a bigger role in the new global financial markets". His demand: "More internationally coordinated regulations to prevent future crises". Oh great leaders of the ‘free world’, what ails all of thee? Doest thou not know which way to face and which way point thy posterior?
As always America leads the way
European tumescence contrasts with American priapism. The recent (16 December) proposals of the Fed (Federal Reserve Bank, America’s central bank) are breathtaking; I have never heard before of a central bank take such bold state capitalist initiatives. It aims to reach out over the head of the usual intermediaries, the banking system, and lend directly to "certain classes of borrowers", such as mega companies and recently state acquired mega mortgage providers like Fannie Mae and Freddie Mac, I guess. The Fed has announced it will buy corporate bonds and commercial paper from corporate issuers; probably the first time the Fed (or any great central bank) will be printing money except in exchange for Treasury (government) bonds. This comes in the wake of pushing real interest rates into negative territory (nominal rates between 0 and 0.25%) and pumping hundreds of billions of dollars to buy part ownership of banks and acquire ‘toxic assets’. These efforts failed to restore inter-bank and general lending, that is, re-liquefy the financial sector; hence these new manoeuvres.
Some proposals are even bolder. Dennis Snower, president of the Keil Institute of World Economy and professor of economics at Keil University in Germany, proposes in the Financial Times (FT) of 18 December that the state should identify "systemically relevant financial institutions" and give them a "solvency guarantee"; to me this means nothing less than virtual nationalisation of the commanding heights of finance capital. He then wants their debts to be converted into equity, or to put it in simple words he wants owners of bonds issued by these institutions to be compelled to forego the bonds in exchange for shares. This would make them partners with state capital rather than holders of guaranteed monetary instruments. A friend of mine, HRS, is even more radical: "Since the USA is going to default on its sovereign debt anyway" (so much for ‘the full faith and credit’ of Uncle Sam) "it should negotiate a cancellation of a part of its foreign bond obligations, now, in exchange for honouring the remainder at a later time" he proposes. All this may sound harebrained today, but may well be the common menu of tomorrow.
A recent FT editorial was entitled "The Fed rips up the rule book" and this could mean only one thing; the American central bank has decided to go all the way it needs to with state capitalist measures – screw Adam Smith, his disciples and the Austrian School. High risk-spreads (in layman’s words, banks demanding high premiums above the base rate since they are terrified by the collapse of other banks and companies) have forced the Fed to tell conventional capitalism to get lost and intervene with state capitalist tools.
What is state capitalism?
State capitalism is not socialism, may not even be a step in the direction of socialism, and may be positively counter-revolutionary. Nazi Germany is a horrendous example and some political theorists argue that Stalinism was a relapse of the Soviet Union into state capitalist barbarity after Lenin’s heroic efforts to hold on to workers’ power was isolated and defeated when post-WW1 revolutions in Germany and elsewhere crumbled. The difference between state capitalism and plain vanilla capitalism is that the former deviates from the normal arrangement of market competition where numerous capitalists compete against each other. Instead, the highest classes of society get together in a corporatist economy and relinquish state power to fascists, bureaucrats or thuggish populists. Usually, state capitalism is born of crisis and this time as well; what is different on this occasion is that democratically elected governments, not fascist thugs, are at the helm of the state. Governments pronounce decrees, take over banks, suspend the market in part or in whole and usurp economic powers spending billions of exchequer dollars.
Conversely, the difference between state capitalism and the first steps on the road to socialism is that the latter envisages progress in the direction of a classless society. Hence subaltern social classes, directly or indirectly, play a central role in the transition; they hold or share political power. Although, unavoidably, there will be some similarities, this is the crucial difference between a transitional society on the way from capitalism to a more just and equitable society (transitional post-revolutionary cases), and emergency-room state intervention struggling to revive capitalism after cardiac arrest.
Globalisation to the rescue
The measures in hand to pull the global economy out of recession cannot work except as a coordinated international effort involving several countries, principally America, the EU, China, Japan, and to a degree the petrodollar-fattened Middle East. Americaforeign debt is about $5 trillion and if US Treasury bondholders unwind their positions the dollar will crash (or be printed in shiploads) or the US will have to default. This is a calamity that all parties wish to avoid; but there is a contradiction in that in the medium term the dollar will revert to its secular decline anyway. So retaining Treasury bonds is a double-edged sword. A settlement of this issue cannot be deferred much longer and has to be worked out through intergovernmental negotiations.
The problem, in fact, is far more complicated because Washington needs lots of money in the next two years to finance its stimulus packages - about $2 to $3 trillion in the mid-2008 to, say end-2010, period. Where is the money to come from; obviously foreign borrowing and the printing press, but there are limits to the latter. Foreign borrowing will take the form of the US continuing its large current account deficit, especially with China, Japan and the oil producers. This compounds concerns expressed in the previous paragraph, making international agreements more pressing.
At the same time, the whole capitalist world is egging China to stimulate economic growth to balance declines in American and European. While China’s recent $600 billion stimulus package is welcome (some of it recycled old projects) more is expected. The problem however is that Beijing would like to cash of its astronomical foreign reserves to pay for the stimulus, but this flies against the previously discussed constraints. Furthermore, the Chinese have to be persuaded to revalue the yuan, allow more imports and avoid a disastrous trade war with America and Europe. Again, globalisation to the rescue of Western capitalism!
The Chinese leaders, bureaucratic imbeciles that they are, are still unwilling to commit themselves to a large expansion of the domestic economy designed for the benefit their own people – that is mass healthcare, education, housing for the poor and wage increases at the bottom of the ladder. Power rests in the hands of an assemblage of state, provincial and party functionaries and this is best illustrated by the regimes preference for weighting the stimulus package towards breaks for exporters and large infrastructure schemes whose plum projects will go to large state or private corporations. Nevertheless, shrinking export industries and raising unemployment in 2009 and the paranoia of social unrest will push Chinese Stalinism to swing consumption in the direction of the broad population.
There are other monumental tasks facing the global financial system; creating a currency regime for global trade and capital flows and restructuring the Breton Woods institutions. The dollar in its present form as a currency issued by one country is no longer adequate for the facilitation of world finance and trade; something fundamental has to change, but I will not discuss this here. Nor will I take up how new global monetary and development institutions can be created, and how a new regimen of international regulations formulated. What is for sure is that capitalism needs international state involvement on a scale that resembles the emergence state capitalism on a global scale.