Capitalism, the prevailing world economic system is on a trial. Its fundamental principles of government non interference with the market mechanism-to guarantee a fair play and non distortions in the price structure; optimum allocation of resources; serving the public interest well and self correcting seem to have failed. Neo- liberal economic predictions are failing, and market rationality and decision are collapsing in the current global financial crisis.
The credit crunch that started with the sub-primed mortgage in the United States led to home loan defaults and the collapse of the sub- primed mortgage market economy around the globe. More than $600 billion of credit losses and write- down by financial institutions worldwide ensued. Crashed capital market and recessing economies prompted banks to hoard cash; a $700 billion bailout of companies like Fannie Mac & Freddie Mac and take-over of America International Group (AIG). The US Treasury devised plans to buy home loans, mortgage- backed securities and other assets deemed necessary to effectively stabilize the financial market. The crisis has spurred an unprecedented government intrusion into the market: 37 Billion Pounds in struggling banks in Britain; government guarantee of bank deposits and debt for two years as a measure to restore confidence in the Ireland’s financial sector; about 640 Billion Dollar and 400 Billion Euros in Germany in form of loan guarantee; 64 Billion Capital injection in Dexia – the ailing lender to local governments in France , Belgium and Luxembourg governments and partial nationalization of Fortis by the Dutch and Luxembourg governments.
The impact of the crisis is still far reaching. IMF experts warn that a number of industrialized nations will either experience minimal growth or fall victim to a recession. Even worse, the real economy will not feel the full brunt of the crisis until later on.
As the world financial turmoil rages and government try to remedy the crisis, the Bretton woods institution (the agents of free market system) has been spectating thus questioning its sincerity in administrating the same package to the developing nations. Are IMF and World Bank packages for developing nations alone? Does what French President Nicolas Sarkozy call “New Capitalism” signal the failure of the market correcting mechanism of the market system? What happened to market solutions to market problems? Is capitalism redefined as the French President would have us believe? Is capitalism on self destruction as predicted by Karl Marx?
In proffering a common solution to the financial and economic crisis, world leaders under the umbrella of G-20 Economic Summit recently took far reaching decisions which included: increasing government spending and cutting interest rate with a view of stimulating economies; ensuring proper regulation and supervision of the financial markets; boosting developing nations through funding and greater voice; reforming the World Bank and IMF and abolishing new trade barriers for the next 12 months.
Critics of the bailout packages condemned it as a reward for financial institutions for their greed, corruption and reckless speculations and contended that governments should have allowed a market solution for a market problem, by allowing them to fail or bought out by stronger ones. One hopes that the world is not headed towards a redefinition of the free market system and the market domination of neo-liberal globalization.
Ferdinand K. Nwobodo,
MPS Kenya 2007 Essay winner