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2 Marking time until the
meltdown By Walden Bello
Ten years after the Asian financial
cataclysm of 1997, the economies of the Western
Pacific Rim are growing, though not at the rates
they enjoyed before the crisis. The region has
been indelibly scarred: there are greater poverty,
inequality and social destabilization than before
the crisis. South Korea's painful labor-market
reforms, for instance, have produced the quiet
desperation behind one of the highest suicide
rates among developed countries.
Meanwhile, despite all the talk about a
"new global financial
architecture", there is
little in place to regulate the massive amounts of
capital shooting through global financial networks
at cyberspeed - one of the chief causes of the
1997 crisis. Leave-it-to-the-market enthusiasts
tell us not to worry and confidently point out
that there has been no major crisis since the
Argentine bankruptcy in 2002.
But those
who know better, like Wall Street insider and
former US treasury secretary Robert Rubin, are
very worried even as they resist regulation.
"Future financial crises are almost surely
inevitable and could be even more severe. The
markets are getting bigger, information is moving
faster, flows are larger, and trade and capital
markets have continued to integrate," Rubin writes
in his 2003 book In an Uncertain World.
"It's also important to point out that no one can
predict in what area - real estate, emerging
markets, or whatever else - the next crisis will
occur."
A recent study by the Brookings
Institution confirms Rubin's fears: there have
been more than 100 financial crises over the past
30 years.
The reign of finance
capital The amount of speculative capital
sloshing around in global financial circuits is
truly mind-boggling. According to McKinsey Global
Institute figures cited by Financial Times
columnist Martin Wolf, the global stock of "core
financial assets" stood at US$140 trillion in
2005.
Traditional commercial banks held a
significant amount of global financial assets. But
non-bank financial operators, which have become
important intermediaries between savers and
investors, accounted for $46 trillion in 2005,
hedge funds for $1.6 trillion, and private-equity
investors about $600 billion. These figures and
other data on the stupefying rise and scale of
global finance capital were presented by economist
C P Chandrasekhar at the conference "A Decade
After: Recovery and Adjustment Since the East
Asian Crisis" held in Bangkok, the epicenter of
the 1997 financial earthquake, in mid-July.
The explosive growth of finance capital
stems from the overcapacity plaguing the global
economy. This has resulted in a marked slowdown in
investment in major parts of the global economy,
with notable exceptions such as China and the
United States. With the global economy stagnant,
capitalists are less motivated to invest in more
productive capacity and have more incentive to
move their money to speculative activity and to
squeeze more value out of already created value.
Speculative activity as a mode of
profit-making has also outrun trade, with the
daily volume of foreign-exchange transactions in
international markets standing at $1.9 trillion
daily, compared with an annual value of $9.1
trillion of trade in goods and services. In other
words, speculative activity in a single day
amounted to 20% of the annual value of global
trade. British financial journalist Martin Wolf,
one of the cheerleaders of globalization, captures
today's power relations among the fractions of
global capital when he writes: "The new financial
capitalism represents the triumph of the trader in
assets over the long-term producer."
Ten
years after the International Monetary Fund (IMF)
and the United States put the blame for the crisis
on the alleged non-transparency of financial
transactions in Asian countries, opaqueness is now
the order of the day when it comes to global
finance. The movements and mutations of
speculative capital have outstripped the capacity
of national and multilateral regulatory
authorities. In addition to traditional credit,
stocks and bonds, new and esoteric financial
instruments such as derivatives have exploded on
the financial scene. Derivatives represent the
financialization - the buying or selling of risk -
of an underlying asset without trading the asset
itself. Today, risk on everything can be
financialized and traded, from the pace of carbon
trading to the rate of Internet broadband
connections to weather predictions.
Paralleling the emergence of more complex
instruments has been the rise of hedge funds and
private-equity funds as the most dynamic players
in the global casino. Hedge funds, said to be key
villains in the Asian financial crisis, are now
even more freewheeling. Numbering more than 9,500,
hedge funds take short and long positions on a
variety of investments, with a view to minimizing
overall risk and maximizing profits.
Private-equity funds target firms to control,
restructure, then sell them for a profit.
Reserve accumulation
strategy With the absence of global
financial regulation to tame the whirlwind of
global finance, Asian countries have taken
measures to defend themselves from the volatile
global speculators that brought down their
economies when in panic they pulled $100 billion
out of the region. To protect their economies, the
member states of the Association of Southeast
Asian Nations have banded together with China,
South Korea and Japan to form the ASEAN Plus Three
financial grouping. This arrangement enables
member countries to swap reserves if speculators
again target their currencies.
Even more
important, these countries have built up financial
reserves by running massive trade surpluses, an
objective they have achieved by keeping their
currencies undervalued. Between 2001 and 2005,
according to Nobel laureate Joseph Stiglitz, eight
East Asian countries - Japan, China, South Korea,
Singapore, Malaysia, Thailand, Indonesia and the
Philippines - more than doubled their total
reserves, from roughly $1 trillion to $2.3
trillion. China, the leader of the pack, is
estimated to have more than $900 billion in
reserves, followed by Japan.
This has
resulted in a highly paradoxical situation. In a
global economy marked by strong tendencies toward
stagnation, China as producer and the United
States as consumer are the twin engines that keep
the world economy afloat. Yet to keep its economy
going, the US needs a constant flow of credit from
China and the other East Asian countries to
finance the middle-class consumption of goods
produced in China and elsewhere in Asia. In the
meantime, countries like those in Africa that
really need the capital from East Asia get very
little of these reserves, since they are not
considered creditworthy.
The demise of
the IMF Asian countries have built up large
reserves because of their bitter experience with
the International Monetary Fund. Governments
recall the crisis as a one-two-three punch
delivered by the IMF.
First, the fund,
along with the US Treasury Department, pushed them
to liberalize their capital accounts, which
resulted in the easy exit of foreign capital that
brought down their currencies. Then, the IMF
provided them with multibillion-dollar loans, not
to rescue their economies but to rescue foreign
creditors. Then, as their economies wobbled, the
fund told them to adopt pro-cyclical
expenditure-cutting policies that accelerated
their plunge into deep recession.
"Never
again" became the slogan of a number of the
affected governments. The Thaksin Shinawatra
government in Thailand
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