Wayne O’Leary

Confronting the Demon

The rolling financial crisis and widening recession President-elect Barack Obama has inherited is not just another in the long line of periodic downturns that have bedeviled the American economy in the postwar period. Rather, it’s something completely new: the first worldwide fiscal emergency brought about by globalization, the force that was supposed to ensure prosperity for all. The timeless cyclical nature of capitalism, its rhythmic booms and collapses, has not been repealed by journalist-proselytizer Thomas Friedman’s “flat” world; it’s simply moved to a higher, more uncontrollable level.

The first intimations that the integrated world economy celebrated by the globalizers would not be all it was being cracked up to be came early in the present decade when outsourcing, the bane of blue-collar America, began to cut deeply into the nation’s manufacturing base and its psyche. Nevertheless, the “old-economy” job losses could be rationalized away as a natural, and ultimately healthy, process of creative destruction leading to a new, beneficial high-tech service economy. Now that white-collar jobs are disappearing as well, cheerleading economists are less sanguine; in fact, they’re downright worried. Nearly half of Americans share that foreboding; a 2008 Pew survey indicated that only 53% of them saw international trade as a positive, down from 78% six years earlier.

But it’s the present financial crisis, not the long-simmering doubts about so-called free trade, that has really brought the country face to face with the realities of globalization. Outsourcing and manufacturing job losses, after all, took place when the globalized economy was running on all cylinders; denial was still possible. At present, we’re faced with what happens when the engine shuts down completely.

Economic interconnectedness is the core of the problem. Since corporate-led globalization was given its head, cross-border integration has been proceeding apace. A few recent examples affecting US firms: General Electric has sold its GE Plastics division to Saudi Arabia’s Saudi Basic Industries; Microsoft and IBM have set up R&D centers in India and China; Halliburton, the notorious energy-services firm, is now headquartered in Dubai on the Arabian Peninsula; and in a symbolic sign of the times, the venerable New York Stock Exchange is seeking to list its shares on China’s Shanghai Stock Exchange. Even where companies have not moved or changed hands, foreign involvement has become the norm. The Carlyle Group, foremost private-equity fund in the US, has taken as a partner the United Arab Emirates, whose sovereign-wealth fund Mubadala (a government entity) owns a 7.5% interest in the firm; Mubadala has also announced intentions to become one of GE’s 10 largest shareholders in the near future.

Sovereign-wealth funds, a form of state capitalism, were created at the height of the latest free-market mania to invest government monies in the international private sector. They have become heavily vested in Western hedge funds and private-equity firms, as well as large banking institutions, such as Citigroup and Morgan Stanley, adding to global interdependence. One, the Abu Dhabi Investment Authority, actually rescued Citigroup and saved it from bankruptcy during the financial meltdown with an infusion of funds; another, the China Investment Corp., acquired a $3 billion stake in the US private-equity company Blackstone in June 2007, then lost $500 million when Blackstone’s shares plunged a year later. Economic integration giveth and it taketh away.

The upshot is that globalization has, for better or worse, linked the world economies in unanticipated ways, making for unintended and potentially catastrophic consequences. Asian and Middle Eastern governments, either through their central banks or their aforementioned sovereign- wealth funds, now control $7 trillion in financial assets worldwide, including the national debts owed them by countries like the US; that figure is projected to reach $15 trillion by 2013. The other side of the coin is that the number of Western banks with a presence in developing countries is approaching 1,000, and emerging nations have $1 trillion deposited in those suddenly rickety institutions, three times the level of 2002.

You can see where this is going: Economic dislocations anywhere affect the world economy everywhere. This is especially true regarding financial linkage. As suggested by The Economist in its recent special report on the current crisis (to which this analysis is indebted), losses incurred by major European banks dabbling in American mortgage products could cause tighter credit in a country as far out of the mainstream as, for example, Hungary. In the words of its editors: “Globalised finance, it turns out, is an inextricable part of global integration ... more trade inevitably produces more capital integration. A financial infrastructure grows up to support global supply chains.”

The downside of this unplanned and unanticipated development has been the banking collapse that began with Wall Street’s deregulated shadow banking system of money-market funds, securities dealers, and hedge funds, and quickly infected London’s financial district. From these twin epicenters of “Anglo-Saxon finance,” it spread like a cancer. As of October, worldwide losses on mortgage-related debt originating in the US were approximately $1.4 trillion. Globally, banks alone had $600 billion in credit-related losses. Before financial integration and the “securitization” it brought, bank failures and crashes were localized or regionalized; now, they’re worldwide. Exotic, risk-spreading financial instruments increased available capital, but they also gave rise to such doomsday anomalies as a $55 trillion global market in credit-default swaps. The Frankenstein monster created by the free-market globalizers has awakened and turned on its creators.

There is no quick, easy way out of the fix market fundamentalism has gotten the world into, but over time governments can institute regulatory reforms to tame the beast of globalization. This does not necessarily presume a retreat into nationalistic, protectionist shells. It does, however, entail a drawing back, pending renegotiations, from the flood of flawed, open-ended free-trade deals adopted in recent years. It also involves ending the regime of debt, whereby nations, as well as businesses and individuals, put everything on the tab and hope that economic growth will somehow balance the books. Finally, the cure includes answering the call of British Prime Minister Gordon Brown—he’s been the stand-up hero in this situation so far—for a new Bretton Woods agreement like the one that stabilized the world economy and regulated capital flows following World War II. It’s time to cage the beast.

Wayne O’Leary is a writer in Orono, Maine.

From The Progressive Populist, Feb. 1, 2009

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