Stormy skies above the New York Stock Exchange
building (© Cheryl Casey / Dreamstime) BY a vote of 228 to 205, the US Congress defied the White House on 29 Sept 2008 by voting against a US$700 billion rescue package to bail out near bankrupt American financial institutions. It is interesting to note that two-thirds of Republican Congresspersons voted against the bill presented by their own president, George W Bush.
The next day, the Dow Jones Industrial Average plunged by 777 points to 10,365, the worst drop ever on the New York Stock Exchange. US$1.2 trillion worth of investors’ money evaporated into thin air overnight.
The stock markets in Europe and the rest of the world followed suit, registering various degrees of massive losses. The much-touted globalised economy seems on the threshold of a financial Armageddon!
A time of crisis is a time for finger-pointing. Who is to blame?
Pointing the finger
It all started with too much money.
Copious amounts of foreign investment funds have poured into the American financial market for nearly a decade. Instead of investing prudently, most investment banks decided to make credit easy to the housing market in what is now known as subprime loans. That means leading money to borrowers whose ability to repay might not have met stringent standards.
In recent months, there have been widespread defaults in these subprime loans, leading to a huge drop in real estate prices. The banks could not recover their bad loans by selling these houses as credit became harder to acquire. Eventually, the banks were strapped for cash, and fell like nine pins. By September, 14 of the biggest American banks had gone bust. Household names have become household garbage.
(© Shaun W / sxc.hu)Voting against party lines
Why did the Republican Congresspersons vote against a president from their own party?
You have to understand the Republican’s conservative philosophy through the years since the Second World War. Republicans believe in a kind of laissez-faire market fundamentalism: the market works best with the least government intervention. If there is a crisis in financial institutions, the “unseen hand” of Adam Smith will allow the market to right itself. A government that bails out failed banks is entirely antithetical to this conviction in a free market economy and monetarism.
This is also an election year in America. The country is already in recession. Middle- and lower-middle classes of Americans are grappling with unemployment, retrenchment, and inflation caused by high fuel and food prices. So why should taxpayers cough up US$700 billion to bail out failed banks for mistakes that bank boards made? Who would bail out struggling and failing small businesses in the US?
The easy thing would be to blame greedy banks for putting investors’ money in dubious ventures. After all, banks may prosper or banks may go bust. But their CEOs always get fabulous salaries, bonuses, and perks.
(© Mark Huls / Dreamstime)Political origins
It is easy to miss the political origin of this financial debacle. Deregulation and free-market economy practised by successive American governments have created a free-for-all financial and economic ambience in which excesses, greed, and the idea of limitless consumption have all contributed to the present mess. Marxism may be dead now, but Karl Marx’s criticism of free enterprise and capitalism is still valid.
Put it this way: even if the current crisis on Wall Street can be eventually ameliorated by a bail-out scheme, another round of crisis will occur in 10 years or so.
Writing for the Guardian in his 28 Sept 2008 column titled A Shattering Moment of America’s Fall from Power, John Gray has this to say about the crisis:
“Our gaze might be on the markets melting down, but the upheaval we are experiencing is more than a financial crisis, however large. Here is a historic geopolitical shift, in which the balance of power in the world is being altered irrevocably. The era of American global leadership, reaching back to the Second World War, is over.”
US Treasure Secretary Henry
Paulson (Public domain) He noted the symbolic irony of how the Chinese had just sent astronauts into space for a walk at a time when the US Treasury Secretary Henry Paulson was brought to his knees.
Indeed, the countries least affected by the Wall Street meltdown are those that manage their economy without subscribing to the American philosophy of free enterprise, such as China, the Arab States, and Russia. They are also some of the biggest creditors to the US whose national debt has reached astronomical proportions. How these countries react to the crisis in terms of ways and means of managing their American bonds and currency will partly decide the future of the US in the 21st century.
Shifting power balance
Some American analysts have predicted that the days of Wall Street as the citadel of Western capitalism will be over soon. In the midst of a presidential election, this period is one in which the American will choose a chief executive of the nation who can lead them in a new direction to transition to a new way of doing business. John McCain does not seem like a viable option.
Najib: In denial? (Public domain)
According to Gray, the shift in geo-political balance of power will see a new multi-polar world in which newly emergent regional powers in economy and finance will come to the fore on the world stage. Asia is one such regional power.
In the short term, the American financial crisis will have a negative impact on the Malaysian economy, starting with our manufacturing sector that exports electronic goods to the US.
The assurance by new Finance Minister Datuk Seri Najib Razak that we will not be too much affected is a sign of denial. It would seem that we, too, need a geo-political power shift in our domestic politics in order to chart a new economic course in the uncertain seas ahead. 
Sim Kwang Yang was DAP Member of Parliament for Bandar Kuching in Sarawak from 1982 to 1995. His column, An Examined Life, is published weekly on Malaysiakini.com.
