By Anoop Sukumaran

 

The Tsunami of the Financial Variety

When James Bond begins to support socialist presidents in Latin America it is indeed a reflection of change. For even a cold war relic like James Bond to shift and accept that winds of change are indeed blowing is a strong reflection that the free market has proven to be a mirage that has left millions of people around the world worse off, and an environment that is teetering at the brink of disaster. We are in the midst of an unprecedented crisis, which some say is as big if not bigger than the Great Depression of the 1930s. Governments are panicking; bailouts are the order of the day. The same governments which refused to increase budgetary allocations for public health or education have now found billions of dollars to bail out financial institutions which had done badly due their own reckless investments. There is a growing body of analysis that traces the roots of the present crisis, some of which now point out that the signs were always there yet the warnings never heeded.

It is now estimated by the International Labour Organization (International Labour Office, 2008) that 50 million people will be unemployed before the end of 2009 and 200 million workers may be pushed into poverty. These estimates might actually be very optimistic ones, as the actual figures at the end of 2009 will probably be much higher.

This global crisis cannot be seen in isolation. It was preceded by other crises, only those earlier crises were relatively confined within regions and did not have the scale of the present one. In 2008, several almost consecutive global crises have triggered what can be called the ‘mother of all crises’. These consecutive crises could be broadly be classifed under three headings: the sub-prime mortage crisis, the 2008 oil crisis and the food crisis. They are indicative of the extent of structural crisis within neoliberalism.

The first question one might ask is, what on earth is a subprime mortgage? ‘Sub-prime lending’ is a fancy financial term for high-interest loans to people who would otherwise be considered too risky candidates for a conventional loan. These include middle-class families who have accumulated too much debt and low-income working families who want to buy a home in the inflated housing market. To cover their risk, lenders charge such borrowers higher-than-conventional interest rates. Or they make ‘adjustable rates’, also known as ‘teaser’ loans, which offer low initial interest rates that jump sharply after a few years. The lenders did not hold on to the loans, however; instead the loans were re-packaged and sold to investment banks and investors, who, enticed by the high interest rates, assumed these were goldmines and in turn sold them again. The whole scheme worked as long as borrowers made their monthly mortgage payments. Mortgage brokers, who occupy an unregulated niche of the lending world, made a commission for every borrower they handed over to a mortgage lender. These brokers are like the drug dealers on the street corner. They are the smallest link in a lending chain that includes some of the largest and most respectable Wall Street firms.

Large mortgage finance companies and banks made big bucks on sub-prime loans. Last year, 10 US lenders—Countywide, New Century, Option One, Fremont, Washington Mutual, First Franklin, RFC, Lehman Brothers, WMC Mortgage, and Ameriquest—accounted for 59 percent of all sub-prime loans, totaling US$284 billion.

Wall Street investment firms set up special investment units, bought the sub-prime mortgages from the lenders, bundled them into ‘mortgage-backed securities,’ and for a fat fee sold them to wealthy investors around the world. According to The New York Times, China’s second-largest bank, Bank of China Ltd, held almost $9.7 billion of securities backed by U.S. sub-prime loans. These investors, who bought the collateralized securities, were happy as long as they got paid their higher interest on the bonds or other investments.

When the borrower, the average Joe (yes, Joe the Plumber too) could no longer afford his mortgage payments and defaults, the foreclosures began. With it came the great unraveling of a financial system built on greed and more greed. The executives and officers of some mortgage finance companies cashed out before the market crashed. The poster boy is Angelo Mozilo, the CEO of Countrywide Financial, the largest sub-prime lender. He made more than $270 million in profits selling stocks and options from 2004 to the beginning of 2007. And the three founders of New Century Financial, the second largest sub-prime lender, together realized $40 million in stock-sale profits between 2004 and 2006. Paul Krugman reported in The New York Times that last year the chief executives of Merrill Lynch and Citigroup were paid $48 million and $25.6 million, respectively.

Even before the true extent of the sub-prime crisis was evident, investments had begun to create yet another bubble and a crisis.

The Oil Crisis

This saw the spiraling of oil prices reaching a peak of $147 in June 2008, breaking all previous records. The reasons for this unexpected and seemingly unstoppable upward trend in oil prices were many, including the increasing demands of India and China for energy (BBC, 2008). This was touted as the period of peak oil. However, the role of speculation in the spiking of the prices was relatively played down, until the rapid decline in prices falling well below the $50 mark in November 2008 conclusively proved the driving role of speculation in the price hike and its consequent decline. (See Figure 1.)

Source: Energy Information Administration, http://tonto.eia.doe.gov/dnav/pet/xls/pet_pri_wco_k_w.xls

‘…Even those who believe that the market is based on fundamentals accept that the participation of speculators has created greater volatility in the market. Factors that in the past might have moved the price by a few cents could now move it by more than a dollar. It has also given sudden relevance to factors that in the past would not have moved oil prices at all.’ (BBC, 2008)

While oil exporting countries found themselves with a sudden surplus, on the other hand oil importing countries had their development plans thrown out of gear, with transportations costs spiraling sky high, subsequently increasing costs of goods and services and also contributing to spiraling prices of fertilizer and inputs into agriculture and food production, contributing in part to the food crisis.

The Food Crisis

Many scholars would argue that the food crisis has been ongoing for much longer than acknowledged. It is indeed a fact that there are more people going hungry today despite producing more food than ever in human history. While this would lead us to examine history with a very different lens, for the moment we shall remain with the sudden spike of food prices in 2008. In this article, by the food crisis, I am referring to this short period. The causes for the food crisis is multifaceted, an amalgamation of factors, each significant and overlapping with others. The exact causes are a matter of intense debate, but facts on the ground were clear. There was an unprecedented increase in the prices of staple cereals. In many developing countries this led to food riots (International Herald Tribune, 2008) and forced governments to take action.

‘Shortages and high prices for all kinds of food have caused tensions and even violence around the world in recent months. Since January, thousands of troops have been deployed in Pakistan to guard trucks carrying wheat and flour. Protests have erupted in Indonesia over soybean shortages, and China has put price controls on cooking oil, grain, meat, milk and eggs.

Food riots have erupted in recent months in Guinea, Mauritania, Mexico, Morocco, Senegal, Uzbekistan and Yemen. But the moves by rice-exporting nations over the last two days — meant to ensure scarce supplies will meet domestic needs — drove prices on the world market even higher this week.’ (Bradsher, 2008) See

The factors contributing to the severity of the food crisis ranged from climate change to population growth and also to changing consumption patterns, particularly in China and India. Sound familiar?

The World Bank points out that global food prices have risen by 75% since 2000, while wheat prices have increased by 200%. The cost of other staples such as rice and soy beans have also hit record highs, while corn is at its most expensive in 12 years. The increasing cost of grains is also pushing up the price of meat, poultry, eggs and dairy products.

According to the latest FAO estimates 963 million people worldwide are going hungry (FAO, 2008)—a trend the FAO believes is likely to intensify, despite recent fall in prices. The oil crisis exacerbated the problem; the FAO food index (see FAO food index above) clearly shows a spike in June corresponding to the spikes in oil prices. While climate change, changing consumption and bio fuels are factors to the rise in food prices, they do not explain the spikes in the prices. This is explained by speculation and the collapse in the value of the dollar.

‘This is being tacitly encouraged by the central banks, such as the US Federal Reserve, who are trying to ignite another asset bubble to replace the real estate and dotcom bubbles which have burst in spectacular fashion. It’s the third bubble and it’s hitting the third world hard.’

Desperate for quick returns, trillions of dollars are being taken out of private equity and financial derivatives and ploughed into food and raw materials. The financial websites call it the ‘commodities super-cycle’. It ranges from precious metals at one end, to corn, cocoa and cattle at the other - speculators are even placing their bets on water prices.

The collapse in the price of the dollar means that most international commodities are more expensive for poor people. The dollar’s decline is a result of the low interest rate policy of the Federal Reserve. When rates are set below the rate of inflation, investors have to keep moving their massive funds from sector to sector in search of higher returns.

They piled into the internet stocks in the 1990s as the boom in dotcoms got under way. Then they shifted into real estate and complex financial derivatives such as collateralised debt obligations based on sub-prime US mortgages. Now, with the collapse of the property bubble across the world, investors are on the move again, and the only place left is commodities.’ (MacWhirter, 2008)

The question is an age old one, and one with no obvious answers. Philosophies, dogmas and religions have dealt with it, tried to reason with it and stigmatise it, yet avarice is alive and well and is rewarded in the economic system of today. The financial crisis today and in the past have brought to focus the centrality of unbridled greed of a few running amuck with the price being paid by the working classes. The wage earners, small producers and peasant farmers never benefit from the ‘good times’ of the boom but are also the worst hit in the ‘bad times’. This is now being reflected around the world. However, the responses are more to ‘stimulate’ the economy by putting more public money into a hemorrhaging economy rather than putting into place a system that inherently dis-incentivizes speculation, and which promotes equity, fairness and sustainability. The fundamental purpose of economic organization should be to provide for the basic needs of a community, in terms of food, shelter, education, health, and the enjoyment of culture, as opposed to a concentration on the generation of profit and on the growth of production for its own sake. Economic life must also be organized in such a way that it enhances rather than destroys the environment and safeguards natural resources for the use of future generations. Economic life must be informed by bottom-up development strategies, in which people and communities have the power to make economic decisions that affect their lives, in contrast with the dominant model which marginalizes grassroots communities and fosters international economic relations in which the center subjugates the periphery.

Are there choices? While there is no silver bullet, no one-size-fits-all alternative, it might be helpful to take a quick look at some options. What I have tried to list down below is neither a comprehensive or nor exhaustive list, but rather a small snapshot of some options to consider toward meaningful change.

The Tobin Tax

The name Tobin Tax and the original concept derives from James Tobin, a Nobel-laureate economist at Yale University. While Professor Tobin initiated his ideas in 1972 (Patterson & Galliano, 1998), it was not until the Asian financial crisis that his ideas began to get any serious attention. The concept of Tobin tax, also known as the Currency Transaction Tax (CTT), while not essentially a complete alternative to the present economic model, was seen as means to rein in speculation in the currency markets. The basic idea is to levy a charge (tax) of between 0.1% and 1% on the conversion of one currency into another. This would be too low to discourage long-term investment; but would represent a substantial annual rate on transactions which involved buying and selling a currency within a single day, week or month. The CTT aims to do the following:

•to reduce exchange-rate volatility by reducing currency speculation;

•to raise revenue for international organizations and development; and

•to make national economic policies less vulnerable to external shocks.

The foreign exchange market has a daily volume in excess of US$1.5 trillion, which is 50 times the size of the transaction volume of all the equity markets taken together. The total volume of the foreign exchange market is calculated at in excess of four hundred and seventy-five thousand billion dollars ($475,000,000,000,000) each year. A base rate tax as small as 0.005% would generate in the region of $15 - $20 billion of revenue every year (Stamp out Poverty, 2002).

For the most part the CTT would operate at this very low base rate raising revenue to finance international development. However, if a nation’s currency becomes subject to a speculative attack and its value changes dramatically (exceeding an agreed band of safe fluctuation) then the tax rate would automatically rise to an extremely high rate (as high as 50%) so as to make it unprofitable for financial actors to continue trading in that currency.

The interest in the CTT became intense in the late 1990s and the formation of a movement called Association for the Taxation of financial Transactions for the Aid of Citizens (ATTAC). ATTAC was key player in the anti-globalisation or alter-globalisation movement and continues to do so.

‘Your money’s value is determined by a global casino of unprecedented proportions: $2 trillion are traded per day in foreign exchange markets, 100 times more than the trading volume of all the stockmarkets of the world combined. Only 2% of these foreign exchange transactions relate to the ‘real’ economy reflecting movements of real goods and services in the world, and 98% are purely speculative. This global casino is triggering the foreign exchange crises which shook Mexico in 1994-5, Asia in 1997 and Russia in 1998. These emergencies are the dislocation symptoms of the old Industrial Age money system. Unless some precautions are taken soon, there is at least a 50-50 chance that the next five to ten years will see a global money meltdown, the only plausible way for a global depression.’ (Lietaer, 2002)

Complementary community currencies (CCCs) describe a wide group of currencies or scrips designed to be used in combination with standard currencies or other complementary currencies. They can be valued and exchanged in relationship to national currencies but also function as media of exchange on their own. Complementary currencies lie outside the nationally defined legal realm of legal tender and are not used as such. The rate of exchange, scope of circulation and use in combination with other currencies differ greatly between complementary currency systems, as is the case with national currency systems (Wikipedia, 2008). This is not a radical alternative, in the strictest sense of the term, but provides an opportunity and means to extricate communities from an economic system which moulded and transformed outside the community. The CCCs does not attempt to replace existing national currency systems but are complementary to them.

There are many similar trading systems around the world, commonly know as community exchange systems, local exchange and trading systems (LETS), mutual credit trading systems or time banks.

The main difference between these and conventional money systems is that the scope of the money is usually restricted to a geographical area or organisation. Money in the above types of complementary currencies does not ‘exist’ like conventional money so there is no need for a supply of it need for any to start trading.

Money in these systems is a retrospective ‘score-keeping’ that keeps a record of who did what for whom and who sold what to whom. There can therefore never be a shortage of money and money does not have to be created by a third party (banks or government) outside the circuit of buyers and sellers. For this reason money and credit are free, for the buyers and sellers ‘create’ it at the moment of trade.

There are many different types of CCCs and they are growing in popularity throughout the world. Some use ‘hard’ currencies, where notes and coins are issued by the group for their own use; others use time as a currency rather than notes; and yet others use a ‘virtual’ currency which is the recording of the values of goods and services exchanged.

Complementary currencies foster the real wealth of communities and rebuild a sense of worth and self-esteem among the users. Around the world an increased sense of vitality is reported in all sectors of the communities using them. While these trading systems might have a slightly different function for each of these sectors, it certainly has relevance to all.

The Bolivarian Alternative for the Americas

The Bolivarian Alternative for the Americas (ALBA) represents the first attempt at regional integration that is not based primarily on trade liberalization but on a new vision of social welfare and equity. Alternatives to regional integration based on neoliberal free trade are often either theoretical to the point of impracticality, or so micro that scaling up presents huge challenges. ALBA is not only macro in scale, but has been taking concrete shape. ALBA is by now well known as the antidote to the US-backed Free Trade Area of the Americas—an alternative that is based on cooperation and solidarity, without forgetting economic sustainability. The uniqueness of ALBA is that it is built on forging a new road away from multinational competition and neo-liberal free trade, so that each country retains its own sovereignty and is able to develop its own country according to its own necessities and desires. It is based on breaking away from the economic colonization that swept across Latin America in the 1990s through a wave of privatizations, free trade agreements, and structural adjustment policies that pushed Latin American countries further into debt and increased the already aggravated inequality ratios prevalent.

But there remain many questions and the debate continues as to what exactly constitutes ‘Bolivar’s alternative,’ about which programmes, agreements, and joint ventures fall under the grand umbrella of the ALBA, and about what actually sets the ‘alternative’ apart. ALBA itself is a work in progress, towards which the countries of Cuba, Venezuela, Bolivia, and the rest of Latin America are, in the words of one ALBA analyst, ‘taking their first steps.’ The first official declaration and subsequent agreement made under the framework of ALBA was signed between Cuba and Venezuela in Havana on 14 December 2004 (with Bolivia additionally joining in April 2006). Among twelve guiding principles highlighted in the declaration is the blueprint for the cooperation, solidarity, and integration encompassed within ‘Bolivar’s Alternative.’ The proposals include a continental literacy plan; a Latin American plan for free health care; an education scholarship programme; a Social Emergency Fund; a Development Bank of the South; a regional petroleum company, Petroamerica; a regional television station, Telesur; and many others. Some of the proposals have moved faster than others, such as Telesur and Petrocaribe.

The Latin American Television Network, Telesur, which has been seen as the counter-weight to CNN and which has correspondents across the Americas, was formed between Argentina, Cuba, Uruguay and Venezuela (as 51% owner) over a year ago. The network is the main communicational initiative set up under the framework of ALBA, with the goal of ‘developing a new communicational strategy for Latin America’.

The joint venture, Petrocaribe, was formed between the Venezuelan state-owned oil company PDVSA and fourteen Caribbean nations in June of last year, and has opened the doors for the Caribbean nations to receive oil at preferential rates, with 40% financing, 25 years to pay it off, and the potential of partial payment in other non-monetary goods and services. Since Petrocaribe, various other joint ventures have also been formed, including the formation in April 2006 of a joint venture between PDVSA and a group of mayors from Nicaragua’s Sandinista party. Of course, these agreements and joint ventures under the framework of ALBA are not without their problems. Many argue that the solidarity and cooperation in participation from various nations is not uniform, and that the main motivation for the involvement of certain nations comes purely from an individualistic and economic standpoint. This could be the case with many of the PDVSA joint ventures, where Venezuela appears to be lending its solidarity and extensive oil reserves to the partnership for little in return and to those who have little to offer. But the same could be said for other relationships which appear to be overwhelmingly unbalanced. Cuba receives only Venezuela’s ‘friendship’ in exchange for the high costs of the thousands of Venezuelan patients who have traveled to the island nation over the past five years for medical treatment as part of the 2000 Cuba-Venezuela pact, which is now also considered to be within the framework of ALBA. But as explained above, the Cuban-Venezuelan (and now Bolivian) experience of integration, cooperation, and solidarity, within the exchange of resources, doctors, students, medical patients, and other support within the framework of ALBA is a unique and special one in which the three countries appear to hope to pave the road for the integration of the Americas.

ALBA with its imperfections does provide an instance of true south-south cooperation in the spirit of solidarity, with the potential for replication in other parts of the world. However, the significant aspect of this is the political willingness and perspectives of the governments. There are no Asian governments which have such political perspectives that would facilitate an ALBA-esque process in Asia.

Participatory Economics (PARECON)

Participatory economics, also known as the abbreviation parecon, is a theoretical economic system that uses participatory decision-making as an economic mechanism to guide the production, consumption and allocation of resources in a society. It is seen an alternative to contemporary capitalist market economies and also an alternative to centrally planned socialism or coordinatorism—leadership by elites. It is also described as ‘an anarchistic economic vision’, and could be considered a form of socialism, since under parecon, the means of production are owned by the workers. It emerged from the work of activist and political theorist Michael Albert and radical economist Robin Hahnel, beginning in the 1980s and 1990s.

‘Parecon owes, in particular, to the anarchist and the libertarian socialist heritage, to the most recent experiences of the New Left of the Sixties, but also to every historical uprising and project aimed at eliminating class rule from the beginning to the present. It has learned from successes and from failures.’ (Albert, 2006)

The underlying values that parecon seeks to implement are equity, solidarity, diversity, workers’ self-management and efficiency. (Efficiency here means accomplishing goals without wasting valued assets.) It proposes to attain these ends mainly through the following principles and institutions:

• workers’ and consumers’ councils utilizing self-managerial methods for decision-making,

• balanced job complexes,

• remuneration according to effort and sacrifice, and

Parecon is anti-market as it argues markets are inherently inefficient and only the interests of the buyer and the seller are considered and not those of others who might be affected by this transaction (Hahnel, 2005). In traditional economics these impacts on others outside the transaction are called externalities. For instance when vehicles using combustion engines are sold, and bought the transaction does not involve the cost of the pollution to the environment and its impact on health. While traditional economics deals with externalities through Pigovian taxes, Parecon supporters argue that these taxes are not capable of fully understanding the social costs. They also argue that the externalities are the norm rather than the exception; hence the premise of mainstream economics that externalities exist only for some goods is a false one.

Advocates of parecon say the basis of capitalism is the concept of private ownership, which confers upon every owner the right to do with their property as they please, even though decisions relating to some property may have unwanted effects on other people. This, they argue, is particularly true when it concerns corporations, since corporations are legal entities that have an existence as a legal person, but are not human and do not die (though they can cease to exist through bankruptcy or takeover) but the activities of this legal person have extremely wide implications for many people.

Although participatory economics is not in itself a general political system, clearly its practical implementation would depend on an accompanying political system. Advocates of parecon say the intention is that the four main ingredients of parecon be implemented with a minimum of hierarchy and a maximum of transparency in all discussions and decision-making. This model is designed to eliminate secrecy in economic decision-making, and instead encourage solidarity and mutual support. This avoidance of power hierarchies puts parecon in the anarchist political tradition.

Although parecon falls under left-wing political tradition, it is designed to avoid the creation of powerful intellectual elites or coordinatorism, which was perceived as the major problem of the economies of the communist states of the 20th century. The workplace democracy model, the Wobbly Shop, was pioneered by the Industrial Workers of the World, in which the self-managing norms of grassroots democracy were applied.

It must be underlined that Parecon is still conceptual, while there have been smaller experiments with the theoretical perceptions like in Venezuela. In 2004, Venezuelan President Hugo Chavez created a movement named the consejos comunales (communal councils) aimed at creating more responsive local governance by handing local budgetary and legislative power to the councils. This movement was seen by Chavez as one of the most important of the five motors of the ‘Bolivarian Revolution’ in that they should influence policy from the grassroots upwards. Great interest in the councils was evident between 2004 and 2007 in that thousands formed quickly and $5 billion was given to them during this period. Communal banks are a pre-requisite to receiving funds from the government so as to avoid clientalistic relationships of dependency (Gill, 2008).

Labour and Change

In the coming months, the working class is going to be hardest hit in the economic downturn. The powerful US auto industry finds itself in dire straits. The United Auto workers union, while commendably refusing to allow a reduction in wages for its members, was unable to push the bailout package for the industry through the Senate. The successful attempt of the Republicans to refuse a bailout unless the unions agreed to a wage cut to make them ‘competitive’ is a clear indication of the continuing strength of pro-market forces. The market is in shambles and there remains no excuse to argue that the market is efficient. Yet its promoters remain defiant, and unrepentant. As we speak, thousands if not hundreds of thousands of workers are being laid off, across different sectors in almost every country, some as part of ‘downsizing’ of companies and others simply finding their factories closed (UE, 2008).

Labour’s Response to the Crisis?

The labour unions’ response to the magnitude of the crisis has been different, depending on the political ideologies, leadership and country specificities. It also shows a fragmented movement that is grappling to make its presence felt.

‘Few unions have suggested a desire to initiate a major struggle over the crisis, and almost none talk about the need to end the capitalist system. Yet virtually all federations, even the most conservative, have felt it necessary to speak out on the damage to working-class lives and the need that the world’s governments do something for working people.’ (La Botz, 2008)

The survey by La Botz on major trade union positions on the financial crisis, showed that European and North American trade unions were more moderate and less radical than their Latin American and Japanese counterparts. Large unions in countries like India were silent on the issue.

We have yet to see militant responses, from the labour movement. The movement is in a reactive mode at present, which is content to criticize and suggest reform (that is obvious) of the system but aside from the Latin American movements there is hardly a proactive position of demanding radical change. The quagmire which finance capital has dragged everyone into is deepening, and it is not enough to merely suggest a stop-gap fix to stem the crisis for the time being. This is probably time to demand a complete overhaul of the system.

The role of labour movements would have to be at the forefront of this demand. It is not enough to save the hemorrhaging of jobs at the moment, because as history shows it will happen again unless the fundamental causes are dealt with. 

There have been reports of some militant actions as well. The United Electrical, Radio and Machine Workers of America (UE) occupied the Republic Windows and Doors factory in Chicago on 5 December, after being given just three days’ notice by the company that the plant was closing. After five days of occupation and subsequent negotiations, the workers won a settlement. The settlement totals $1.75 million. It will provide the workers with eight weeks of pay they are owed under the federal WARN Act, two months of continued health coverage and, pay for all accrued and unused vacation.

Questions for Today?

In the fallout of the financial crisis, these are questions that is going to be asked: by alternative or alternatives are we looking at a or types of state-socialist models that replaces the state-capitalist model? Or are we looking at alternatives based on the participatory economics model or some such similar idea? This is a debate that needs to happen urgently, not merely at levels of the intelligentsia but at all levels. If capitalism is flawed then what should replace it and how? Is there the need to redefine development away from the model pursued by capitalism? And how different will the new vision be? Will the new vision be an answer to make society equitable, sustainable and just?

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A 1 Bia note issued by the Community Currency Bia Kuchum in Thailand. The Bia was later withdrawn under opposition from the Central Bank of Thailand.