Column

The US financial meltdown and the administration’s inept responses to it have established two things beyond reasonable doubt: one, there is a God of Financial Services hovering above us (even if he’s sometimes asleep at the switch), and, second, he has a decidedly whacky sense of humour. The latest $300 billion bailout of banking giant Citigroup through capital injection and loan guarantees arguably takes the US one step closer to a creeping nationalisation of its financial system. The $700 bailout package initially approved by US Congress, which was intended to mop up financial institutions’ toxic sub-prime assets, has been tweaked to allow the government to buy up equity stake in banks; this radical, even “un-American”, move was required because the earlier plan would have taken a while to work through the financial system, and there was a risk that by then there wouldn’t have been any banks left to rescue.

Watching the unravelling of the West’s doctrinaire approach to the free market, it’s a trifle too tempting for Asian governments and leaders to give themselves over to a bit of schadenfreude. Only a decade ago, when countries across East and Southeast Asia were in the grip of a financial crisis of their own, they were given a earful of unsolicited advice from US treasury secretaries on the folly of “financial socialism” and bailing out investors who had been “reckless”. They were read the riot act for institutionalising “crony capitalism”, and counselled to raise interest rates and avoid creating asset bubbles.

The International Monetary Fund then became the West’s chief whip in taming the roaring Asian tiger economies. Among the conditions it laid down for the liquidity that Asian governments desperately needed were that they should allow failing banks to go bankrupt, end subsidies for the poor and raise taxes to run up budget surpluses. In short, they were required to give free run to the free market.

None of this is, of course, bad advice in itself. Yet, when free market principles are elevated to something of a universally applicable neoliberal doctrine, their hard-sell, without acknowledging the peculiarities of a situation or the painfulness of the implementation process, becomes grating in the extreme.

Worse, when the US now claims — as it does with the ‘socialist’ bailout of its banks and the huge budget deficits it’s racking up — that sauce for the Asian goose isn’t quite sauce for the American gander, the whole thing reeks of hypocrisy.

It’s hard, of course, to defend ‘crony capitalism’ or ‘financial socialism’ in any form or shape, but in the light of the meltdown of the global financial system in recent months, the ‘Asian way’ may have had a few things going for it. One of the underlying reasons for the current crisis is that ownership of financial institutions became far removed from management that it induced an element of out-of-body recklessness. CEOs embraced higher and higher risk, raked in huge bonuses and, when the going got rough, bailed out on ‘golden parachutes’. To the extent that the responses to the crisis restore that organic link between management and ownership, and introduce an element of sobriety in the way businesses are run, it’s a healthy development.

In fact, looking back, if the US administration had not been blinded by its neoliberal doctrine and had bailed out Lehman Brothers in mid-September with the same alacrity that it now brings to the table when it sees a tottering financial institution, the global financial system might have been spared the panic attacks of the past two months.

For all its faults and the micro-economic distortions it induces, Asia’s embrace of a benign form of ‘crony capitalism’ may be a viable model, to the extent that state guidance for private ownership creates a politically stable environment in which technocrats can pursue conservativeeconomic policies. Until the US fixes the problems wrought by the excesses of neo-liberalism, it can profit from the ‘Asian way’.

Email: venky@dnaindia.net