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When Americans Over-Spend The Rest of the World Goes Bankrupt!S. HewageIn the early 1990s the architects of economic globalization—mainly
from the West—argued that economic globalization is the ultimate
path to global wealth, economic prosperity, and above all, to the establishment
of democracy around the world. The United States was in the driving
seat steering towards the new global economic order, with the full backing
of the international financial institutions such as the International
Monetary Fund (IMF), the World Bank, and the World Trade Organization
(WTO). The key policy makers of the U.S. government, together with the
top officials of the IMF and the World Bank, developed a package of
crucial policy guidelines to be followed by all governments in the world
to ensure smooth implementation of global economic policies. This policy
package, known as the “Washington consensus of deregulation”
was praised by leading conservative “Think Tanks” in the west. One of the key recommendations of the “Washington consensus,” was to keep the governments out of the free market activities. A leading proponent of the “Washington consensus” is Francis Fukuyama, the author of the now disputed “End of History” thesis that claimed liberal democracy had defeated communism, and the west had won the battle against the cold war. Fukuyama argued that the “world made up of rational democracies…have much less incentive for war, since all nations would reciprocally recognize one another’s legitimacy.” While Fukuyama later admitted that he spoke too soon about the lack of desire for wars among the leaders of liberal democracies and the respect for the internal sovereignty of nations, a great deal of neo-liberal economic policies were driven by ideology and dominant class interests of the West. They had very little to do with real economic strategies designed to increase economic productivity of the global masses, reducing poverty, and income inequalities. In the year 2000, one percent of the world’s population owned 40 percent of the global wealth, according to a report by the Helsinki-based World Institute for Development Economic Research of the United Nations University. Americans account for 42% of the world's billionaires and own 37% of the total global wealth. By contrast, the bottom half of the world adult population owns barely one percent of global wealth. The latest crisis of the global financial market that began in the banking sector in the United States shows that the neo-liberal economic policies of the last twenty years were driven by sheer greed, to say the least, and they were not based on realistic assessment of economic activities. The epicenter of the crisis, the United States, has been consuming the global wealth at an alarming rate that it has exceeded the real economic strength. Whether it is to finance its war in Iraq and Afghanistan, or to fund their domestic programs, the spending in the U.S. has surpassed its national revenue to the level that the American national debt today stands at $ 10 trillion, and is increasing at the rate of $ 3.29 billion per day. To put it another way, the share of every American citizen in the national debt is approximately $ 33, 661. This is a crisis of over-spending, and this crisis is most evident at the individual level. The sub-prime mortgage that was the beginning of the current global financial crisis is simply a crisis brought on by individual citizens of the U.S. buying homes that were beyond their means. The sub-prime and adjustable mortgages that began in early 2005 at the height of the U.S. housing bubble was a part of the complex lending mechanism adopted by the financial institutions. According to this system of lending money to individuals buying homes, the borrowers had easy initial terms such as very minimum down payments and lower interest rates. As the housing market was going up, the sub-prime mortgages encouraged many to assume difficult mortgages hoping that they would be able to refinance at rates that were as favorable in the future. However, as the interest rates started to rise and housing prices began to go down, refinancing became more difficult, resulting in loan defaults and foreclosures. The fact of the matter is that the sub-prime mortgage mechanisms encouraged a vast majority of people to borrow money to purchase homes, who would otherwise not have been able to get home loans in the first place. In this case, both borrowers and lenders acted with excessive greed. This is the ultimate consequence of a deregulated market enabling greedy executives of major financial institutions to design lending policies without any oversight. To finance these schemes, U.S. sub-prime related commercial papers were sold to millions of investors around the world through banks and brokerage firms. Major financial institutions around the world faced an unprecedented liquidity crisis as the loan defaults and foreclosures in the U.S. began to mount—and the global economy came crashing down. The governments around the world had to pump billions of dollars to cash trap banks and other financial institutions that created the mess in the first place. The U.S. government alone, although grudgingly, approved a $ 700 billion rescue package to guarantee the value of bad assets owned by banks, and to protect the individual deposits. The irony is that these are the very institutions that wanted their governments to stay out of the market place. In the meantime, supporters of the “Washington consensus,”
such as Fukuyama, continued to back the policy of deregulation as the
key to expand the global economy. As recently as 2004, Fukuyama insisted
that the “state sectors of developing countries were in very many
cases obstacles to growth and could only be fixed in the long run through
economic liberalization.” His main criticism against countries
in Asia and Latin America is that those countries have excessive regulation,
and are not opening up their economies, particularly their financial
sector, to the global competition. The economies that are now the least
affected by the current global financial crisis are the very ones that
are the least open to global financial markets. Need I say more?
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