Mortgaged futures

As volatile markets continue to swing like a pendulum Hassan Nafaa* ponders the implications of the global financial meltdown

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Although I am not an economic expert I have been reading so many commentaries written by leading economists that I am willing to risk what I believe is a fair, if simplistic, outline of the current financial crunch in the US. Here are the main points:

- The US economy suffers from "economic balloons" that explode periodically, causing turmoil. In 2000 the dotcom balloon exploded, ending 10 years of boom and sending a tremor through the financial sector. Last year the mortgage balloon exploded. The fall out is till being felt, and not just in the financial service industry.

- The current crisis was caused by a long-running spree of real estate purchase by individuals and corporations, either for purposes of home ownership, investment or speculation. As a result, the shares of real estate companies shot upwards, further spurring the frenzy. As banks started offering credit without adequate guarantees, the financial balloon got bigger. It finally exploded in the summer of 2007 as millions of people began to default on their mortgages. The stocks of real estate companies plummeted and stock markets around the world began to unravel.

- The infection soon moved from the mortgage sector to the banks. As the shares of real estate companies were hit some mortgage lenders folded, and the banking sector was soon teetering on the brink of disaster. A crisis that began in the mortgage sector had moved on to the stock market, then the banks, and was beginning to impact on the rest of the economy.

- As things got worse the US administration intervened, cautiously at first. It pumped $150 billion into the banking sector in August. The magnitude of the problems became clear with the collapse of Lehman Brothers, one of the largest and oldest US investment banks. As signs of stress started showing across the banking sector, the spectre of another Great Depression loomed on the horizon. To avert such a possibility the US administration decided to take over Fannie Mae and Freddie Mac, two companies which between them controlled half of the US $12 trillion mortgage market. The companies had declared losses of $14 billion in one year. The US administration then formulated a package allowing the government to place restrictions on mortgage lending, regulate interest rates for lenders, and buy $700 billion worth of bad debts from faltering institutions.

- The congress debate that followed illustrated the political and ideological divide between the Democrats and the Republicans. Although the Democrats endorsed federal intervention, they resisted a bailout that was to be financed by tax payers, especially low- and middle-income households, many of whom are facing foreclosure on their homes. A crisis that has been caused by the greed of financial institutions and spearheaded by spectacularly paid corporate chiefs should not be resolved at the expense of the tax payers, the Democrats argued.

- US allies, including Germany and France, didn't hesitate to blame the current US administration for the crisis. Although they had no other choice but to show solidarity with the US in a crisis of such global dimensions, many expressed doubts about the efficacy of unregulated market correction mechanisms, calling for more controls and transparency.

The crisis, which appears to be financial and economic, has political and social roots. It has two inter-related aspects, one having to do with the political and social struggle now taking place on the US scene, the other having global dimensions. The crisis will not only affect the structure of the international order, but determine the future of capitalism.

Despite their obvious concern neo-liberals maintain that the current crisis is just a passing tremor, one among many in the last 100 years or so of capitalism. In each of the previous cases, they point out, capitalism rallied and surged ahead.

The above conclusion seems somewhat glib. It does not take into account that the problems have arisen during a period of unprecedented globalisation and that they have hit the US economy -- the mainstay of capitalism -- harder than any other place. Could it be that capitalism has reached its natural limits?

Launched with the industrial revolution and the emergence of the nation state, capitalism has taken three centuries to become a truly global regime. It remained robust thanks to the technological advances it nourished and the massive changes in economic and social structures it introduced around the world. Along with these developments came political and social disturbances that erupted occasionally in the form of revolutions and wars that changed the political map of the world.

Europe gave birth to the industrial revolution and for long remained at the cutting edge of a capitalist expansion that brought imperialism and pillage to the four corners of the earth. The rush to acquire colonies was the main cause of World War I, an event that gave us capitalism's arch enemy, communism. Another round of political and social tensions in Europe led to the rise of fascist regimes and then to World War II. Afterwards a new international order emerged with the US and the USSR as superpowers.

But the wheels of history didn't stop turning. As the Cold War went on Europe managed to regain its strength and the defeated countries of WWII re- emerged as major nations. Western Europe then launched into a process of integration that would eventually help win the Cold War.

The emergence of the extreme right wing in America changed things yet again. Intoxicated by the rapid and spectacular collapse of the Soviet Union they thought the moment auspicious for building a US empire over the remains of the Soviet Union, an empire that would live for another century.

It seems that the huge advantage the US had over the rest of the world's major powers emboldened the extreme right to a point where it could no longer appreciate the risks of unilateralism, especially the type of unilateralism that is backed by military force. The US right wing also underestimated the time Russia and other world powers would take to recuperate and reassert themselves on the international scene.

Armed with theories of the end-of-history and clash-of-civilisations, America's right hoped to justify its schemes of pre-determined aggression. As soon as Bush won the 2000 election the right wing started making plans to invade Iraq, acting on the assumption that the move would give it total control over the Middle East and its oil resources.

It was a massive miscalculation. The war on Iraq turned into a gigantic drain on US resources. Russia pulled itself together, regaining confidence more rapidly than expected. China went on growing in an exceptional manner. And other regional powers emerged onto the scene in Asia and Latin America. This was not the international order the Americans had in mind.

If the credit crunch in the US tells us anything it is that the US has lived for years beyond its means. The federal debt jumped from just under $4 trillion in the late 1980s to nearly $9 trillion at present. The US has run a trade deficit since 1970 which reached $758 billion in 2006 alone. So far this year the budget deficit has reached more than $400 billion is what I think he means. In addition, the recklessness of the neo- conservatives at the heart of Bush's administration has not only eroded US credibility abroad, it has triggered a major political crisis at home.

I am not suggesting that the US is about to collapse or become a second-rate power. But what the mortgage crisis has made clear, at least to some Americans, is that the domestic and foreign policies of the past eight years cannot be allowed to continue. The US needs to put its house in order, abandon its imperial dreams, and pursue a foreign policy that is more in keeping with its real resources.

Perhaps the Americans are about to discard neo- con ideas for a course of action that involves a tamer capitalism and more humane globalisation. Or perhaps the opposite will come to pass, in which case the world may go in the other direction -- over the edge.

* The writer is secretary-general of the Arab Thought Forum, Amman, Jordan.