After the global financial calamity struck in 2008, many analysts put the blame on the uncontrolled credit expansion in the United States that preceded it. But E.H. Carr reminds us that complex historical phenomena are rather like an accident that takes place during a misty night when a driver speeds along a slippery road, a pedestrian crosses it, and the brakes of the motor vehicle fail. What exactly caused the accident?
Land of inequalities
The merit of Raghuram Rajan's work is that he traces the many fault lines that lay beneath the surface not only in the American economy, polity, and governance, but also in the increasingly distorted economic and financial relationships between nations. Rajan begins with the American scene. America is a land of opportunities, but they can be taken advantage of only by those who have the resources, physical as well as human. Because these resources are unequally distributed, it is becoming a land of growing inequalities. In 1976, the top one per cent of households accounted for 8.6 per cent of income, but by 2007 this had shot up to 23.5 per cent. And in 2008, seven out of 10 Americans had stagnating incomes. Because of the strong commitment to the free enterprise system, the country is also rather backward in the safety net it provides for workers. But a democratic polity cannot completely ignore them, and there is something of a moral commitment to help the needy.
Under these conditions, the most seductive answer has been easier credit. “Politicians love to have banks expand housing credit, for credit achieves many goals at the same time. It pushes up house prices, making households feel wealthier, and allows them to finance more consumption. It creates more profit and jobs in the financial sector as well as in real estate brokerage and housing construction.” And everything was safe and good, for a while at least.
Taking risk was another of the goodies, again, for a while. The risks taken by individuals, bankers, brokers, government officials, the Fed, the regulators, were all rational, but nobody envisaged the systemic risks that were difficult to handle. There was a great deal of reliance on market forces, which work fairly well when conditions are ‘normal', but reinforce panic when things go wrong. Similarly, it was thought that modern technology would make it possible for everyone to make informed decisions, but the opportunities the system provided to distort information were not adequately grasped. Those who took big risks were handsomely remunerated when profits were made, but there were no punitive measures to deal with failures. The knowledge that the government would intervene in the event of a crisis encouraged individuals and institutions to seek rewards for themselves.
Turning to the global level, it is well-known that the debt-fuelled domestic consumption of the U.S. was sustained by rapidly rising imports, especially from Asian countries. The economic and political conditions in Asian countries that resorted to an export-led strategy of growth — initially Japan, then South Korea, and now China — have been different from those in the U.S. and Europe. The engine of their growth was external demand, with the U.S. acting, for political reasons, as the “market of first resort”, as a commentator put it. But an import of goods and services sustained by high household and government indebtedness soon hits limits and necessitates adjustments all round.
The most crucial of these is the external value of currencies. Thus the U.S. made out a case that the Chinese currency was being deliberately kept undervalued to give that country a competitive edge in the international market, but China has been slow in making the necessary adjustments and for its own reasons too. Capital still flows into many developing countries, although the principles of finance, banking, and governments' role in them are very different from those in the capital exporting centres and countries. Thus, trade and investment policies, considerations of domestic sovereignty, and the role of international agencies are all involved — rather messily too — in what is frequently referred to as ‘global capitalism.' If the global crisis is to be resolved, every one of them has to be addressed, and that is not going to be easy. Hence Rajan thinks the crisis is far from over.
While the book, thus, is more comprehensive in its approach than many others, Rajan does not go deep enough. There is no recognition that it is in the essence of capital to become centralised and its control to pass into a few hands and that it is this tendency that finance now represents. It is for the same reason that inequalities within countries and across nations tend to grow, especially during periods of rapid and finance-directed ‘growth', which, far too often, is nothing but increasing incomes and wealth for a few. And, when Rajan champions safety nets for the poorer sections, the argument seems to be based on the dictum that a society that cannot take care of its poor will not be able to save its rich. Surely, much deeper analysis is needed if the remedy for the present crisis lies in the creation of social orders informed by justice within countries and across nations.