Future146;s almost here

Once the United States decided that, for the most part, it was interested more in demonstrating its own hubris than tackling real challenges, it became nearly impossible to have a rational plan for a new governance coordination. Most other countries followed one of the two options: either they emulated the American system, or they were content to free ride on it and in doing so become complicit in producing infirmities in the international system. It is not accident, for example, that the Chinese are not gloating too much over the current crisis. This is not just for the obvious reason that they will also be somewhat hurt by this downturn. It is also because they were also the prime beneficiaries of the irrational degree of indebtedness of the American consumer. The Europeans, for all their self-image of being purveyors of a different kind of capitalism, were actually in the forefront of pushing for capital market liberalisation and various forms of deregulation. While America may have been at the heart of the crisis, everyone was free riding on the circumstances that led to it.

The crisis is also an object lesson in the fact that few politicians are prepared to explain economic truths clearly; they would rather sustain the illusion that the pain of adjustment can be deferred. Many financial players even on the Right had been pointing out, for instance, that the US economy was 8220;running on empty8221;, to use Peter Peterson8217;s phrase. The one true classic of contemporary economic history that remains an indispensable background to understanding the deep roots of the crisis, Robert Brenner8217;s The Economics of Global Turbulence, had long pointed out that asset bubbles risked creating a self-perpetuating vicious cycle by fostering the illusion that rise in asset prices itself constituted saving; that Bernanke8217;s so-called global savings glut was illusory. And he helpfully pointed out that the negative growth in American savings rate had a lot to do with the consumption patterns of the top 20 per cent of the population. He also doubted the capacity of the world economy to easily integrate imbalances or cushion the effects of deflating bubbles. But fundamentally no politician wanted to ever tell the American public that an economy could not function by for ever deferring coming to terms with debt. When a cultural history of this crisis is written, there will be something interesting to be said about the ways in which complex financial instruments and securitisation fed on a culture that had come to believe that debts could be for ever deferred.

This point is worth reiterating because even though politicians in the US are preparing the ground for the coming slowdown, they are not yet willing to acknowledge that radical reorientation this crisis might entail farcically, bonuses to executives are still being paid with public money.

The crisis has also come at time when there are very few world leaders that command widespread domestic mandates. Even if Barack Obama wins, his ability to carry along large numbers of Americans on sweeping changes is still very much an open question. Gordon Brown has salvaged his personal reputation a bit by acting more decisively and fairly than Paulson but his hold over the British public remains tenuous, Sarkozy is flamboyant but with credibility at home that is in inverse proportion to his panache overseas, Japan is in permanent political paralysis, Canada has a minority government with narrow horizons. Leaders on the world stage will be required to take major decisions, on forms of global governance, on restructuring their domestic social contracts. Sometimes politicians with weak mandates can rise to the occasion. But the gap between the magnitude of the decisions required and the legitimacy of those who will have to take them should be a source of worry.

The financial crisis will translate into blunt political movements. Already in Europe there are signs of that. The grand European project, already slowing down, now does seem more politically at risk. The appetite for further globalisation will certainly be attenuated, not because of technical arguments, but because the legitimacy of the elites that pushed for globalisation is seriously coming into question. So long as globalisation was embedded in the fantasy that living beyond one8217;s means was possible, there was support for it. But fundamentally now that the US will have to make a massive adjustment to live within stringent limits of its means, there is little doubt that there will be a backlash against globalisation. The US is grudgingly beginning to accept the fact that it cannot simply direct the world system as it pleased. But we know that global financial architectures come into being largely because they serve what the dominant powers perceive to be their interests. What is disquieting now is that it is not clear whose interests will drive the realignment, and whether it will take on board the wisdom of the proverb, 8220;Money is a good servant but a bad master.8221;

The writer is president, Centre for Policy Research, Delhi expressexpressindia.com