By Eva Cheng
Despite a chain of summit meetings since early October among the world's most powerful countries, they remain far from a solution to the spreading economic crisis which, exploding first in July last year in Asia, is threatening to strike at the system's imperialist core — the US and Europe.
None of the emergency gatherings — of the Group of Seven (G7) richest countries on October 3, the Group of 10 on October 4 and the Group of 22 on October 5 — has produced anything beyond general statements and wishes.
The joint annual meeting of the World Bank and the International Monetary Fund, which started on October 6 and at which 182 member nations were represented, failed to produce anything concrete either, except for US President Bill Clinton's call for yet another "emergency summit" in November.
The main differences were on whether, in order to shield Third World economies from damaging speculative attacks, imperialist countries should relax their push to force more of them open to foreign (mainly imperialist) capital.
There were also disagreements on the extent to which countries should be obliged to reveal key sensitive economic data (which generally are useful to speculators), and how widely and tightly financial institutions should and could be regulated.
These contentious points were billed as a solution to the world economic crisis. But they come nowhere near tackling its root causes: overflowing excess productive capacity coexisting with workers too poorly paid (or denied a job altogether) to meet their needs, all due to the tyranny of the capitalist order, geared to the profit-maximising "right" of capital owners.
Due to overfilled markets, a mammoth and increasing mountain of capital fails to find productive investment attractive and roams around the global financial market in pursuit of higher "yields".
Speedier and more frequent transactions increase profit opportunities. They also increase market volatility, but that's not the speculators' problem.
Speculators increasingly seek to swamp a small market. If it means devastating those economies, so be it.
'Insufficient demand'
As the crisis deepens, more capitalist ideologues acknowledge the centrality of the overcapacity problem, which they sometimes called a problem of "insufficient demand". This is a far cry from the fairytales in the earlier days of the crisis, when they put the blame on excessive risky borrowing by Third World capitalists while insisting that those economies were fundamentally sound.
Acknowledgement of the importance of overcapacity has increasingly seeped into business magazines — there is "too much spare (or excess) capacity", "inadequate utilisation of industrial capacity", "enormous overcapacity", "chronic overcapacity". They portray it as a problem of individual industries.
The October 1 edition of the Far East Economic Review takes it further. Under the headline "Dead Weight — Asian Recovery Hinges on Jettisoning Excess Capacity", specific examples of "stunning" "excess supply" in some countries are followed by the conclusion that this situation could apply to "virtually every sector across the region".
"... the same intractable equation applies: Supply far outstrips demand. Basic materials, steel, cars, petrochemicals, semiconductors — the list rolls on."
To this problem, the key capitalist remedies have been jacking up public expenditure — mainly handouts to capitalists such as subsidies, contracts and cheap loans, and supplementary temporary tax breaks for workers — or manipulating "monetary conditions", essentially cutting interest rates to reduce the cost of capital.
Following this recipe, the Japanese government has spent trillions of yen (funded by borrowing up to the annual production of its entire economy) and has also cut official interest rates to near zero since its economy plunged in 1990.
Both strategies failed to stimulate production. Japan's recent move to cut the official interest rate by 0.25% to 0.25% was a desperate move that carries mainly symbolic value.
Tokyo's early October plan to give workers "Happy Monday" off work and coupons worth 30,000 yen (A$375) for each citizen or 4 trillion yen in total (nearly 1% of GDP) for shopping confronts the crucial question of demand, but only superficially and can at best produce temporary results.
A rude wake-up call
Months into the crisis, the US was still trumpeting its bull market and its longest (seven and a half years) postwar economic boom, while key European countries declared the crisis had little to do with them.
That's been changed by the near collapse of the Long-Term Capital Management (LTCM) hedge fund. It woke even the most complacent US and European capitalists to the fact that they are in the same boat. Major US and European banks recently reported huge losses in the "emerging markets" (the Third World) and from hedge funds.
US Federal Reserve (central bank) chairperson Alan Greenspan told a Congressional hearing on October 2: "There are trillions and trillions of dollars out there in all sorts of commitments around the world, and I would suspect there are potential disasters running into a very large number, in the hundreds".
The probability that the "whole system would necessarily unravel was, in all of our judgments, sufficiently large to make us very uncomfortable about doing nothing" about the LTCM, he said.
Hedge funds' ability to hurt lies in banks' huge lending to them.
Capitalists from the First World were already hit by plunging demand and rising defaults in Asia. That weakened imperialist banks through rising bad loans and fewer new lending opportunities. Any major bank going under has the power to trigger a damaging chain of defaults.
Banks
Because of their critical importance to capitalism, banks are the most regulated of all businesses. "Prudential" standards have been imposed on them since the world crisis in the '70s and tightened in the wake of the so-called Third World debt crisis of the '80s, centring on stricter capital controls.
But this is a house of cards. The key requirement is that banks should move towards having at least $8 of capital to support every $100 worth of "risk assets" — loans and other uncertain investments.
Shareholders' funds are only a small part of what is accepted as capital. Many concessions were made to enable banking capitalists to engage in a large volume of deals with minimal capital outlay.
Concessions were also made on what constitutes risk assets by an elaborate scheme of risk grading, with the result that more assets require little capital support.
The biggest gap lies in excluding from the calculation the most risky activities — the "off balance sheet" items. These excluded items comprise trading in derivatives (financial contracts whose value derive from stocks, financial indexes or exchange rates) and other speculative financial contracts which require investments that are only a small fraction of the potential loss.
This gap is widely known in the market. It wasn't plugged because those activities are exceedingly hard to regulate. Regulations apply to licensed financial institutions — banks and merchant (or investment) banks — and require them to report transactions to the supervisory body where they are incorporated, and obey restrictions.
But the global multiplication of subsidiaries, supervised by bodies of different levels of stringency, has provided useful ways to minimise restrictions. International banks can "book" selected business in countries where it suits them.
The banking watchdogs have been talking about regulating derivative trading since the mid-'80s. Recently, the pressure to step up their effort has increased.
Beyond supervision
However, a big chunk of such trading is conducted by institutions beyond the control of the supervisory bodies. Existing regulations apply mainly to banks and, to a lesser extent, stockbrokers. Institutional funds (such as pensions and insurance) and big multinational corporations are heavily engaged in financial speculation but are under no-one's control.
Moreover, huge multinationals have different vehicles for different businesses, banks being only one of them. In addition, a lot of rules can be circumvented by shifting business between subsidiaries across countries.
Reducing the excesses of speculation by regulating banks was effective in the old days. It has become less so as capital's global reach has extended beyond sales to production and speculation.
But the imperialist governments are still trying to sell this fake medicine as the cure. Clinton's suggestions of greater "transparency" (more public reporting on key data of a country and its banks) and tighter supervision at most scratch the surface.
Capitalists are vigilant that their global reach isn't frustrated. Some Third World countries' suggestion that the crisis could be eased by capital controls was adamantly rejected by US Treasury Secretary Robert Rubin.
IMF managing director Michel Camdessus revealingly remarked earlier that the Asian crisis was really a "blessing in disguise" because it gave the IMF the leverage to force structural policy changes (to increase their dependency on imperialism) which governments in the Third World would not otherwise adopt.
The "remedy" the imperialists have in store involves great human costs at the expense of the working majority, especially in the Third World.
Those measures save the capitalists only in the short term, while cutting their potential markets further. With the looming worldwide recession, individual capitalists will more viciously cut wages and jobs to maintain profitability. But that will surely increase their collective problem of "insufficient demand" for their products.