WHAT does the projected American budget deficit of $1.85 trillion look like? In numbers, here’s how: $1,850,000,000,000. Or 185 followed by ten zeros. Over the last few months, we have had so many large numbers thrown at us by governments, banks and collapsing hedge funds that we can be excused for forgetting that they all represent almost unimaginable sums of money. Money, in fact, that has suddenly gone missing, almost like mountains disappearing into a vast black hole.
From the headlines and the balance sheets, these enormous losses are now visible in the boarded-up shops and vacated homes in countries around the world. Fortunately, countries like Pakistan have been partly insulated from the evaporation of liquidity that has frozen the banking systems in so many developed countries. But a steep decline in demand for exports from developing countries has destroyed jobs indiscriminately. And this growing unemployment is having an enormous impact on domestic business activity and consumption.
But it is in the developed world that the recession is biting deepest. As companies downsize in a desperate effort to stay afloat, hundreds of thousands are suddenly finding themselves on the dole. Middle class professionals, accustomed to a comfortable lifestyle, are increasingly finding themselves on the streets, unable to pay the rent. Children who were studying at some of England’s finest boarding schools have been moved to state schools. Top restaurants are offering deals that would have been deemed impossible just a few months ago.
We have been away from England for over four months now, but have had a succession of friends coming from there to stay with us in Sri Lanka. Without exception, they have all advised us to stay away for as long as we can. They have also given us graphic accounts of depressed neighbourhoods; of friends suddenly having to cancel holidays; and of relatives struggling to make ends meet. Entire high streets have witnessed well-known retailers pull up their shutters. Bankers are being shunned at social occasions.
In the United States, ground zero of the economic meltdown, the plight of ordinary people is even more painful. After years of increasing prosperity, millions are finding themselves out of jobs and unemployable. The pain is palpable. For these people to see well-heeled fat cats, widely perceived as the cause of their misery, getting obscene bonuses in the midst of the fiscal wreck they have caused is like a red rag to a bull.
Recent events at the giant insurance company, the American International Group, have provided the world (and President Obama) an insight into the depth of the rage that stalks Wall Street. If one institution can be said to be the principal cause of the current crisis, it is AIG. And if one person can be said to have caused the collapse of the insurance giant, it is Joseph Cassano. In a major investigative article titled The Big Takeover posted on 19 March by Matt Taibbi in the American magazine Rolling Stone, the author points out that in the three months ending on 31 December 2008, the company lost $61.7 billion dollars, the biggest quarterly loss posted by any company anywhere. This translates into a loss of $27 million an hour. Taibbi writes of Cassano’s reckless (and unregulated) deals:
‘In the span of only seven years, Cassano sold some $500 billion worth of CDS [credit-derivative swaps] protection, with about $64 billion of that tied to the subprime mortgage market. AIG didn’t even have a fraction of that amount of cash on hand, but neither did it expect it would ever need any reserves…AIG was essentially collecting huge premiums by selling insurance for the disaster it thought never would come…’
The unit selling these financial instruments of mass destruction was a subsidiary called AIG Financial Products, and had 400 employees. These are the very people who were recently rewarded for their services through bonuses amounting to around $200 million in tax money given to the firm to bail it out. Understandably, this decision has caused unprecedented fury. So much so that the management has warned employees not to go out alone, and has appointed guards for the top executives.
The deregulation of the financial system that made this mind-blowing scam possible was echoed in the UK where Gordon Brown copied the American model when he was Chancellor of the Exchequer. Here, too, the culture of greed took hold, and small, stable credit societies were allowed to transform themselves into major banks. Large banks went on an acquisition spree, morphing into unmanageable behemoths. But as long as the markets went up, the regulators turned a blind eye to these excesses.
Financial journalists were just as gung-ho. Until the very end, they were advising readers and viewers to buy shares in banks that were about to go belly-up. Risk analysts, credit rating agencies and internal auditors either kept quiet and collected their fees and bonuses, or warned management, and were often shown the door for their trouble. The infamous Madoff Ponzi scheme that cost investors at least $50 billion happened despite warnings that it was all a house of cards. Similar schemes have been run in Pakistan, and to the best of my knowledge, the authors have laughed all the way to the bank.
Both the American and British governments are trying to solve the problem by throwing money at the very financial institutions that caused it. AIG, for instance, has used its multi-billion dollar bailout to pay off the banks that had bought insurance for their toxic mortgages. The Treasury Department hopes that by cleaning up red-stained balance sheets, it will eventually revive the financial sector. I have my doubts as I think the economy will remain depressed until employment and demand pick up. As long as people sit on their money, the factories will remain under-utilised, and businesses will deplete their inventories before undertaking more production.
Recently Obama tried to defuse some of the rage by saying that he understood why people were furious, but added: ‘We cannot govern from anger.’ Presumably he did not have his life savings in shares. And he certainly has not lost his job, although the ongoing furore has taken some of the shine off the new presidency. Even Barack Obama cannot walk on water forever.