People's Democracy

(Weekly Organ of the Communist Party of India (Marxist)


No. 37

September 21 , 2008


The Balloon Bursts!

Sitaram Yechury

THE super profits being reaped by international finance capital was often portrayed as a balloon that could inflate to infinity. The periodic crises like the collapse of the South Asian “Tigers” in the 1990s or the collapse of US hedge fund Long Term Capital Management a decade ago and the insolvencies of major financial giants in these years of the 21st century were all treated as minor ruptures that could be repaired like punctures in a tyre. Given the unsustainable character of globalisation, the balloon had to burst and that it did.

Lehman Brothers Holdings Inc., the fourth largest US investment bank, with $613 billion of debt, has filed for bankruptcy. The 158 year-old firm had the reputation of surviving the rail road bankruptcies in the second half of the 19th century and the Great Depression of the 1930s. The fact that it has collapsed now is leading many to conclude that the current crisis of international finance capital is deeper than the Great Depression.

The matter, however, does not end here. Merrill Lynch had to enter into a distress sale with the Bank of America for $50 billion. The insurance titan, American International Group (AIG) Inc., has turned to the US Federal Reserve and the state of New York for assistance. At the time of going to press the US Federal Reserve has agreed to an $85 billion bailout for AIG “to avert a possible financial crisis worldwide”. Clearly, this slide to disaster is not going to stop here. The crisis is bound to intensify affecting us, in India, very severely as well.

The Lehman bankruptcy has reportedly wiped off more than Rs 2,000 crore from the market valuation of Indian companies in which the US financial giant made equity investments. Merrill Lynch, which had global assets of around $2.5 trillion, had Rs 3,47,095 crore in India as its assets at the end of March 2007. It has been present in India since 1984 and has six major offices employing over 600 people. Its future is now under a big question mark.



Both Lehman and Merrill Lynch succumbed to the sub-prime mortgage crisis that they helped create in the first place. This crisis is an inevitable consequence of the path of globalisation that is unfolding in recent decades.

Two important features of globalisation require attention. First, this process has been accompanied by growing economic inequalities both within countries between the rich and poor and between the rich and the poor countries. The Human Development Report, 2007-2008 confirms this with indisputable statistics. Forty per cent of world’s population living on less than $2 a day accounts for 5 per cent of global income while the richest 20 per cent accounts for three quarters of world income. More than 80 per cent of the world’s population lives in countries where income differentials are widening.

Secondly, globalisation has given rise to the phenomenon of `jobless growth’. The growth of employment has always been lower than the GDP growth rate globally. Both these features put together mean that the purchasing power of the vast majority of the world’s population has been declining. Now, capitalism inevitably plunges into a crisis when what is produced is not sold. Under these circumstances, the only way that capitalism can sustain its levels of profits is by encouraging people to procure loans whose spending will maintain the levels of economic activity. However, when the time comes to repay these loans, there is the inevitable default.

This is precisely what happened in the USA in the current sub-prime (loans given at interest rates lower than the prime rates) crisis leading to a sharp fall in housing prices with large defaults on home loans. This adversely affected financial firms that held derivatives on home loans. Some of these have already gone bankrupt and many others are on the brink of such fate. The size of losses on sub-prime home loans is estimated at $400 billion. What goes unreported, however, is that those who do not repay loans are ruined.

This should not really come as a big surprise. The Wall Street Journal, reported on October 12, 2007 that the wealthiest one per cent of Americans reportedly earned 21.2 per cent of all income in 2005. This increased from 19 per cent in 2004 and exceeded the previous high of 20.8 per cent in 2000. In contrast, the bottom 50 per cent earned 12.8 per cent of all income which was less than 13.4 per cent in 2004 and 13 per cent in 2000. The consequence of such growing inequalities would lead, according to Merrill Lynch, to a fall of $360 billion in consumer spending during 2008-09. This only means that the crisis will intensify. Obviously, Merrill Lynch did not take its own assessment seriously.



While the rich have been earning their super profits by urging the poor to take loans, the resultant crisis from the fall has inevitably hurt those very sections of the poor further.

The burden on the global poor has been compounded by a massive rise in the prices of foodgrains and petroleum products. This can mainly be explained by speculation in the foodgrains commodity exchanges. This is directly related to and triggered by the sub-prime home loan crisis that has led many a global financial giant to bankruptcy. In order to cut their losses, global speculators have chosen to shift their operations of `derivative’ trading to the commodity exchanges.

Derivatives are shadow financial instruments that include futures, options, forwards trading. If one buys or sells a share in the stock market, then it is actual trade. However, if one buys or sells the option to buy or not to buy a share, then it is derivative trade. The seller of the option, believe it or not, need not own that share. Likewise, the buyer need not pay the full money for the share. Such speculation in the global commodity exchange markets is playing havoc with food and oil prices.

According to the Bank of International Settlements, as of December 2007, the total value of derivative trade stood at a staggering $516 trillion. This has grown from $100 trillion in 2002. Thus, this shadow economy is 10 times larger than global GDP ($50 trillion) and more than five times larger than the actual trading in shares in the world’s stock exchanges ($100 trillions).



Any government of the day is duty bound to take measures to try and insulate ourselves on such global speculation and protect the livelihood of our people. After all, if inflation is a global phenomenon, so is bird flu. Do we not take measures to protect ourselves from the spread of this disease? Likewise, it is incumbent upon the UPA government to shield ourselves from such massive global speculations.

At least now, the UPA government must realise that without the banning of speculative forward/futures trading in essential commodities, the run away price rise cannot be contained. Likewise, it should immediately abandon all policy measures seeking to further liberalise India’s financial sector in the name of `reforms’. Thus, the moves to increase the volumes of foreign finance capital in our insurance sector, permitting foreign banks to acquire Indian private banks etc will only create avenues to bail out the international finance capital from the crisis by offering new avenues for investments and profit making. This, however, would put at risk the life-long savings of a large number of Indians which are currently lodged with the Indian financial institutions. Remember that the bulk of the assets of insurance giants like AIG Inc. are the pension funds of workers and employees. The bankruptcy of the firm means the ruination of the lives of millions of employees and workers. The UPA government must immediately abandon its proposed legislation to privatise pension funds.

The Indian economy and the people must be protected from this crisis. Three of the Wall Street’s five big independent investment banks have disappeared in less than six months. What India needs is not more of financial liberalisation, but less of it. The UPA government would do well to continue to accept Left’s objections to these `reforms’ in the interests of the Indian economy and the livelihood of our people.