INTER PLANETARY ECONOMICS THE MELTDOWN AND BEYOND a popular exposition

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INTER-PLANETARY ECONOMICS: THE MELTDOWN AND BEYOND A Popular Exposition C T Kurien Vikas Adhyayan Kendra Inter-Planetary Economics: The Meltdown & Beyond Vikas Adhyayan Kendra (VAK) established in 1981, is a secular Voluntary Organisation engaged in the study and research of contemporary social issues Geographically, VAK’s activities are oritented towards Western India, viz, Maharashtra, Gujarat & Goa Inter-Planetary Economics : The Meltdown and Beyond A Popular Exposition C T Kurien Edition: August 2009 Cover Design: Priya Kurien Published by Vikas Adhyan Kendra D-1, Shivdham, 62 Link Road Malad West, Mumbai 400 064 Ph: 2882 28 50/2889 86 62 Fax: 2889 89 41 Email: vak@bom3.vsnl.net.in Website: www vakindia.org Printed by Omega Publications & 3, Emerald Corner, Maratha Colony Tilakwadi, Belgaum 590006 Cell: 988620 3256 Preface This write up was taken up at the suggestion of members of the family – my wife, daughter and brother – that I should make the complexities of the global meltdown intelligible to them The draft that they found helpful was circulated over e-mail to other members of the family and a few close friends, none of them with special knowledge in finance or economics To my surprise all of them found it intelligible and some offered comments also They felt too that the material should be made available to a wider readership Since I had virtually retired from active academic life almost a decade ago and had paid only casual attention to the plethora of writings on the topic, I deemed it necessary to get critical professional opinion on what I had written Hence a modified and slightly polished version was circulated to about a dozen of my former professional colleagues who are still active in research, teaching and writing Practically all of them responded immediately and enthusiastically with valuable suggestions urging me to place the material in the public domain at the earliest The text has been further revised in the light of the comments received I am grateful to all of them, members of the family and friends, for their comments and encouragement; but I am solely responsible for the piece as it appears now When the piece was under circulation over e-mail, I had suggested to the recipients that they should feel free to forward it on to any one they thought would be interested in it In that process it reached Ajit Muricken with whom I had contacts some years ago, but had not been in touch for a while He immediately called me and asked for permission Inter-Planetary Economics: The Meltdown & Beyond to have the piece brought out as a Vikas Adhyayan Kendra publication I am grateful to him for his support The cover was designed by my daughter, Priya and I am deeply indebted to her for it and for being my mentor on all technical matters – C T Kurien I The Two Planets There is a striking passage in the early pages of Niall Ferguson’s recent book, The Ascent of Money: A Financial History of the World: “In 2006 the measured economic output of the entire world was around $47 trillion The total market capitalization of the world’s stock markets was $51 trillion, 10 percent larger The total value of domestic and international bonds was $68 trillion, 50 percent larger The amount of derivatives outstanding was $473 trillion, more than ten times larger” Stocks (or shares), of course, are claims to wealth, and bonds are widely known as debt instruments Derivatives may be less familiar although they are widely used and discussed in financial circles As the word itself suggests it is something derived from another word or object To begin with, we may note that within the realm of finance a derivative is a financial instrument derived from another and underlying instrument such as a debt Briefly, then, what Ferguson says is that we have reached a situation where finance is clearly dominating what is often referred to as the “real economy” which produces the tangible goods of everyday life and the services associated with their production Ferguson puts it more picturesquely “Planet Finance is beginning to dwarf Planet Earth”, he says The figures given above will make better sense now When Ferguson was writing his book (it was published in 2008) Planet Finance was rapidly expanding at a rate much higher than that of Planet Earth “The volume of derivatives … has grown even faster” he says, “so that by the end of 2007 the notional value of all ‘over-the-counter’ derivatives … was just under $600 trillion Before the 1980s such things were virtually unknown” If international currency exchanges are Inter-Planetary Economics: The Meltdown & Beyond also brought into Planet Finance, they increased from $500 billion per day in 1990 to $1500 billion in 1998 and to a whopping $3.2 trillion in 2007 Indeed, in those heady days of Planet Finance, reports about it, especially its innovation, expansion and achievements were greatly overshadowing the rather slow moving and, at any rate, the older and less fascinating Planet Earth It was as though Planet Finance had its own and somewhat mystifying laws of motion which were far beyond the grasp of the uninitiated Then suddenly in the last quarter of 2008 there were signs of panic in Planet Finance – some of its major parts collapsed; resuscitation attempts became visible; and there was a crash! It is part of the prevailing confusion that the crash is also referred to as “the meltdown” But even those who not know what has happened recognize that the glamour is gone The mood now is one of depression Major Issues In this context there are many things that call for explanation The most obvious is the spectacular rise of Planet Finance in the few years immediately preceding 2008 and its sudden collapse in the last quarter of that year, as noted above Equally important to consider is whether some kind of revival is likely, and if so when More important is whether Planet Finance and Planet Earth are independent of each other, and if that is not the case, what is the nature of interdependence between the two And third, since these entities are “planets” only as metaphor, how are they related to the realities that we all know and experience? In particular, how are they related to other realities that we deal with, administration and governments in our country and globally? This article deals with these issues, not necessarily in the order mentioned above, but in such a way that any interested reader will be able to follow it No professional training in economics or finance is expected of the reader II The Banking System and Credit By way of background it may be useful to have an understanding of banks and related institutions in the working of a modern economy A bank is an intermediary between those who wish to deposit their funds with it and those who are eager to borrow funds (credit) Credit is required because there is a time lag between what is needed now and the ability to repay later or over time Hence what credit does is to link the present and the future: indeed, because what is lent now was generated earlier, credit links the past, present and future Providing this temporal connection is crucial for the smooth functioning of a modern economy But if there are many who have funds to lend and many who are eager to borrow why they not establish contacts directly instead of going through an intermediary? At least for three reasons The first is that an individual or any other unit that has funds to lend may not know the person or unit who requires credit and vice versa An intermediary connects those who have funds and those who require credit We may think of a bank also as an institution that pools information about lenders and borrowers and makes it available to those who need such information Actually, the bank pools borrowings from large numbers of lenders (that’s why it is a bank) so that the borrower does not have to know anything about individual lenders and lenders won’t know who is borrowing their funds The bank as an intermediary, thus, performs the important task of gathering and processing information and that plays a major role in the effective functioning of an economy The bank plays a second and more important role Lending of funds to a strange or even a well-known borrower Inter-Planetary Economics: The Meltdown & Beyond is a risky thing to do: you may never get back what is yours! The bank may also lose funds that it lends, but there is a sort of safety in numbers What you when you lend to the bank, the intermediary, rather than to an individual borrower, is to reduce risk considerably Of course, you are taking the risk that the bank may fail, but if you are into the business of taking risks you know that you are calculating probabilities, and you know from experience that a bank failing is less likely than an individual borrower disappearing or going bankrupt Thus information (gathering) and processing and risk reducing are the crucial functions of a bank as an intermediary The Bank provides these valuable services not free of cost, but for a consideration The bank pays you (a specified rate of interest) for the deposit you make (usually a higher rate for a longer period of deposit) The bank charges a higher rate of interest to those who borrow from it The margin between the lending rate and the deposit rate is (part of) the earnings of the bank for the services it renders We may note also that when there are several banks they come to have additional roles and powers that individual banks may not have The banking system as a whole can create credit; you leave your money with the bank trusting that it will be safe and sure that you will earn something by way of interest; the bank knows that you will not withdraw your money immediately and lends it for a while to those who can use it A group of banks or the banking system as a whole can generate more credit than a single bank can For these and other reasons banks come under regulations from higher authorities, usually from a central bank (the Reserve Bank of India in our case) which is an independent body, but finally responsible to the government Features of Intermediation An economic system characterised by intermediaries or the role of intermediation has some characteristics which we must note If an important function of an intermediary is to gather and process information, it becomes an information The Banking System and Credit specialist in selected spheres A bank is a specialist on credit just as a real estate broker is a specialist on matters relating to that market Where intermediation is general, therefore, one must expect information asymmetry, and not a uniform spread of information as is usually assumed by some widely touted economic theories A second feature of intermediation is closely related An intermediary who is a specialist in some areas tends to use it for his own advantage After all, he too is an economic agent! And, if distorting information is to his advantage why expect him not to use it to his benefit? This common sense understanding of the behaviour of an economic agent goes under the name of Agency Problem in technical literature which states that an agent may (usually does) become more concerned with his own interest rather than the interest of the principal whom he is supposed to be representing We shall soon see how this agency problem plays a role in an understanding of Planet Finance Third, intermediation has a tendency to proliferate We noted that by resorting to the intermediation of a bank the depositor reduces risk The bank must find ways of reducing its risk of lending One thing it can is to turn to an insurance agency to cover the risk, of course for a payment So another intermediary emerges A second possibility for a bank (usually a big one) is to repackage the debt instruments it holds according to differences in the rate of interest, the date of maturity, risk profile and pass on the repackaged “products” to other agencies Agencies twice or more removed from the original principals come to the scene handling new financial instruments – “derivatives” – thus contributing to the glamour and rapid expansion of Planet Finance In the next section we shall trace how such changes actually happened, particularly in the USA 22 Inter-Planetary Economics: The Meltdown & Beyond the US and China who are major partners in economic relationships Impact on China and India Once China decided to reverse its initial policy of pursuing an internally driven growth pattern and opened up to the rest of the world, exports became a significant share of its GDP, now over 50 per cent Exports accelerated after it became a member of the World Trade Organization (WTO) in 2001 and by 2003 China was Asia’s largest exporting country replacing Japan and by 2005 the third largest in the world, next to USA and Germany By that year it was supplying a fifth of the USA’s requirements of manufactured goods and had a trade surplus of over $100 billion with that country, held largely in the form of US Treasury bonds Chinese exports into the US continued to grow at around 20 percent for the next couple of years as well Let us now turn to what happens when there is a meltdown in the US, starting in the financial sector, but spreading rapidly throughout the economy Jobs are lost and incomes come down Goods imported from China and used in the industrial sector get reduced People’s spendings go down and there is less demand for Chinese goods which had invaded supermarkets – let us say, electronic goods and toys Factories producing these export goods in China are affected and workers are laid off Millions of Chinese workers from industrial towns are forced to go back to their rural families What started in the posh cities and financial centres in the USA soon reach the humble dwellings in far away China, and the meltdown has become a worrisome global phenomenon adversely affecting the lives of millions of people everywhere India has been affected too, but not as much as China because our exposure to the rest of the world – whether in the form of capital flows or trade – has not been as high as in the case of China When the early signs of trouble in the financial sector in the US started appearing, there were those who maintained that India (perhaps China too) could be The Global Dimension 23 “decoupled” from such calamities because our economy was essentially internally driven, finance did not play a dominating role in our system unlike in the US, and our financial system was thought to be adequately insulated from global finance But today it is openly admitted by economists, business people, administrators, politicians and many more that our economy has been adversely affected by external factors A brief examination of what has happened is worthwhile Though in overall terms the rate of growth of the Indian economy has continued to be a respectable close to percent per annum, it still is a fall from the near percent we had achieved before the troubles started and the 10 percent that we anticipated could be achieved Our banking sector, on the whole, still remains robust because of the dominance of the public sector banks that have been forced to follow the effective supervisory role of the Reserve Bank that prevented banks from following adventurous paths And although the Indian economy’s total external transactions (value of exports and imports plus gross capital flows) have increased from around 47 percent of GDP in 1997-98 to over 117 percent in 200708, we have not yet gone in for full convertibility of the rupee Hence, so far there has been no banking crisis or shake up in the financial sector Only our stock markets which are linked to their counterparts in the rest of the world have crashed and have become subject to volatility Capital flows into the country, on the other hand, have declined especially those coming from foreign institutional investors (FII) In fact, a reverse flow of funds from FIIs had set in towards the close of 2007 (In this connection a major difference between India and China may be noted We relied largely on financial flows from outside whereas China insisted on foreign capital going into productive activities.) External commercial borrowings have also declined These two have lowered the level of investment in the country and the growth of the manufacturing sector has been adversely affected Our exports have declined too as Indian exports in which services account for some 37 percent are very sensitive to levels of 24 Inter-Planetary Economics: The Meltdown & Beyond income in the Western countries The domestic sectors affected have been metals and metal products, textiles and garments, automobiles, gems and jewellery and information technology Many business concerns have been affected, IT, travel and tourism, hospitality and entertainment Associated with it has been loss of jobs for which there have been no firm estimates mainly because close to 90 percent of the total workforce in the country is in the unorganised sector about which it is not easy to get clear information But an official survey sponsored by the government has estimated that about 1.5 million workers would be thrown out of work between September 2008 and December 2009 Many consider this to be a rather optimistic estimate Thus, the impact of the meltdown in India has been largely on the real economy and on the lives of real people from the lower sections in particular 25 VI Quo Vadis? Where we go from here? We shall not go into bailout schemes and quick fixes of that kind, but deal with some basic issues that need to be addressed in the light of the contemporary global calamity Regulation of Credit and Direction of Investment Of these one of the immediate ones is how credit and the banking system are to be regulated Credit is the most omnipresent, though largely invisible, aspect of any modern economy It is based on economic considerations, but is principally grounded in trust which is above and beyond the economy If trust fails, credit fails and banks fail too If that is the case, the regulation of credit must be vested with the most publicly accepted and most stable of social institutions, the government This is similar to, but more important than, the control over currency, or money in general In the early stages of the evolution of credit and currency, these were under the responsibility of agencies whom the immediate transacting parties trusted Over time the government took over the responsibility of intermediation which accounts for the general acceptability of these instruments Thus because of the allpervading role of credit and the need to assure and sustain trust, credit must be under the regulation of the government To a large extent, and for the same reasons, it is best for the banking system also to be under the ultimate control of the government This suggestion may be resisted, if not rejected, on the grounds that anything that is under the control of the government will become bureaucratic; and it is a genuine apprehension Unlike in the case of credit which is largely unseen, banks are visible and enter intimately into the 26 Inter-Planetary Economics: The Meltdown & Beyond day to day lives of ordinary citizens If banks become bureaucratic institutions, it will be terrible indeed However, it is possible for banks to be functioning as banks should, but for the control over them and their regulation to be exercised by an agency of the government That is what the nationalised banks in our country have demonstrated Granted that banks are in an intrinsically risky business, the essence of the regulation of banks is that they are prevented from becoming too adventurous which businesses motivated largely by profitmaking cannot seem to avoid That is what shadow banking has shown The principle underlying the agencies that later turned out to be shadow banks is sound: the separation of the credit generation function and the investment function of banks This was tried out and legalised in the US after the Great Depression and appeared to be working well for a while and a number of investment banks emerged But over time they made a nonpermissible entry into the banking function of credit expansion through the “innovative” method of CDOs, CDO 2s, etc which must have had the initial approval of the banks also because both found it a new method to increase their profits However, they also succeeded in generating a horizontal credit network, outside the regulatory system of banks Then came the proliferation of intermediaries, all guided by the sole objective of making profits pretending that self-regulation (that is, regulation by the market) provided the necessary protection and also enabled wealth to increase But before anyone realised it, they slipped into a crisis bringing down themselves, their base, the banking system, and further down, the rest of the economy as well Hence, one of the first things to be done is to eliminate the “derivatives industry” and with it shadow banking because these are based on the possibility of costless production ensuring easy profits – for a while Once this is done, it will be possible to bring credit creation and financial investment under social control In the US, the Fed as an independent non- Quo Vadis? 27 governmental agency claims that it is responsible for regulating credit through regulating money supply There are many problems here First, more than formal control over money supply is necessary to regulate credit because credit instruments themselves which are beyond the purview of the Fed can form the basis for credit expansion Second, the Fed has no mandate to deal with financial investments and hence leaves it entirely to the market And third, and most important, while the Fed claims to be independent of the government, its true nature is seen only during periods of crisis when it becomes a partner, a junior partner actually, of the government This is not surprising either because while the Fed may supervise and regulate the banking system, only the government can deal with the economy as a whole Thus, a designated independent authority, responsible to the government, is unavoidable for the management of credit and the regulation of the banking system This authority must also be entrusted with the task of deciding whether and when new credit instruments are required, ensuring that “profit only” will not be allowed to become the criterion for resorting to them The question of investment decisions also has to be considered The reference is not to physical investment (fabricating machinery, putting up construction, oil drilling etc) but to financial investment Those who have large amounts to spare, individuals as well as institutions such as pension funds, are always looking for opportunities to invest them Safety and expected (in most instances, assured) returns are the main considerations and there are many potential possibilities – shares, bonds, mutual funds and the like, all segments of the general category of finance Subject to considerations of risk, the main objective is to secure the highest returns, and naturally this is the avenue where intermediaries with their objective of maximising profits function Naturally too, this is the area where most problems arise mainly because there is either no independent regulatory authority or because regulations 28 Inter-Planetary Economics: The Meltdown & Beyond are not effective Public Regulation Other than eliminating intermediaries which have no justifiable raison d’etre, there are no easy ways of dealing with this area However, a procedure that may bring down the profit-only operations and agencies is worth consideration Some elements of it already exist During the apartheid regime in South Africa, many individuals and institutions in different parts of the world decided that they would not let the funds they had available for investment go to firms that had dealings with that regime, or doing business with that country It was a form of protest; a form of effectively making a moral statement The same spirit can be made more positive by the decision of those who have funds that they are willing to forego some earnings to support financially sound but not-for-profit organisations Educational and medical institutions, publishing concerns are examples These should be allowed to receive funds as investments assuring a reasonable return to the investors To encourage the practice, tax incentives, for instance, can be given to those who make such investments The idea is to build up a constituency that will consider reasonable returns as a constraint, rather than maximum returns as the sole objective Initially only convinced individuals and institutions may take this route However, once this becomes an established alternative, it will spread and can bring about a qualitative difference to the economic system as a whole Obviously, agencies that run not-for-profit businesses should come under public regulation, the reason being that they are using funds from the public The word “public” used above has a connotation quite different from what it has come to have in ordinary parlance where “public” is almost synonymous with government as for instance in “public sector” undertakings But in the paragraph above, “public” is used as the antonym for “private” A family or partnership which uses its own resources can be considered private, but any concern which uses funds from the public Quo Vadis? 29 becomes a public concern irrespective of who owns it, whether the government or a company In this sense, a business corporation that raises funds from the market (strictly speaking from the public through the market) is a public concern, even if it does not receive any financial support from the government By the same token, a “public” regulatory authority need not necessarily be a body of and by the government: it can be a body set up by members of a particular industry, but independent of it with a mandate to protect the interest of the public associated with that industry, and not that of any particular concern within that industry or even of all concerns that constitute that industry As a matter of fact, in a democratic set up the government itself is such a public body constituted by the largest “public” with the specific task of protecting and promoting the “common good” The judiciary is another independent public body to ensure that the government as a public body does not assume arbitrary powers and does not deviate from the tasks assigned to it And the state is the ensemble of independent authorities each with its own specific mandate, and all necessary to articulate, promote and protect the common good (It is very unfortunate that the crucial distinction “public” as opposed to “private” and public as synonym of “government” is not properly appreciated Think also of the use of the word “public” in Public Schools which everybody knows are private, and Public Interest Litigation which is the concern of the public, often against the government Perhaps we need two different words instead of the same word “public”.) State vs Market With that understanding we may briefly revisit “the state versus market” debate The first thing to note is that if the expression is meant to convey that society has to choose between the two, it is either false or is based on misunderstanding For, there is no modern society which functions, or can function, without both in some form or the other If authority is the essence of the state, without it there 30 Inter-Planetary Economics: The Meltdown & Beyond will be chaos Further, it was known from the days of Adam Smith that agencies concerned only with profits will have no incentive to provide infrastructural facilities and merit goods such as defence, education etc, although in education, healthcare and so on private bodies soon discover ways of making profit Hence in many societal aspects including what may be considered to be “strictly” the realm of economics, the state (through its representative manifestation, the government) has a major role to play This position is very different from a view strongly canvassed by a powerful body of American economists (and their followers in the rest of the world) and converted into an ideology by politicians that the ideal economic system is where the state performs the minimum necessary functions leaving the rest to the market based on the principle of self-interest The rationale of this view is often traced back to a passage from the writings of Adam Smith in which he stated that when individuals work for their own gain they are “led by an invisible hand” to promote social good also Smith, indeed, made such a statement But what is often forgotten is that Smith’s basic position was that “justice upholds the edifice [of society, and] if it is removed, the great, the immense fabric of society … must in a moment crumble into atoms” Upholding justice, understood at least as the common good, is the role of the state in the social order Part of the reason for many of the economic ills of recent decades has been a deliberate attempt to underplay the government’s unavoidable role in the economy Turning now to the market, if exchange is the rudimentary function of the market, without it every individual (or family or some small group like that) will have to be selfsufficient Hence the market certainly is a useful social institution At times, as in the context of discussions on finance, it is the (self) regulatory function of the market that is featured When things are working well it may appear legitimate also But even Alan Greenspan who, as Chairman of the US Federal Reserve Board from 1987 to 2006, maintained and avidly Quo Vadis? 31 propagated this view admitted when the avalanche of the financial crisis erupted that he was wrong One thing that is often overlooked is that except for the most elementary form of barter, all market transactions, including the transactions of commodities, are done through intermediaries and hence markets in general are subject to the problems of mediation noted earlier As we have already seen, the problem of mediation is more so in transactions of credit and finance but is inherent in all market transactions Hence as a general proposition we may say that all markets have to be subjected to non-market regulations Monetary transactions are effectively synchronisations of market and state in so far as money is a symbol of authority But in some transactions more than that symbolic authority and regulation is required More important still, we have seen that the foundation of a modern economy is trust which is beyond the market and not self-interest considered to be the basis of exchange and the market system The state comes into matters of finance because though finance is, up to a point, the realm of the well-to-do it impinges on the lives of most members of society, or the public at large A democratic polity, in particular, cannot afford to ignore economic and social problems of sharp increase in inequalities that finance brings about when its performance is considered to be good, and the loss of jobs, incomes and shelters of the ordinary people when things go wrong But how are the interests of the ordinary citizens to be protected? Growth? Stimulating growth is put forward as the immediate and standard remedy However, unspecified growth is just a number which can mean many things depending on what has been growing Hence the composition of growth itself must be examined For instance, growth generated substantially in the finance sector will have one kind of impact on the economy and society compared with growth generated in the 32 Inter-Planetary Economics: The Meltdown & Beyond agricultural sector In India, where the contribution of the services sector in the GDP is already greater than the combined value of the output of the agricultural and industrial sectors, “growth” often means merely a further bloating of service sector itself And growth confined to selected segments of the economy and limited sections of society is often illusory Hence it is important to consider what exactly is growing and to ensure that growth is inclusive reaching the lowest rungs The specifics will depend on the type of economy concerned But a democratic system must ensure that the productive activities of its economy are directed such that the basic needs of all are met Special attention should be paid to reach out to those who have been thrown out by the financial crisis A deliberately designed bottom-up strategy of growth will be the best to rehabilitate the economy and set it on a healthy growth path A strong case can also be made to have a permanent safety net that will provide protection to vulnerable sections of society This is not only a philanthropic consideration Growth will increase and can be sustained when all become productive Since shelter is a basic requirement, providing minimum housing at reasonable rates to all must be included as part of social policy In fact, food, clothing, shelter, education and health care must be recognised as economic entitlements of all citizens in an enlightened democratic system Changes at the Global Level While these are matters largely for each country to decide, some changes are required at the international and global level because no country today can ignore its economic relationships with other countries This can be best stated with reference to the US-China relationship dealt with earlier As noted there, the domestic situation in the US is partly the result of its currency’s dominating role globally A vast and relatively low-income country like China should not be using its resources to provide American consumers low priced goods However, at this stage China cannot afford to suddenly change that pattern as its productive activities are so crucially Quo Vadis? 33 linked to the American market It cannot also withdraw its piled up dollar reserves because that will weaken the dollar and make China poorer! Nor can China raise the value of its currency suddenly as that will adversely affect the export advantage it now enjoys, although in the long run it should readjust its economy to produce more for the use of its own citizens, if necessary importing more than it is now doing What we see is that even a country that has the basic economic strength to make readjustments cannot that because of its global tie ups China, therefore, has put forward the legitimate demand for a genuinely global currency that will not give any one country special advantages Towards the end of the Second World War a similar need was felt and the International Monetary Fund (IMF) which permitted member countries to draw on its reserves when required was created for that purpose However, the role of the IMF was then perceived to be to deal with only payment problems between countries and not long term needs of development More crucially, the special drawing rights (from the IMF) is related to each country’s contribution as decided in 1944 when the Fund was set up, and not reflect the vastly changed international economic conditions today Hence if the IMF is to continue to be the global currency authority, it will have to be radically restructured If that is to be achieved the United Nations Organisation must also be reorganised in tune with the vastly changed profile of the nations of the world today International trade regulations also require to be changed to stabilize a new global currency and to have healthy economic relations between nations The poorer countries of the world are at an economic disadvantage because of the strong trade barriers that the richer countries maintain to provide protection to sections of their own citizens The WTO was set up for this purpose and to bring about freer trade between countries But after several rounds of negotiations not much progress has been made To move forward it is necessary to have a new architecture of global governance with a global reserve currency which is not the national 34 Inter-Planetary Economics: The Meltdown & Beyond currency of any one country, something corresponding to a World Reserve Bank that will lay down fair conditions for drawing on global reserves, a just international trading system that protects the interests of the poor and vulnerable throughout the world Thus, within countries and between them there is much to be done to remedy the problems created by the global meltdown and go beyond The suggestions put forward may appear to be too idealistic as they call for changes in attitudes and priorities, as well as considerable institutional restructuring But the attempt has been quite deliberate, and for two reasons The first is that it is widely recognised that what happened to the US financial system in 2008 and has been spreading to the world since then is not merely one more of the many crises that the US economy has gone through in the past It is qualitatively different and is sure to mark the beginning of the end of the global economic domination of the US Hence this is the time to think anew Secondly, that opportunity should be used to heavily underline that fairness, not greed, must be the cornerstone of economic systems within countries and in an increasingly globalising economic order The message of the meltdown is that while institutionalised greed may sustain the system and even provide some semblance of well-being for a while, it surely paves the way for destruction from within Inter-Planetary Economics: The Meltdown & Beyond 35 Note : In writing this piece the following have been of help: Cable Vince, The Storm - The World Economic Crisis and What It Means, London, Atlantic Books, 2009 Economic and Political Weekly, Special Number on Global Economic and Financial Crisis – An Agenda for the Future, Vol.XLIV, No 13, March 28- April 3, 2009 The papers in this Number also provide extensive references Ferguson Niall, The Ascent of Money – A Financial History of the World, London, Allen Lane, 2008 Morris Charles R., The Trillion Dollar Meltdown – Easy Money, High Rollers And The Great Credit Crash, New York, Public Affairs, 2008 The statistics relating to income inequalities in the United States given in Section IV are taken from pages 152 &153 Soros George, The Crash of 2008 and What it Means – The new Paradigm for Financial Markets, New York, Public Affairs, 2008 Comments received from a wide circle of members of the family and friends on earlier versions that led to substantial revisions are also gratefully acknowledged ...1 INTER- PLANETARY ECONOMICS: THE MELTDOWN AND BEYOND A Popular Exposition C T Kurien Vikas Adhyayan Kendra Inter- Planetary Economics: The Meltdown & Beyond Vikas Adhyayan Kendra (VAK) established... by the government gave it a new lease of life There are other hedge funds also that have continued, because as they are huge and influential, they can raise loans way beyond their capital base,... companies or of the rate of interest Planet Finance appeared to be emerging as a separate entity with a law of motion of its own, moving up and up as creating paper assets was an easy task and
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