IN THE SHADOW OF THE GLOBAL FINANCIAL CRISIS

"Capitalism without bankruptcy is like Christianity without hell"

By Miša Brkic

Does the crash of the global financial system have the effect of the fall of the Berlin Wall? Or, to put it more precisely, will capitalism break down too almost twenty years after the fall of communism?

From the perspective of October 2008, anti-globalists' gloating over the death of capitalism seems exaggerated despite the fact that the system of private ownership, competition and market economy has been seriously shaken. The awareness that capitalism should be urgently reconfigured (reshaped) rather than thrown in the "garbage of history" has already been turned into practice at the Camp David Summit, when outgoing American President George Bush, French President Nikola Sarkozy and President of the European Commission Jose Manuel Barosso agreed to open dialogue on mending the system (of capitalism) without questioning its sum and substance at a series of summit conferences with other world leaders. The principles by which capitalism would be reformed follow the slogan, "All for one, one for all."

The French President belongs to the circle of "early roasters" among world leaders who have started the polemic about reshuffle of capitalism. "I am convinced that the problem is deeply rooted and that we should start from the scratch to rebuild the entire world financial and monetary system. The idea about the absolute power of the market that should not be bound by any rules or political interventions was a mad idea, the same as the idea about the market always being right. The crisis opens the door to a state's bigger intervention in a financial system, both nationally and at the global level," said Sarkozy. Having joined the dialogue leaders of the International Monetary Fund said the global financial crisis was of "a system character."

Sarkozy brought a new "Bretton Woods" to Camp David - a plan for the reform of the world financial system (like the one drawn in Bretton Woods in 1944). Two days earlier leaders of the European Union had discussed the plan in Brussels and called for urgent, strategic measures of control and support to the badly shaken world financial system that would restore stability of the world economy and curb the panic at stock markets. "The entire system should be set on new foundations and, in particular, 'financial heavens' that have been beyond the reach of economies and states should be removed," said Sarkozy at the beginning of his talks with Bush. The French President also brought with himself to the United States Europe's support to his idea about a meeting between the Group 8 of most influential states and the countries with growing economies (China, India, Brazil, Mexico and South Africa) that would deliberate re-channeling of the global financial system and institutions.

For Europeans, the measure that need to be taken would not only solve the financial system in crisis but also establish a more "moral" economic-financial order based on production rather than on financial speculation.

German Prime Minister Angela Merkel explained the term "more moral" while urging the Bundestag to adopt a 500-odd-million Euro package of assistance to banks. "Governmental measures aim at humanization of market economy. The threat to the stability of financial market still looms but the state takes strong measures to safeguard the structure for a humane market economy," she said.

Everyone expected the Americans to be "a harder nut to crack" when it comes to "humanization of market economy" since they had opposed rearrangement of the world financial system and insisted on liberal economy and deregulation of global financial mechanisms and currents.

The collapse of the market of hypothecary credits and the ensuing collapse of a great portion of financial market costing taxpayers 700 billion dollars forced George Bush to offer the United States for a host to the series of summit conferences. "It is very important that we work together, since the crisis affects us all," he commented. European Premier Barosso also called for "an urgent joint action" and warned about the necessity of "a new world financial order." Bearing in mind the pandemic of bankrupt banks and scarce capital, such series of meetings on rearrangement of the world financial system could be convened under the auspice of the United Nations, the more so since Secretary General Ban Ki-Moon has already mentioned that to Sarkozy.

Despite the fact that they will surely not be invited to any of meetings, some politicians have already given statements that contributed to opening of a global dialogue about the fate of capitalism. Senator Jim Banning from Kentucky said in mid-September that "the free market was dead in America" and that the Bush administration would "introduce socialism in America" with its anti-crisis measures. Brian Moor, presidential candidate of American Socialists-Marxists, said, "The announced nationalization of the American International Group will contribute to the socialist cause." The American administration's plan to spend billions of dollars to save AIG and take over control of 79.9 percent of the company's stocks made liberal economists wonder "whether the United States of America is turning into the United Socialist Union of America." The decision by the Bush administration is unprecedented in the American history. Only few exceptions such as the establishment of the public railroad company Amtrak in 1971 or nationalization of electrical power supply in Tennessee during Roosevelt administration and the Depression have gone down in history so far.

The present recession begun with the crisis at the US hypothecary market, with the so-called toxic loans. At the beginning of the crises caused by tumbling prices of real estate, many banks were forced to write off several billion dollar loans, some went bankrupt or were salvaged either by the government or takeovers. In early 2008 the American government intervened to save the Bear Stearns bank, in September it had to take over Fanny May and Freddy Mac hypothecary companies and then intervened in the leading insurance company, AIG. In the meantime the fourth biggest American bank, Lehman Brothers, went bankrupt, while Merrill Lynch was saved thanks to its prompt sale to the Bank of America. Then Washington Mutuals, yet another among the biggest American banks, went bankrupt, the federal government seized its property and sold it to JP Morgan for almost two billion dollars. In late September, Sheila Beir, head of the FDIC, told a panel discussion at the New York Stock Market that other American banks should also have to declare bankruptcy since financial crisis was far from over. Collapse of banks caused distrust in the banking system. Banks ceased giving loans to one another and to companies and citizens. In July the cost of real estate dropped by 16.3 percent by comparison with July 2007. In late summer toughened crediting conditions decreased Ford, Toyota and Chrysler sales by over 30 percent. Americans begun to spend less and were incapable of paying off all their credits. That was when City Group prognocized that its credit losses in the third quarter of 2008 would amount to 10 billion dollars. In September, 159,000 people were left jobless, the unemployment rate was 6.1 percent and the industrial production index was the lowest since 2000. Budget analyst at the American Congress, Peter Orzag said that the US pension fund had lost 2,000 billion dollars in 15 months.

American President George Bush decided to urgently cover up all the state's regulatory and control failure through conventional interventionalism. After much parliamentary debate and strategic polemic about the nature of the measures for overcoming the crisis the American Congress adopted a 700-billion-dollar package of financial assistance to financial institutions. The "package" was worth 12 Bill Gates or equaled Holland's GNP. According to the Congress, each American citizen would have to contribute to curbing the crisis with 2,300 dollars.

With this money the government will buy out "contaminated" hypothecary credits and other worthless property from the financial institutions in crises and thus motivate them to lend money to companies and citizens instead of keeping it in reserve.

Many in the United States and worldwide saw the healing of private companies - that had hazarded at the market to earn fortunes and then lost everything - with taxpayers' money as an incredibly brazen state interference into market affairs.

Branko Terzic, energy consultant at Deloitte Services, tried to explain the functioning of the American financial system. He said it was complex and relying on regulatory measures at the federal level. To illustrate his point he presented the examples of two semi-governmental agencies, Fanny May and Freddy Mac, which used to enjoy unique status and played to the rules laid down by the Congress. Both were privately financed but had state guarantees. When the crisis broke out the state acted in accordance with its duty to save those to big hypothecary companies, says Terzic, adding that "generally speaking, private firms and capitals usually go bankrupt and then get reorganized with the assistance of new investors." "This time, however, because of the sizes of companies and possible consequences on the financial situation in the country and worldwide, federal authorities had to act since those firms and their businesses were too important to be let down the drain," explained Terzic.

Daniel Mitchell, economist at the Cato Institute in Washington and main adviser to the republican congressmen opposing the salvage of the financial sector by state intervention, has no understanding for such model. He told the Voice of America that the American government was responsible for financial difficulties since it had pursued the policy of low interests and tolerated corruptible subsidies to hypothecary banks. Scores of people at the Wall Street enjoyed life as long as millions were earned, and now they expect taxpayers to save their necks, says Mitchell. According to him, correction of financial markets should be left to the laws of demand and supply since "capitalism without bankruptcy is like Christianity without hell." "Banking crises are breaking out throughout the world. Whenever states allow markets to act on their own difficulties end sooner and economies emerge stronger. The American economic crisis will last longer and will be more painful because of latest measures by the American government," said Mitchell.

As expected, the crisis soon overflowed to financial markets in Europe, the Far East, Russia and underdeveloped countries.

To heal the crisis the governments of the EU member-states set aside some 2,000 billion dollars that will be spent on guarantees for bank loans and other urgent needs. Just Germany plans to put some 500 billion Euros into the system - to lend some 400 billion Euros to banks, to spend some 80 billion on recapitalization of banks and (if necessary) on the purchase of risky property, and invest the rest in bank guarantees. The French government approved a 360-billion-plan for protection of banks from collapse and unblocking of the clogged credit markets.

Until a few days ago the global financial crisis was watched from a safe distance in the region of Southeast Europe. Most states and their governments retained their "composure and dignity" assessing the world financial tsunami would reach the Western Balkans in the form of a refreshing breeze, despite the fact that stock market indexes have been "in the red" for days.

However, some international and domestic institutions were sending not exactly encouraging messages. The EBRD, for instance, estimated that the financial crisis would affect Europe's post-communist countries firstly by slowing down their export to Western markets and then by restricting their access to international financial markets and their funds. In its six-month report the IMF stressed that "the world financial crisis could cause problems in European countries with high economic growth, which include Serbia."

Officially at least possible impacts were analyzed in Croatia, Serbia and Montenegro. Croatia, for instance, publicized that the global credit crisis and poor liquidity of the banking sector had affected the investment in construction of business towers and first-rate offices. Consulting real estate firm King Sturge assessed that less than 50,000 square meters of new offices would be constructed in Croatia in 2008 by comparison with 170,000 square meters in 2007. The global financial crisis forced institutional investors (AZ Pension Fund, Auktor Brokers, Erste Invest and PBZ Pension Fund) to accept the offer made by the Hungarian oil company, MOL, and sell out the shares of the Croatian INA oil firm though the offer was lower than the fundamental value.

In Serbia too, some business deals were postponed due to the world financial crisis. Salford Fund released that it decided to postpone the sale of "Knjaz Milos," mineral water and soft drinks plant, for the time being. The "Stara Planina" company also extended the deadline for the tender calling co-investors in the tourist complex "Jabucko Ravniste."

For their part, experts warn that things are not as rosy as pictured by officials. Goran Nikolic of the Chamber of Commerce of Serbia takes that the decrease in the world liquidity, shortage of capital and fewer opportunities for domestic companies to obtain foreign credits are the key reasons for the weakening of the RSD exchange rate.

And experts of the Belgrade Economic Institute warn that the world economic crisis would influence the growth of interests and slowing down of economic growth in Serbia.

On the other hand, Vice-Premier for European Integrations Bozidar Djelic said, "In the aggravated circumstances for the world economy Serbia stands good chances for attracting investors, whose businesses are facing difficulties in certain countries. Therefore, this is our chance to become stronger." Yet another vice-premier, Mladjan Dinkic, minister of economy at the same time, claims that "for the first time after a long period Serbia will collaterally benefit from global developments." And Governor of the Central Bank Radovan Jelasic told the press that the IMF meeting commended Serbia for its monetary policy and financial system.

And then things stopped being so rosy though in their servile poetry columnists were doing their best to present them in cheerful colors.

Firstly, Reuters' analysis of economic circumstances in the countries of the Western Balkans showed that smaller Balkan states could overcome the consequences of the financial crisis only with the guidance of the International Monetary Fund, whereas Serbia and Croatia could also need fresh funds. "Serbia seems to me more vulnerable than Rumania and Turkey," said Tim Ash of the Royal Bank of Scotland. Ash added that Serbia would probably have to make corrections to RSD exchange rate and estimated it could benefit from IMF's support to its payment balance or from standby loans.

Then the Belgrade Stock Market laid down the rule that reduced the range between the allowed daily fall and growth in stocks - the so-called fluctuation zone.

From now on, stocks at the Belgrade Stock Market's A list will maximally fall by 8 percent (10 percent until now) at cheapen by 12 percent (20 percent until now) at free market.

Later on, the Central Bank decided to annul the provision on mandatory reserve deposited in it from foreign loans, retroactively as of October 1. Governor Radovan Jelasic explained the measure had to be taken due to aggravated circumstances for obtaining foreign credits against the backdrop of the world financial crisis.

Representatives of investment funds in Serbia also assessed that liquidity and investors' distrust were the biggest problems affecting them and requested the state to form a 10-million-Euro intervening fund that would help them to promptly respond to investors' demands and restore their trust. "The value of the property managed by investment funds decreased from 63 million Euros in October 2007 to today's 27 million Euros," said the representatives.

The general public was deprived of any information about the outcome of the meeting between the Association of Banks and members of the governmental working group for monitoring the impact of the world financial crisis on the Serbian economy. Reporters were kindly asked to leave the meeting though they had been duly invited to attend it.

To conclude with, once all the safes in Belgrade banks have already been rented (by former clients, who placed their savings in them) and with unnecessary delay the Serbian government spoke out. Premier Mirko Cvetkovic said that at the suggestion of the European Commission the state of Serbia would increase saving guarantees from 3,000 to 50,000 Euros per deposit and temporarily lift the tax on savings. The state has also temporarily - till 2012 - lifted the tax on capital gain and the tax on the transfer of absolute rights in trade in stocks. Though the world financial crisis has bypassed Serbia so far, the state plans to set aside funds in the 2009 budget for maintenance of the banking system - in the event the crisis continues and gets worse.

Is capitalism jeopardized in Serbia and should it be reconfigured along with UNMIK?

Reconfiguration of UNMIK seems to be by far more important now. Capitalism can wait.