T K Arun
Now that the US Federal Deposit Insurance Corporation, Treasury and the Fed have all come together to salvage US banking once again, taking over two failing banks and making all depositors whole, and not just those small enough to qualify for deposit insurance, can we finally exorcise the spectre of neoliberal policy that has been haunting broad spectrums of the Left-liberal political discourse, even after COVID-era state activism had driven a stake right through its heart?
Neoliberal is a term of abuse in Leftist circles pretty much around the world, and particularly so in India, although if pushed hard to explain precisely what they mean by the term, even the most vociferous critics would struggle to come up with anything more precise than something like ‘championing unrestrained market forces, free of government direction or regulation’.
Insufficient allocations to health and education are laid at the doorstep of neoliberal policies supposedly adopted by India’s governments after the 1991 economic reforms. Liberalising governments are supposed to be anti-people, pro-capitalist and blasé about rising inequality if not actively encouraging it.
At the outset, it might be useful to point out some conceptual and empirical chinks in this imputed policy framework.
Free market policies do not really mean an absent state. The market functions according to rules and rules need to be enforced, contracts honoured and their violators penalised. In other words, the market cannot work in the absence of the state as a rule and contract enforcer, apart from as a protector of individual and group freedoms and property.
Can telecom operators deliver their service, if every operator tries to use the very same chunk of spectrum for the purpose at the same time? How the spectrum is to be used has to be sorted out in an arrangement that finds acceptance by all operators. The state has to play a role, even in the most extreme of neoliberal economies.
The state does a whole lot more than protect freedom and property and enforce rules and contracts. As the production process draws in more and more members of society in ever more intertwined relationships, the potential grows for conflict and social divisions. This calls for mitigation, to maintain social harmony, without which, production would be disrupted. Mitigation takes the shape of policy, laws and redistributive taxation and spending.
The UPA Years
Critics of neoliberal policies have no difficulty recognising the period of the two UPA governments as a period of continuity of the neoliberal policies pursued since 1991. The period saw fast growth, the rise of billionaires, attempts to privatise coal, although only through the captive mine route, diluting the dominance of the state in the economy through an ever-expanding sweep of public-private-partnerships in infrastructure, and ever-greater openness to foreign capital. This fits the neoliberal bill, alright.
Yet, instead of being wilfully anti-people, the UPA governments also brought in redistributive policies such as the employment guarantee scheme, the Forest Rights Act to give forest-dwellers the legitimacy colonial policy had taken away from them, converting them into trespassers on state property, enacted the Right to Information Act, put affordable mobile phones in the hands of even most rural Indians, adopted policies that brought down the maternal mortality rate and the infant mortality rate, unleashed construction of roads, urban infrastructure and real estate, leading people to migrate out of the stagnation of the village, to feed ambition and aspiration, raise the real, inflation-adjusted rural wage for six continuous years, depressing poverty.
The National Payments Corporation of India was set up, and Aadhaar was conceptualised and rolled out, in the teeth of stiff opposition from political opponents. India was released from the technology denial regime in which it had been held since the nuclear tests, to allow the nation to gain access to key dual-use technologies, by entering into a controversial nuclear deal with the US.
The neoliberal economy delivered fast growth that enhanced collective welfare, enhanced strategic autonomy and laid the foundation for future prosperity. Perhaps, it wasn’t all that neoliberal, in the sense of floating free of state intervention, moving in the direction and with the speed yielded by the cumulative effect of the forces of supply and demand, mediated by the forces of competing greed and want.
No economy anywhere has been totally neoliberal in terms of being wholly untainted by state intervention.
The State In The US
At the turn of the 20th century, that haven of free market principles, the United States, saw the enactment of strong anti-trust laws to rein in and even break up monopolies. The stock market collapse of 1929 led to the creation of a state agency to regulate markets, the Securities and Exchange Commission. Repeated bank failures led to the creation of deposit insurance and many strands of banking regulation, some sensible, some not so sensible. The New Deal fought depression and unemployment with public funding. World War II saw the US government commandeer automakers to make tanks, set up new companies to make armament and later privatise them.
Defence research projects and liberal upfront funding of Stanford faculty and students working on those projects spawned Silicon Valley. Medicaid and Medicare took root. The government guaranteed student debt and housing mortgages, lowering their cost.
Bailouts And Stimulus
When regulation fell far behind advances in financial engineering and derivatives generated more risk than they mitigate, and the financial crisis of 2007-09 took place. Once again, the state came to the rescue, bailing out banks and giant companies, depressing interest rates close to zero and innovating quantitative easing. In the midst of all this vigorous state activism, the one thing that did not weaken was the notion that neoliberalism ruled.
The COVID pandemic once again unleashed a slew of government programmes around the world. Fiscal and monetary stimulus (for the first time, the US Fed bought private debt) amounted to some 18 per cent of GDP in the US, way higher in the UK and comparable levels in rich European nations. The fates of individual economic agents directly depended on the extent of state activism.
The world was awash in liquidity created to prevent economies from sinking. The parts of that liquidity that made their way to stock markets bloated stock valuations and the net worth of billionaires. Depressed interest rates arising from this extraordinary creation of liquidity are to blame, in part, for the current banking crisis in the US.
After the financial crisis of 2007-09, banks were reinforced with greater levels of capital, additional tiers of loss-absorbing capital, periodic stress tests and tighter regulation. But this still left one chink in their armour. Many banks invested in secure government bonds, alongside riskier private loans, with the plentiful deposits that came their way. The rapid, Fed-driven increase in interest rates eroded the value of these investments and rendered the banks short of liquidity if they needed to encash their investments for an urgent need, like paying back depositors who come seeking their money back.
Banking Crisis And The State
If a bank has the luxury of holding its bond investments to maturity, it would be fine, it would suffer no erosion in the value of its assets. Banks hold assets to generate returns, and choose a sufficient proportion of them as liquid assets, so as to be able to sell them, generate cash and meet depositors’ repayment demands, were they to arise in larger volumes than is anticipated. Government bonds are liquid assets, alright. The trouble is if a spike in yields between the time when you bought those bonds, seeing them as reasonable investments, and the time you sell them, has eroded their value.
To illustrate, an asset that gives you $4 a year is a good buy at $100 if the prevailing interest rate is 3 per cent. But if the interest rate were to go up to 6 per cent, you could get $4 on just $67, which means that bond has lost a fraction of its value now. By selling such bonds, you will make a loss. This is what happened to Silicon Valley Bank, and Signature Bank.
After the crypto-oriented bank Silvergate folded up, following its exposure to FTX and other crypto exchanges and platforms, depositors were nervous about the health of all small banks, and the faintest hint of weakness or trouble was enough to spread panic and force runs on these banks.
The social media rumour mill amplifies depositor concerns, accentuating the fear and panic that propel bank runs. The US regulators and the government stepped in. They took Silicon Valley Bank and Signature Bank into receivership and promised to repay all deposits, not just those covered by insurance. They had to invoke the risk of systemic damage to do this, which was probably warranted.
The US regulators have opened a loan facility to troubled banks that would accept their collateral at face value, rather than at lower values arising from discounting at the higher interest rates of today. Meanwhile, in Switzerland, the government brokered the acquisition of troubled Credit Suisse by UBS.
The short point is that the spectre that is haunting the global economy is that of the activist state, not of any neoliberalism. It is time to put this bogeyman to rest, once and for all.
The article was first published on Money Control as Time to bury the neoliberal bogeyman on March 23, 2023.
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