Anand Swaroop Verma

After the resignation of Pushp Kamal Dahal “ Prachanda” as the prime minister of Nepal, the political parties have once again created a situation that reminds one of the days of the 12-point agreement of November 2005. The 12-point understanding was reached between the CPN-Maoists, which was underground and carrying out the people’s war, and seven parliamentary parties. This turned out to be a historic accord because the programme it articulated not only culminated in the November 2006 peace agreement but also made way for the election to the Constituent Assembly and establishment of a republic in Nepal. Had the 12- point accord not been signed then the monarchy would not have seen the quick exit it did. It might be worth recalling here that the US had launched a brazen campaign against the accord. The then US Ambassador to Nepal, James Moriarty, had advised the parliamentary parties to face the Maoists in tandem with King Gyanendra instead of joining hands with them. He had also attempted to impress on the parties the need to come out of it, once they had signed it, to do some introspection.

The agreement in question was signed in New Delhi at a time when the government of India was busy arresting the Nepali Maoists. Clearly, this accord could not have been signed without the consent and knowledge of India. This was possible only because of Nepali Congress patriarch Girija Prasad Koirala, whom the Indian establishment has always considered a close ally. However, after some time, once the situation had become completely normal, it was revealed Prachanda had suggested that the accord-signing meeting be held in Rolpa, and had even offered to ensure the security of the political leaders involved. Koirala, though, had not agreed to this. He insisted on Delhi as the venue and, instead, made a counter-proposal of providing security to Prachanda and his colleagues.

That the accord between the parliamentary parties and the CPN-M came about is only seemingly surprising. The drive to arrest political leaders launched by Gyanendra once he had usurped all powers on February 1, 2005, had compelled the former to realise the need to join hands with the Maoists to bolster their ongoing battle against the monarchy. Maoists, who too were looking for the right opportunity to forge an alliance with parliamentary parties, were more than willing to meet those politicos half way.

In such circumstances, the vicious American opposition to the accord revealed that while there may be many areas of mutual cooperation between New Delhi and Washington, there are few issues such as Nepal on which they have serious disagreements. India believes a strong American presence in Nepal runs counter to its national interest.

The political  polarisation in Nepal on the issue of dismissal of the old Shahi army chief, Rukmangud Katwal, is largely the manifestation of the American desire that all traditional parliamentary parties should form a front against the Maoists. The monarchy has been abolished but its remnants are present in the form of Katwal and once again the US, which had earlier lost the game, has tried to turn the situation in its favour.  It is significant that parties such as the Nepali Congress, the CPN(UML) and others have united on the issue of Katwal, and are trying to alienate the Maoists. The Nepali Congress and the CPN(UML), which won only 37 and 33 seats respectively out of the 240 seats of the constituent assembly, have formed the government by alienating the CPN-M, which won 120 seats in first-past-the-post voting. What is even more ironic is that former general secretary of CPN(UML) Madhav Nepal, who lost the elections badly from Kathmandu and Rautahat to little-known Maoist candidates and whose party was completely wiped out, has taken over as the prime minister.

Clearly, those who have brought the people of Nepal, its democracy and its politics to such a shameful pass were the ones who had earlier tried to forge some kind of an understanding between the monarch and the political parties so that a joint offensive could be launched against the Maoists.

How long this new government will last is far from certain. But what is beyond doubt is it is a tough proposition for a government to function by isolating the CPN(M), which has 240 seats in the constituent assembly.

It is gradually becoming clear that the Prachanda government was thrown out of power through a well-orchestrated conspiracy. It is also now known who the persons were who encouraged Katwal not to abide by government orders. The CPN(UML), the main ally of the CPN(M) in the government, had impressed upon Prachanda to immediately sack Katwal. This had been conveyed to Prachanda by UML chief Jhalnath Khanal after the issue had been deliberated upon inside the party. In spite of this, the party protested Katwal’s removal by Prachanda and withdrew support to the government on the very day Prachanda had acted. Incidentally, Bamdeo Gautam, senior vice-president of the party and home minister in the Prachanda government, had publicly criticised this move of his party and had described it as a suicidal step.

Massive rallies were held in four major towns besides Kathmandu to protest President Rambaran Yadav’s decision to re-induct Katwal. Addressing the Kathmandu rally, Prachanda made it clear that under no circumstances would the CPN(M) go back to the villages and forests and resort to guerrilla warfare. It would, he stressed, launch peaceful struggles against the feudal and status quoist forces that do not desire a complete structural transformation of Nepal and have been obstructing the drafting of a peoples’ constitution. Prachanda resigned on the issue of supremacy of civilian rule in contrast to the supremacy of the army. That, needless to say, increased the popularity of his party manifold. The action of the President, who is clearly in league with Katwal, is being described by most Nepalis as a coup ’d etat. Prachanda holds the view that till the President does not retreat, the struggle will continue. On the whole, Nepal once again appears to be on the threshold of a civil war.

The approach of the Indian media on the developments taking place in Nepal has been quite shameful and ridiculous. Editorials of newspapers, particularly those in Hindi, are quite galling. It is, indeed, amazing how these newspapers have managed to muster so much of courage to purvey disinformation to its readers. These comments generally observe that Katwal was sacked because he refused to succumb to Prachanda’s pressure to recruit guerrillas of the People’s Liberation Army (PLA) into the national army. Obviously, if a reader is fed with this kind of (mis)information he would stand by Katwal and condemn Prachanda. For him, the step taken by President Yadav would appear to be rational. Our newspaper editors do not even bother to inform the readers that the question of induction of PLA guerrillas into the national army is not an issue that is being pursued unilaterally by Prachanda and his party but is a legitimate part of the Comprehensive Peace Agreement reached in November 2006. It is an integral element of the peace process. These editors have chosen not to highlight the fact that the peace accord reached between the government and the Maoists clearly says that neither the Maoists nor the government would go in for fresh recruitment until the two forces are unified. Katwal, in violation of this agreement, has recruited 3,000 personnel into the Nepali army. The United Nations Mission in Nepal (UNMIN), which has been monitoring both the armies, had, in fact, written to the prime minister to stop recruitments into the Nepali army. Prachanda had, through his defence minister, informed Katwal of this UNMIN directive but the latter chose to ignore it. And this was hardly an exception. During Prachanda’s prime ministerial tenure Katwal refused to obey government orders at least on five or six occasions.

The Hindi daily Janasatta carried the most outrageous editorial on the subject. It said, “Since Mr Prachanda could not succeed in inducting his people from the (Maoist) armed squad (into the Nepali army) he sacked Mr Katwal.” It also argued that his insistence to transform the army according to his personal wishes could not be accepted. Else, “tomorrow it would be said that the judges of the jan adalats (People’s Court), which he ran be given powers similar to the members of the country’s judiciary. Democracy has its own norms, rules and compulsions. When a party or a government prefers to overlook these it gives rise to the threat of authoritarianism.”

Dainik Hindustan ran an editorial on May 5, 2009, under the heading ‘Prachanda araajakataa’ (Prachanda’s anarchy). It read: “This incident underlines that his decision to drop the title Prachanda, which he had adopted during the guerrilla war, to project himself as a suave jananayak (peoples’s leader) was a pretence and he failed to provide correct leadership to Nepal under pressure from China and his Maoist comrades. Violence and immature political education, and the illusion of  having accomplished the Maoist revolution within 20 years, prevented him from understanding the ground realities of his country as well as its neighbours. He was hell-bent on inducting the fighters of the People’s Liberation Army into the country’s army.” The editorial, however, did deign to mention that the issue of unification of the two armies was included in the ceasefire agreement. It, however, also did its bit of damage by claiming in the same edit that the army chief had been reluctant to accept it. Not surprisingly, the editorial ended up declaring the sacking of the army chief as disorder.

Dainik Jagran wrote no army chief would ever accept people, who till the other were resorting to violence and arson, into his army’s fold. Dainik Bhaskar also justified the opposition from the army chief as this was “a heinous attempt to politicise the army”. Obviously the editorial indicated the editor was not aware of the fact that the general was refusing to obey a political decision, which was incidentally an important part of the peace agreement. Rashtriya Sahara also held that Prachanda was trying to achieve his political target by inducting the PLA personnel into the army. Besides, the editorial cautioned Prachanda and sought to tell “all Maoists” that “they should realise that in a democracy and that too in a coalition government it was not possible to impose one’s own desires on others and this was also against the principles of democracy”.

On May 5, Aaj Samaj editor Madhukar Upadhyaya observed in his article ‘Nepal Phir Badhaal‘ (Nepal Again in Bad Shape) that “In spite of protests from the partners of the ruling coalition, Mr Dahal at the advice of his party issued an order in the name of the army chief that former Maoist guerillas should be inducted into the army. Naturally, the army chief refused to implement it and as a result Mr Dahal sacked him.” Upadhyaya also wrote how in the entire world no erstwhile fighters of a war are inducted into the army once the war has come to an end. He gave the example of Subhash Bose’s Indian National Army (INA) and argued that INA personnel were not taken into the army of Independent India. Somebody should ask Upadhyaya what led him to do so much research when he should have known that the decision to absorb Maoist fighters into the army was arrived at after much deliberation. Obviously, Upadhyaya is neither aware of the basis of the agreement nor the sensitiveness of the situation.

The Navbharat Times editorial showed that the writer was aware that under the peace agreement various parties had accepted this condition. It also mentioned that Katwal wanted some special power and for this he did not bother to confront the government. This was the only editorial which confessed that behind Katwal the President and all the political parties had opened a front against the Maoists.

In contrast to most of the outrageously partisan Hindi editors, the editors of some English-language dailies tried to take the situation seriously and studied the matter in right perspective. The May 5 editorial of theHindustan Times is an example: “Though the Maoists would be blamed for acting in haste and also unilaterally, the undemocratic approach of the General towards the civic control and peace process  is primarily responsible for the current crisis. At the time when the people’s struggle against King Gyanendra was at its peak all the parties had agreed that the PLA should be inducted into the democratised national army. Now once democracy has been established and the task to create the Constitution of Nepal is in progress, the Nepali Congress and the CPN(UML) have gone back on this issue. The maximum damage has been done by the attitude of General Katwal.”  The editorial refers to violations of government orders by Katwal. The editorial mentions that no democratic institution could tolerate such indiscipline as had been displayed by the general. It also referred to the danger that it may jeopardise the peace process. The editorial also said that the CPN(UML) and Nepali Congress, in the name of  opposing the Maoists, had endorsed the actions of President Yadav and also euglogised it and thereby set a dangerous precedent for the new-born democracy and also people-army relations. The Asian Age, however, demonstrated its ignorance by echoing the view that had been articulated by much of the Hindi press. It appreciated the President for protecting the army from being destabilised by the entry of Maoist forces.

Nepal has two armies: the old monarch’s army, which is now the national army, and the Maoist PLA. National and international organisations have accepted the identities of both the forces. Under the 2006 peace agreement, the national army is in the barracks and the Maoist forces are in specially erected cantonments. Since the two armies must not violate the peace agreement, a UN team has been monitoring them. Without knowing the following management mechanisms of the two forces, any comment would be incorrect and ridiculous.

1. In point 4 of the ‘Comprehensive Peace Agreement 2006’ of November 21, 2006, under the heading ‘Management of Armies and Arms’, the issue of management of the army has been explained. In point 4.4 it is stated: “The interim cabinet shall form a special committee to carry out monitoring, integration and rehabilitation of the Maoist combatants.”

2. In the same manner in part 20 of the interim constitution, under the heading ‘Provision Regarding The Army’, the issue of rehabilitation of the soldiers in has been mentioned in point 146: “The Council of Ministers shall form a special committee to supervise, integrate and rehabilitate the combatants of the Maoist Army, and the functions, duties and powers of the committee shall be as determined by the Council of Ministers.”

3. On December 23, 2007, a 23-point agreement was reached by seven parties. This was  signed by Sushil Koirala (Nepali Congress), Madhav Nepal (CPN-UML), Prachanda (CPN-Maoist), Amik Sherchan (Janamorcha), Narayan Man Bijukchhe (Nepal Majdoor Kisan Party), Shyam Sunder Gupta (Nepal Sadbhavana Party-Anandi Devi) and C P Mainali (United Left Front). Under article of the agreement it is said, “Regarding the integration of the verified combatants of the Maoist Army, the special committee formed by the Council of Ministers as per the interim constitution shall move ahead the process after deliberations/discussion.”

4. The news released by ANI and Nepal News.Com said: “The chief of the Nepal army General Rukmangud Katwal said that the political parties have already reached agreement on army integration…. The General, talking to newsmen in Kathmandu, said that now “discussions are going on among them, which is part of the democratic process. He said as per the peace pact and other understandings among the parties, the army integration will be carried out through a special cabinet committee, which has not yet been formed.”

5. On October 28, 2008, the government formed a five-member army integration special committee headed by the then deputy prime minister and home minister Bamdeo Gautam, a CPN(UML) leader. Members of the committee included the then defence minister, Ram Bahadur Thapa, leader of Madhesi Janadhikar Forum Mohammed Habibullah, and the then peace and reconstruction minister, Janardan Sharma (ex-officio member). One post was kept vacant for the Nepali Congress. The main problem facing the committee was the Maoists wanted to head it, which was opposed by the Nepali Congress. Finally, the leader of CPN(UML) was entrusted with the task to lead the committee.

Translation of a Hindi article published in the June 2009 issue of FILHAAL, a radical Hindi fortnightly published from Patna.

 Bülent Gökay and Darrell Whitman

At the conclusion of his widely popular 1987 study of the global political economy, titled The Rise and Fall of the Great Powers, England-born and Oxford-trained Yale historian Paul Kennedy observed, “The task facing American statesmen over the next decades . . . is to recognize that broad trends are under way, and that there is a need to ‘manage’ affairs so that the relative erosion of the United States’ position takes place slowly and smoothly” (Kennedy, 1989: 534). In chronicling the decline of the US as a global power, Kennedy compared measures of US economic health, such as its levels of industrialisation and growth of real gross national product (GDP), against those of Europe, Russia, and Japan. What he found was a shift in the global political economy over the last 50 years generated by underlying structural changes in the organisation of its financial and trading systems.

Kennedy’s arguments about a structural decline in US power are shared by other critical historical thinkers who similarly see global political economy through a historical lens. Andre Gunder Frank (ReOrient, 1998), Emmanuel Todd (After the Empire: The Breakdown of the American Order, 2002), Giovanni Arrighi (Adam Smith in Beijing: Lineages of the Twenty-First Century, 2007), Niall Ferguson (The Ascent of Money, 2008), Peter Gowan (“Crisis in the Heartland”, 2009), and Fareed Zakaria (The Post-American World, 2008) all use history to argue that US power is declining in parallel to a rise of regional powers, and particularly China. In their view, this decline is not the consequence of “bad behaviour”, even if bad behaviour has occurred, but is the function of structural changes that have occurred as the global economy attempts to adapt to changing historical circumstances. Our analysis of the roots of the present crisis similarly finds that historical change has affected the structures of the present system in ways that its original design did not anticipate, and argues along with Frank, Arrighi, Gowan, and Zakaria that these changes are long-term trends that cannot be mitigated by regulatory reform but must be accommodated through structural adaptations that recognise emerging political, economic, and environmental realities that cannot be contained by Euro-American global capitalism.

Immediate Cause of the Present Crisis

As of this writing, economic opinion has converged around a consensus that the immediate cause of the present global crisis was sub-prime mortgage lending in the US that spread through an interconnected global financial system.(1) We argue that this sub-prime lending, which began in the U.S. in the early 2000s and spread to parts of Europe thereafter, was generated not for the purposes of either providing housing to those previously excluded from home ownership, as many mainstream economists and politicians have argued, but in response to a massive accumulation of capital in the international financial system that required profit-oriented investment.(2)  The perception of prosperity was largely fabricated on the basis of a housing boom and highly leveraged real estate speculation.  While sub-prime lending was accompanied by the development of new speculative financial instruments, in operation it functioned as part of a money merry-go-round that was created within global capitalist financial structures to enable the expansion of global capitalism. This expansion involved privatising important elements within the system, such as currency management and banking, in ways that removed them from public scrutiny and regulation.

By closely examining how sub-prime mortgage lending served the global money merry-go-round, we hope to offer insights into the more pernicious features of the global capitalist political economy that have plagued it with recurring economic crises since its creation at Bretton Woods in 1944. Of particular importance has been the role of the US in acting as the economic policeman for this system, and the way that it has encouraged, rather than discouraged, a proliferation of complex investment tools that masked the true nature of underlying capitalist economic activity. In so doing, the US oversaw a structural transformation of international banking that interconnected global financial institutions and exposed them to speculative losses they little understood. This framed the current crisis as the first truly global economic contraction in more than 70 years, making it a direct challenge to continuing US economic and political leadership. As capitalist governments scramble to regain control, they are confronted not only with the failure of US leadership, but also the inadequacies of the Bretton Woods system to accommodate the global shifts and systemic faultlines that now infect global economic and political relationships.

Sub-prime Mortgages and the Money Merry-go-round

As the term suggests, “sub-prime” mortgage lending was highly speculative because it targeted potential buyers that otherwise could not qualify for standard home loans. The “sub-prime” element in these loans was the below-market rate of interest charged during the initial loan period, which would last 3-5 years, depending on the loan terms. However, once the initial period passed, the rate was destined to rise, raising the underlying mortgage payment. Additionally, many, if not most, of these loans were made with little or no down payment, instead of the 5% or 10% usually required in standard home mortgages, down payments were effectively folded back into the original loan, which, when closing costs and fees were added, made the amount of the loan exceed the stated price of the house. The underlying premise of sub-prime lending was that borrowers would be able to accommodate higher payments in the future, either because their incomes would increase, or because the value of the house itself would continue to rise creating equity for the borrower where none had earlier existed.

The amount of global capital devoted to US sub-prime lending was staggering, amounting at one point to some $12 trillion in the US alone.(3) Yet, even as sub-prime mortgages carried risks related to their character, these risks were not equally distributed among the borrowers, lenders, and ultimate holders of these mortgages. For example, loan originators, who earned large fees for making but not managing these loans, were exposed only to the risk that the market would collapse, leaving them with few customers. On the other hand, borrowers bore the risk that their income would not keep up with the increase in their mortgage costs, or that the value of their property would decline, leaving them “upside down” on their mortgage, a condition where the value of their mortgage exceeded the value of their house. However, the greatest risk was born by the ultimate holder of the mortgage, because they had no direct knowledge of the actual value of the property, the circumstances of the borrower, or the prospective long-term value of the home. While the low risk, high-profit motive of the loan originators is apparent, and the deferred risk motives of the borrower can be understood, it is still difficult to understand why sub-prime mortgages became such a major part of the US home loan industry, or why the ultimate holders of these loans would agree to buy them.

On closer inspection, sub-prime mortgages were driven by lending practices that created an illusion of opportunities for risk-free profit. With huge amounts of capital pouring into the US through the purchase of US treasury notes and corporate stocks and bonds, US interest rates, including mortgage interest rates, fell steadily through much of the 2000s. Yet, at the same time opportunities for traditional investments in the US were shrinking as the US increasingly bought more and more of its goods and services from low-wage countries. This created the “problem” of the excess capital requiring new outlets for profitable investment, which was solved by channelling it into real estate at all levels. Sub-prime loans thus became a popular investment because they offered a quick profit to the lending industry, and the appearance of long-term profits to the ultimate managers of the loans, based on the seemingly unstoppable rise in real estate values.

The loan originators in the US were led by Country Wide, which, as its name suggests, was a major national mortgage lender, and Freddie Mac and Fannie Mae, two quasi-public lending agencies that originated home loans on behalf of the US government. These and other smaller lenders were encouraged to enter the sub-prime market by public officials, who wanted to both appear to generously extend home ownership to the working class and poor and a profitable outlet for money invested in Treasury notes. Seeing the potential for speculative profits, major banks joined the sub-prime parade by buying up and repackaging sub-prime loans into investment bundles that mixed them with traditional loans and resold them at a considerable profit to other investors in the US and throughout the world. Along the way, various security ratings services got into the act by offering assurances, for a price, that these bundled loans were AAA rated as low-risk investments. As the money merry-go-round spun faster and faster, generating quick and seemingly risk-free profits to lenders, banks, and the US Treasury, no one seriously questioned how this was possible.

The illusion of risk-free profit was promoted by the way that the global financial system had become enmeshed in a web of privatised, quick-profit schemes generated by capitalist speculators. In the decade between the mid-1990s, when the global economic system was transformed and largely privatised, and the first tremors of crisis in 2007, an alphabet soup of new speculative financial tools emerged. At the time, and under the influence of a powerful capitalist narrative of profit generated by neo-liberalism, few asked and even fewer understood how these tools worked, but several have now been demystified and exposed as reckless, if not criminal, covers for looting the system. One of the most popular tools was a financial “derivative”, such as the bundling and reselling of sub-prime loans, which simply referred to several ways of disguising the nature of an investment and its risks from potential investors. Citibank, Morgan Stanley, and Lehman Brothers were major sources of these derivatives, which earned them huge profits during the 2000s. A second and particularly onerous tool was the “credit default swap” CDS, which acted as form of insurance to cover the risk that an investment might go sour. American International Group (AIG), which was a relatively small insurance company in the 1990s, gorged itself on CDSs during the 2000s to become among the largest insurers in the global market. But unlike a prudent insurer, AIG paid out the fees it earned for issuing a CDS to its own corporate officers and shareholders, keeping only a minimum of capital in reserve. As investigators subsequently discovered, driven by insane profits none of these capitalist corporations did much to determine the actual risks involved in derivative or CDS investments, leaving the entire structure of global finance exposed.

For their part, sub-prime borrowers, who were generally members of the working class that had long been excluded from home ownership, either accepted sub-prime mortgages because they were their own choice, or were pushed into it by the lenders who saw them only as profit opportunities. Before the credit crunch, mortgage providers were giving out home loans worth 125% of the value of the property, stretching homeowners way beyond their means. Few of them, however, had any real knowledge of how sub-prime mortgage lending worked, or about the longer-term risks that they accepted along with their sub-prime loans. Rather, lenders commonly enticed their applications by assuring them that the risks were small and that they would be able to manage the loan in the future because housing prices would continue to rise, allowing them to either sell for a profit or take out a second mortgage to cover the difference. Once the loan approved, these lenders disappeared, leaving the borrowers to grapple with the consequences as the lenders escaped with their fees as the loans themselves were sold and then resold to other investors.

How Banks Failed

The money merry-go-round of sub-prime lending could not have developed without the changes in the global financial system that allowed for the accumulation of the vast amounts of capital that it required. These changes, generally understood as neo-liberal reforms, included both the promotion of new privatised financial investment tools, and the deregulation of banking, which spread through the US-controlled Bretton Woods economic system through its interlinking of global financial institutions. This allowed high-risk sub-prime mortgages to insinuate themselves into the fabric of ongoing financial activities without a test of their underlying value. As a consequence, second-, third-, fourth-, and fifth-tier investors, many of them international banks, were never required to account for the value of the sub-prime mortgages that they held, until the system began to unravel in 2007.

Looking at the current crisis as interlinked problems with the valuation of bank assets, it is easier to see how the collapse of sub-prime lending acted to constrict the free flow of money necessary to keep the global capitalist system working. The first chapter in this story came when world stock markets peaked and began a sympathetic decline in October 2007, signalling that a global rather than national economic crisis was unfolding. The role of banking in the crisis then became apparent when news of a sharp drop in the profits of Citigroup led to a sharp fall on the New York Stock Exchange in January 2008, which then spread to global markets on January 21 as other US and European banks disclosed they also had suffered massive losses in 2007. Thereafter, several key financial dominos in the global system began to fall, beginning with the venerable Wall Street investment bank Bear Sterns, which was rescued by the US Federal Reserve in a controversial move in March 2008 that merged it with the Bank of America as it was nearing bankruptcy.(4) The crisis was held in relative suspension for the next several months as capitalist speculators debated how US government actions might rescue the global economy through various stimulus schemes that would inject hundreds of billions of dollars into the US national economy, and through various schemes that would rescue the US banking system. The debate ended, however, in September 2008 when Lehman Brothers, a 158-year-old international investment bank and one of the largest financial institutions in the US, was forced into bankruptcy.

The failure of Lehman Brothers was immediately caused by the reluctance of the US government to step in with yet another bank rescue, which was attributed to a split within capitalist policymakers between those that favoured purely “free-market” economics that would allow any institution to fail in a competitive marketplace, and liberal capitalists who argued that Lehman Brothers was “too large to fail” because its failure would trigger a “credit crunch”, or inability of banks to provide loans except to their very best customers, as banks withdrew from lending in the face of uncertainty about loan risks. The decision to let Lehman Brothers fail first demonstrated that the risks of a credit crunch were very real, but also revealed how governments played a key role in managing capital markets. The relationship between banks and the government economic management had been first raised by commentators with the rescue of Bear Sterns, who observed that its rescue was required “to prevent key financial players from going under”,(5) but without noting just who qualified as a “key” financial player. Because the capitalist markets reacted favourably at the time, the rescue of Bear Sterns became a further argument in favour of rescuing Merrill Lynch, Goldman Sachs, and Morgan Stanley, three other giant investment groups, after Lehman Brothers failed. Thus, gripped by fear of a total financial meltdown the US government began to pour hundreds of millions of dollars directly into major US banks, predicated on the ability of this rescue, deemed the “Toxic Asset Relief Program” (TARP), to relieve the speculative pressures that were enveloping the US banking system.  However, this too failed to stem the crisis and other and even larger and more visible interventions by the US and other capitalist governments followed during the Fall of 2008 and Winter of 2009 – which together were the largest synchronised government interventions in markets since the 1930s.

Even as the US and European governments coordinated action in November 2008, the crisis intensified in the US and Europe, and spread to other national banks and economies, with a particularly vicious impact on those, such as Iceland, that had been most active in the global financial system. This radically changed forecasts about the global economy, with the International Monetary Fund (IMF) first revising its projections for real global 2008-2009 GDP growth downward in November 2008 to 3.7% in 2008 and 2.2% in 2009, against its earlier projections of 3.9% in 2008 and 3.0% in 2009.(6) It also saw that the distribution of growth would be uneven, with advanced economies actually contracting by 0.25% in 2009, which would be its first annual contraction for those countries since World War II, and 2009 GDP growth in emerging economies receding to 5.1%, instead of the 6.1% earlier forecast.  Most notably, the IMF predicted the US economy would shrink in 2009 by 0.7% and the UK would suffer the greatest decline among western European countries by contracting 1.3%. Taken as a whole, these projections meant that emerging economies would provide all real global GDP growth in 2009 and bear the burden of rescuing global economic performance after 2010.(7)

The revisions made by the IMF in November quickly proved inadequate, and it was forced to update them again on January 28, 2009, projecting even slower growth, with the world economy assuming its slowest pace since World War II. In this case, overall growth was expected to be only 0.5% in 2009, with economic activity contracting in the US by 1.5%, in the Eurozone by 2%, and in Japan by an even greater 2.5%. This revision also projected that growth in the developing economies of China and India would decrease to 5.75% and 5% respectively, thus limiting their ability to act as major engines for the world economy.(8) This led IMF chief economist Oliver Blanchard to admit, “We now expect the global economy to come to a virtual halt.” Then, in March 2009 the IMF further warned that the world economy would likely contract this year in a “Great Recession” that would be “the worst performance in most of our lifetimes”.(9)

The IMF was not alone in its gloomy assessment as the World Bank reported in December 2008 in Global Economic Prospects 2009 that world trade would contract in 2009 for the first time since 1982, with the decline driven primarily by a sharp drop in demand as the global financial crisis imposed a rare simultaneous recession in high-income countries and a slowdown across the emerging economies.(10)  At the national level, the US Federal Open Market Committee (FOMC) similarly revised its earlier economic projections on February 18, 2009, predicting that 2009 economic growth would slow further, while inflation and unemployment would increase.(11) These revisions were understandably hostage to the crisis itself and further revisions were likely to follow that would drive down expectations even further.(12)

As dark as these dark forecasts were, they represented a conservative view by mainstream capitalist economists who tried to put the best face on events. Thus, these reports minimised or ignored how this and earlier crises imposed long-term structural damage on the global economy, choosing rather to blandly predict an economic “recovery” in 2010, based on past experience rather than on the crisis’s peculiar global and financial characteristics. For example, in its 2009 forecast the IMF forecast a 2010 recovery with the caveat that the economic contraction would be more prolonged in certain countries, including the US and the UK (13) Yet, with past experience as a guide these official forecasts look increasingly weak as new measurements of economic activity reveal a much deeper annual decline in the US fourth quarter GDP, far beyond the 3.8% earlier estimated, with private US investment falling in that quarter at a 21% annual rate and the Japanese economy contracting at a 12% annual rate.(14) Thus, prudence argues that official estimates be seen more as self-interested “guesstimates” than as fact, with a parade of downward revisions into the future.

All of these separate facets of the current crisis came together in the banking system because each of them lowered the underlying value of bank assets, which limited the ability of banks to provide credit. With an integrated global economy functioning through an interconnected financial system, whatever happens within the system, whether at the centre or periphery, becomes a factor in determining the value of assets held by banks. This creates a circular process, where a crisis in any part of the global economic system translates into financial factors that feed into global finance creating a crisis in proportion to the weight of the initial crisis that initiated the cycle. Thus, because the US dominates the global economy and leads its financial sector, its sub-prime mortgage lending and crisis of confidence in bank assets has become the defining factor in generating a global financial and now economic crisis. As political economists understand, this is what makes economics political and not just a collection of calculations.

It also is the case that the effects of the global crisis will not be evenly shared among developed or developing economies, and what happens within the countries of the EU will differ, and in some cases significantly, from what happens in the US or Japan. This is borne out by the way the new central and eastern European members of the EU and the poorer economies in the global system are experiencing the crisis with far more limited resources, tools and prospects,(15)  and is chronicled in the plight of developing economies that have already been forced to seek emergency funding from the IMF and World Bank, or face the dark near-term prospect of not meeting their basic needs.(16)

Bülent Gökay is a Professor of International Relations in Keele University and the Chair of Editorial Committee of Journal of Balkan and Near Eastern Studies. Dr. Darrell Whitman is a licensed attorney, community activist, and educator with a professional background for over 30 years in public interest law, environmental program management, and university-level research, and teaching, and is currently undertaking research in Environmental Politics in California.

Notes

(1) Sub-prime mortgages carry a higher risk to the lender (and therefore tend to be at higher interest rates) because they are offered to people who have had financial problems or who have low or unpredictable incomes.

(2) In “Global Imbalances and the Financial Crisis” (Council on Foreign Relations, Special Report No. 44, March 2009), Steven Dunaway characterized this development as “imbalances between savings and investment in major countries”, which he attributes to flaws in the international financial system that allowed governments, as well as private investors, to evade the consequences of their economic choices.

(3) John Gittelsohn, “Ex-subprime exec works flip side of the market”, The Orange County Register, March 16, 2009.

(4) The U.S. Federal Reserve is a quasi-public central banking system managed by a board whose members are appointed by the U.S. President and confirmed by the U.S. Congress, but who act independently of both political institutions in setting U.S. monetary policy. This independence in the past has led to conflicts between the political interests of the U.S. government and the economic interests of private U.S. banks when the Fed acts to protect financial capitalist at the expense of the interests of industrial capitalist.

(5) Neil Irwin and David Cho, “Fed Takes Broad Action to Avert Financial Crisis”, Washington Post, March 17, 2008.

(6) Gross domestic product is a measure of economic activity in a country that aggregates all the services and goods produced in a year. There are three main ways of calculating GDP by measuring national output, income and expenditure.

(7) “World Economic Outlook Update: Rapidly Weakening Prospects Call for New Policy Stimulus”, IMF, November 6, 2008.

(8) “World Economic Outlook“, IMF, January 28, 2009.

(9) “Global economy to contract in ‘great recession,’ IMF warns”, Reuters, 10 March 2009.

(10) “Prospects for the Global Economy”, Global Economic Prospect 2009, World Bank, 9 December 2008.

(11) “US FED: Fed Worsens Projections For 2009 GDP, Inflation, Unemployment”, Forbes.com, 18 February 2009.

(12) It should be understood that official projections rely on economic data generated by governments, and that in the U.S. the process of producing this data has become highly politicized with the process of data collection and reporting increasingly tilted toward underreporting politically sensitive data.

(13) Shobhana Chandra and Alex Tanzi, “U.S. Economy May Shrink 1.5% in 2009 as Recession Stymies Fed”,Bloomberg.com, 13 January 2009.

(14) Connor Dougherty and Kelly Evans, “Economy in Worst Fall Since ’82“, Wall Street Journal.com, 28 February 2009.

(15) See, e.g., “How to Prevent a Financial Crisis in Hungary and Avoid a Domino Effect”, January 2009.

(16) “Global short-term growth revised downwards as economic prospects deteriorate“, Euromonitor International, 27 Nov 2008.

S Sivasegaram

By early 2006, the Government of Sri Lanka (GoSL) had decided to embark on a military course to deal with the Tamil Tigers (LTTE) and was pushed hard in that direction by its extreme chauvinist partners. The build-up for war was nevertheless on between 2002 and 2005 when the ceasefire was effective and even as peace talks continued into 2003. The then prime minister, Ranil Wickramasinghe, claimed credit a year ago for weakening the LTTE by engineering a split (with help from the US) in 2004, and some months ago for purchasing most of the military hardware, with which the GoSL successfully fought the war, between 2002 and 2004. The LTTE too armed itself during the time but did not anticipate the brutal force with which the GoSL would pursue the war and the line-up of international forces against it.

The LTTE was weakened on its naval front by the tsunami in 2004, which took a heavy toll in the LTTE-controlled regions and delivered a severe economic blow, which was aggravated by the government’s de facto denial of tsunami relief. Further, the shortcomings of the LTTE, especially its failure to carry out mass political work and insensitivity to contradictions among the people, cost it dearly when the government went on the offensive in the East in 2006. But the LTTE retreated from the East with minimal losses.

When the government followed its conquest of the East with an offensive in the North, the LTTE steadily lost ground and, despite its ability to deliver the occasional surprise attack, was a poor match in conventional warfare to the re-armed and reinforced Sri Lankan armed forces, with training in counter-insurgency. The government’s push to militarily defeat the LTTE had more than the tacit blessings of India and the ‘international community’, meaning the imperialist alliance led by the US. India and the US provided logistical as well as material support to the GoSL.

The LTTE, contrary to the belligerent image painted by the GoSL, India and the US, was, at least by 2007, keen on cessation of hostilities and negotiations. The armed forces of the GoSL, sniffing victory, were unwilling; and the GoSL made the laying down of arms by the LTTE a precondition for any negotiation. That was hard for the LTTE, which relied heavily on its image of invincibility and defiance for its financial and political backing from its supporters, especially among the Tamil Diaspora.

Well before the fall of the LTTE’s administrative capital Killinochi at the end of 2008, it was clear the government forces could be indiscriminate in their attacks. By ordering all NGOs and journalists out of the conflict zone in mid-2008, the GoSL signalled it was unwilling to let reports of human rights violations and civilian casualties stand in its way.

The human tragedy worsened rapidly from mid-2008; and the displaced population in the North passed 200,000 at the end of 2008. The LTTE left behind a ghost town in Kilinochchi by persuading the people to follow it as it retreated. LTTE’s critics charge that it forced the people, but it is more likely that the people feared the armed forces more than they resented the totalitarian ways of the LTTE, and probably believed that the LTTE would regain control of lost territory as it did on earlier occasions. As the LTTE territory shrank, the number of displaced passed 300,000 and their living conditions became more miserable. The proportion of the displaced who wanted to leave the LTTE-controlled territory at any time is unknown. But it is likely that, with time and the GoSL restricting the flow of essential goods including food and medicine to the LTTE-controlled areas, the number of people who would rather risk it with the armed forces than be unsheltered and face hunger, starvation and disease increased.

The US, EU, UN and India were aware that the condition was deteriorating for the displaced and that the conflict was heading towards a catastrophe for the entrapped civilians. The issues were soft-pedalled by the governments and the UN was indifferent. International NGOs, which witnessed the situation in the North-East since the escalation of fighting, expressed grave concern.  European governments spoke rather late in the day, but, like the international NGOS, they were snubbed by spokespersons for the GoSL. It was clear that none of the international concerns would translate by way of action into anything more than token gestures of suspension of aid.

The government, whose popularity rested on its military success against “terrorism”, paid no heed to international concerns and played to the gallery, and in the process stirred up Sinhala chauvinism. Spokespersons for the government went out of their way to rudely reject all charges of violation of human or democratic rights.

It was towards the last quarter of 2008, after the LTTE had lost much of the territory and had a massive number of displaced persons to deal with, that the people of Tamil Nadu became aware of the gravity of the situation. As the human tragedy gathered pace, LTTE spokespersons and sympathisers among the Tamil Diaspora saw their salvation in intervention by the US, countries of the EU, and the UN.  Some, including Tamil National Alliance parliamentarians, pinned their hopes on India. There pleaded desperately with India to intervene, even when it was abundantly clear that India was hand in glove with the GoSL.

Once re-elected to power with an enhanced majority, the Congress-led government had no incentive to appear to care for the Tamils or to protest the outrages committed during the final weeks of the war. When the GoSL thanked India in May 2009 for its active support, India did not contradict the claim. However, when the defeat of the LTTE was imminent, there was a proliferation of publications in Tamil and English in the print and electronic media, charging that it was China’s enhanced economic and military aid in 2008 that enabled the GoSL to carry out large-scale destruction. It was the handiwork of an India-based group actively pushing an anti-China agenda in India, with a former official of the RAW guiding operations on a number of fronts. This crude attempt to justify India’s conduct continues, and had been unquestioningly adopted by the Times (London), reflecting the West’s fears of China’s growing global influence.

Rivalry between the US and India for hegemony over Sri Lanka has been there ever since British influence faded. It came into the open in 1980, and went dormant after the collapse of the Soviet Union and increasing cooperation between India and the US. Efforts of the West to reactivate its role in the Sri Lankan national question by applying pressure on the GoSL on the question of human rights violations have failed so far owing to the defiant attitude of the GoSL, which has successfully played countries resentful of US domination against the US and its allies. India’s efforts to reinforce its hold on Sri Lanka by siding with the GoSL and even canvassing for it in international discussions did not, however, yield proportionate returns.

India is viewed with suspicion by the Sinhalese as a whole, mostly out of fear that India may again impose a solution of its design to the national question. That is something Sinhala chauvinists would like to resolve by negating the existence of all minority nationalities. India’s stock among Sri Lankan Tamils is rock bottom since the exposure of its duplicity, although a handful of beneficiaries of India’s largesse are seeking to build a political alliance to do India’s bidding among the Tamils.

The rivalry for hegemony goes on. The pressure brought upon Sri Lanka by the US, its allies and the UN needs to be seen in this light. The more affluent sections of the Sri Lankan Tamil Diaspora are working hard to bring the entire Diaspora under their wing by persuading the politically desperate supporters and sympathisers of the LTTE that the hope of an LTTE revival lies with the US-led West.

It is a critical moment for Sri Lankan Tamils at home and among the Diaspora. It is important they review the history of the Tamil national struggle and realign themselves with genuine forces of democracy, freedom and social justice than let themselves be manipulated by players seeking global and regional domination. It is equally critical for the Sinhala majority to recognise the dangers of letting divisions among the nationalities to be used cynically by powers seeking to dominate and control Sri Lanka.

The future of the country depends on its ability to resist any form of foreign meddling, by uniting its nationalities through a just and lasting solution, based on the principle of self-determination, to the national question.