Maravi

(TALKZIMBABWE) Bush, Brown and the Look East Policy

Bush, Brown and the Look East Policy
Editor's commentary
Wed, 15 Oct 2008 03:59:00 +0000

UNITED KINGDOM’S public debt has shot up beyond the 100% mark, signalling a huge blow to Gordon Brown’s (and the Labour Party’s) widely publicised legacy of reducing public debt consistently over the last 10 years. The bedrock of the Labour Party was its ability to repay public debts. That is now water under the bridge.

The large super bank – the Royal Bank of Scotland and HBOS were the two banks central to the welfare of the people of the U.K. They have now been merged and effectively nationalized. Gordon Brown’s government (or Her Majesty’s government) now owns over 60% of the shares in the new arrangement, effectively snatching control from the private sector.

£37 billion was pumped into the institutions, or was used to buy the RBS super bank and HBOS. RBS was bought (or ‘bailed out’ as Brown would like to say) for £20 billion, HBOS/Lloyds TSB was bought for £17 billion.

This is all taxpayers’ money.

Although confidence seems to be increasing in the banking sector, there are no guarantee that things will get better in the West.

Although stock markets soared on Tuesday after Brown’s announcement of the rescue package, the move is still very much patchwork. The domino effect of the financial crisis is yet to be fully comprehended. The effect on mainly the construction and car manufacturing industries is still to be assessed. Even if that assessment was to be made, the ripple effects from other Western economies cannot be completely shielded from hitting the banking sector.

With the government controlling the banking system, the inefficiencies of the civil service will be brought into the banking system. Given Brown’s government’s poor record of record-keeping, the effects of the nationalisation could deal a huge blow to the banking sector and other related sectors.

In any case, in line with financial prudence, the new managers are most likely to be hugely reluctant to lend at the speed and rate at which they lent previously. That means the economy will slow down anyway.

The bailout of Northern Rock and Bradford Bingley in the UK should have been an indicator of things to come; but industry bosses responded late and the British government failed dismally in regulating effectively the banking sector to avoid another collapse.

Although the trigger of the “global financial crisis” was the sub prime mortgage market in the U.S., the problem is much greater than is reported. The structural, deeply imbedded weaknesses should be addressed. The international banking system is still run by cigar smoking, Saville Row suit wearing ‘City Kings’ whose values are hard to bend. This is the same scenario in the U.S. where the rich boys control the banking system and dictate which direction the banking sector (and the general financial sector) takes.

17 major financial institutions are reported to have failed in the U.S. alone. National debt is standing at almost 300% of high economic output and the U.S. owes China huge sums of money.

China has described this money owed by the U.S. as “dead money”. Effectively, this means that the U.S. is unable to repay that amount in the foreseeable future without shaking an already volatile market and sending ripple effects across the Western financial world.

Maybe Western governments should now adopt the “Look East Policy” or at least a Chinese version of capitalism they shunned for a long time. The Hang Seng and other Asian stock markets have not be rocked as much as the Western ones by the so-called credit crunch.

Credit crunch is a misnomer. Meltdown is more appropriate. Western economies especially Britain and the U.S. are already in a recession.

Brown and Bush, by providing the much needed respite and financial patchwork, should think beyond the next few weeks (months). They should adopt an honest, credible and unbiased stance in their assessment of the current crisis.

Although Bush has just adopted the Brownite approach of rescuing ailing (and sometimes dead) institutions, the deeply embedded structural problems need to be addressed and the West should realise that China will play a significant role in rescuing them from their current crisis. The sooner they realise that the better. China could provide a moratorium on the debt owed by the U.S. so that the country can focus on something else.

China will demand huge political and social concessions if it was to come to the rescues of the Western world. It will probably demand a shift in stance over Taiwan, among other demands.

Rather than carrying on by hubris and excessive self-confidence, it is time for Brown and Bush to adopt the “Look East Policy” or accept that China is now a superpower and could in the next few years overtake the U.S. to become the global power.

itayi@talkzimbabwe.com

Labels: FINANCIAL CRISIS

posted by MrK @ 8:46 PM