MANILA, Philippines—Amid doubts raised on the Philippine government’s ability to stay on track of its fiscal target for 2009, three investment banks said they believed the budget deficit for the year would not exceed the official ceiling.
ING, Citigroup and JP Morgan said the Philippine government was unlikely to allow the budget gap to surpass the ceiling for the year—set at 2.5 percent of the targeted gross domestic product, or nearly P200 billion.
Although the government has made pronouncements it would pump-prime the economy through aggressive spending in social services and infrastructure, the banks said the government seemed unlikely to do it to the extent of breaching the deficit ceiling.
“If correct, our view that the worst of the global downturn was behind [during the first quarter], the restrained public spending should form into a trend and keep the full-year deficit within the official target,” ING said in a paper on its latest assessment of the Philippine economy.
The Department of Finance reported this week that the government posted a P7.9-billion budget surplus in April. But for the first four months of the year, the fiscal position was at a deficit of P111.8 billion.
Critics said the four-month deficit was big that it could lead to a breaching of the full-year ceiling. But the DOF said the latest data were not worrisome, insisting that the government’s full-year deficit would stay within target.
Citigroup agreed with the DOF, although it described a P200-billion deficit as something huge. Last year, the deficit stood at only P68.1 billion.
“The single-digit surplus [in April] would momentarily disrupt the expanding deficit trend. Nonetheless, our forecast of a hefty fiscal gap close to P200 billion this year remains intact,” Citigroup said.
According to JP Morgan, the government would not spend as much as it intended if its revenue goals would not be achieved.
The Bureau of Internal Revenue, which contributes the bulk of the government’s revenues, missed its collection target in April as it collected P87.1 billion in taxes compared with its goal of P100 billion for the month.
The BIR blamed the shortfall on the economic slowdown.
JP Morgan said revenue data as of April indicated that spending could also be lower than programmed for the year. The bank said the government would only stick to its expenditure program for the year if revenue targets were also met.
“Expenditures [for the year] may run behind plan,” JP Morgan said.
The goal of limiting the deficit to about P200 billion this year assumed revenue collection of about P1.2 trillion and programmed expenditures at about P1.4 billion.
The Philippines placed 26th among 81 countries surveyed in terms of financial systems standards but was still at the bottom half of the list in the business indicator index, a recent report of eStandards Forum of the U.S. Financial Standards Foundation showed.
Based on the forum’s 12 Key Standards for Sound Financial Systems, the country’s compliance level was scored at 52.50 reflecting medium overall compliance, which brings the Philippines to the 26th place of 81 countries reviewed.
The 12 Key Standards for Sound Financial System are: Macroeconomic Policy & Data Transparency, data dissemination, transparency monitoring policy, transparent fiscal policy; Institutional Market Infrastructure, insolvency, accounting corporate governance, auditing antimony laundering, payment
systems; Finance Regulation Supervision, banking supervision, securities regulation, insurance supervision.
The eStandards Forum, which also reviews the Business Indicator Index, also reflects the country’s political, economic and business model versus an ideal best-practice benchmark.
If there is a silver lining to the increasingly ominous specter of a global financial meltdown and the far-reaching implications of Great Depression-like scenarios, it should be the opportunity to move from “greed economics” toward a global green economy. Global capitalism as we know it has imploded with the collapse of Lehman Brothers, Bear Sterns, Merrill Lynch and such other giant investment and insurance houses, and the future is frighteningly uncertain.
But if out of this mess the global economy is more decidedly weaned from the financial world’s propensity to “make money from the movement of money” (what, pray tell, do “derivative contracts” and other exotic futures instruments mean to the average citizen?) and shift it to the creation of new, real value — new technologies, innovative materials and industrial products that sustainably meet energy needs and address eco-efficiencies — then there is hope for economic renewal, and, indeed, a real chance to curb global warming. Jacques Attali, founding president of the European Bank for Reconstruction and Development, would call it a “Global New Deal.”
Countries with powerful reserves — China, Russia and other oil-producing countries — could well finance “greener” infrastructure projects, especially in sustainable and renewable energy, in the developing world to be built among others, by leading American companies. This would ignite broad growth in the “real economy” of actual production and human invention, argues Attali, who recently wrote the trenchant book “A Brief History of the Future.”
It is time leaders took the Herculean challenge of restoring balance in the larger economy and the underlying factors of ecology with the “urgency of now.” The $700-billion bailout of Wall Street is touted by the Bush government as “pivotal for Main Street jobs and homes.” But as several scientists would propound, such a bailout sum — or a fraction of it — will go a long way in “bailing out nature.”
Just think what wonders a hundred billion dollars can do to repair damaged ecosystems, restore biodiversity loss, curb pollution, support technological innovations and renewable energy use, and put in place mitigation measures for climate change — especially in the vulnerable regions of the developing world. Such environmental threats to human health, food security and continued access to clean water, after all, are inextricably tied to poverty indices and the incapacity of millions around the world to meet basic needs and attain higher standards of living.
The contradictions of global capitalism have led to the crisis of overproduction, or as social scientists would have it, “overaccumulation” and “overcapacity” — the buildup of “tremendous productive capacity that outruns a population’s capacity to consume,” given widespread poverty and inequalities around the world that limit purchasing power and reduce overall profitability. Moreover, the financial economy of unbridled speculation or “squeezing value out of already created value,” as sociologist Walden Bello would describe it succinctly [Read Bello’s column], has only exacerbated volatilities in the world economy, such as crippling oil and food price crises; and have ultimately added to the ruin of the earth’s vital life-support systems of fresh water, clean air, the seas, forests and land.
In the wake of the largest financial collapse since 1929, this crisis should perforce move economic planning and activity toward what environmental/eco-efficiency advocates Dan Esty and Andrew Winston refer to in their book “Green to Gold”: the locating of sustainability and new green technologies at the center of business strategy and government policy. The future of humanity surely depends no less on how society embarks on a sustainable track with regard to both energy needs and environmental requirements.
This requires nothing short of folding environmental stewardship into corporate culture and the running of businesses. This likewise calls for increased and more effective global governance mechanisms and, yes, supranational responses. By necessity, governments and civil society actors will have to take larger roles, and what may have been a heretofore near-absolute faith in the self-correcting nature of free markets will require serious revisiting.
These interventions will have to come in various forms — whether in terms of clear country and regional targets for the United Nations Millennium Development Goals or the accountability and commitments of nation-states and governments in global stewardship instruments like the Kyoto Protocol, among others. The world’s economies and the world’s six billion inhabitants deserve no less.
Only then will new social contracts emerge, or a Global New Deal forged, with greed economics supplanted by a global green economy that drives long-term growth … and heals a battered planet.
Neric Acosta was Liberal Party congressman of Bukidnon province from 1998 to 2007 and principal author of the Clean Air Act and Clean Water Act; he is now a professor at the Asian Institute of Management.
MANILA, Philippines—The crisis that has pushed the American financial system to the brink of disaster is spawning its own moral economy. The new object of fixation is blame-worthiness, rather than credit-worthiness.
The high-flying executives on Wall Street who invented those ingenious financial instruments known as “derivatives” are being singled out for special flogging. Not too long ago, they were the celebrated and highly compensated geniuses of the US economy. Today, there is not a corner in hell that seems punitive enough for them, no penalty that can conceivably equal the magnitude of their greed and recklessness.
But this blame game is ultimately a futile exercise. It’s like blaming culture for the way people are. It may be morally gratifying, and perhaps even politically unavoidable. But it brings Americans no closer to understanding the complexity of their highly-leveraged economy. Credit is not just the lifeblood of the US economy; it is its heart and soul. It is the only way Americans do business. In such an economy, one’s credit record is all that is needed to open doors. It is the center of gravity of one’s identity in the larger society.
A foreigner visiting the United States for the first time will not fail to note the centrality of credit in everyday transactions. Hardly anyone pays with cash, except for the smallest purchases. If someone forks out a hundred dollar bill to pay for a cup of coffee, as Filipino tourists are sometimes wont to do, the cashier will likely take a second look at him and at his money. In this economy, the use of a credit card or even a check to pay for a meal at McDonald’s is the most normal thing in the world.
In hierarchical Philippine society, we measure a person’s worth by his family background, his educational attainment, his profession, his connections, and his visible wealth. In less hierarchical America, a person’s worth is roughly equivalent to what he can borrow from a bank, or how much he can buy on credit. It is one’s credit standing that matters; it is the measure of almost everything else that is regarded as valuable. It attests to a person’s capacity to pay back, which is all that is important. If one habitually pays with cash, there is no way he can build a credit history, the most important basis of economic identity, and one’s principal claim to citizenship in the market.
Credit cards and housing loans are the two most important indices of the average American’s economic standing. It is fairly easy to get a credit card, but also quite easy to lose it if you do not meet the minimum monthly payments. But housing loans used to be different — a steady and adequate income was required to access them. It wasn’t until the early 1990s that the dream of owning a house became possible for almost every American family, notably for those whose incomes did not normally qualify them for such loans. Thus were subprime mortgages born. They were hailed as democratic, rather than devious; equitable rather than exploitative.
It was the time of the economic bubble. Banks and other financial institutions were awash with money that needed to make more money. And so they started giving out loans with little regard for the risks of not being paid back. They were focused on interest payments. Borrowers who were enticed with initially low interest payments found themselves trapped in schemes that carried adjustable interest rates and high penalties for pre-payment. But the spiraling housing demand drove prices through the roof and gave homeowners the assurance that what they were paying out was more than offset by the rising market value of their homes.
It is an aspect of the inventiveness of finance capitalism that when the subprime housing mortgages began to turn sour, the investment houses, instead of being alarmed, bundled these mortgages with credit card debts and sold them as mortgaged-back securities. There was a time when responsible borrowers, still the majority, were seduced with offers to re-finance their mortgages. This meant borrowing more money against the equity they already paid, money they could use to upgrade to a bigger home, or to buy a new car or go on an expensive holiday. These were offers that were too good to ignore, and they were perfectly consistent with the entire logic of the American way of life.
I remember how my US-based sisters and their husbands carefully calculated the benefits of having money to invest in the Philippines against the risks of refinancing under new adjustable repayment terms. They were not alone. Many Filipinos took the money and bought properties in the Philippines, instead of moving into a bigger home or buying an additional car. But many others were not as conservative. The more access they had to borrowed money, the freer their spending habits became. Surely, they must accept some blame, and they are paying for it. But it’s not entirely their fault. They are after all only a small part of a system that has created a reality so complex that it spins one contingent state after another, rendering its self-stabilizing operations totally useless. It is an amazing time.
One good thing that I see in all this for us in the Philippines is that it will finally put a stop, hopefully permanently, to local banks’ annoying practice of issuing unsolicited credit cards in order to spur credit spending. A consumerist culture driven by credit is the last thing we need in these times.
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PARIS—Key developments on Friday in the world credit crisis:
• Markets wait on news of a new vote in the US Congress, where Representatives are to consider a new version of a $700-billion (Є500-billion) bailout plan.
• The European Central Bank renews loans of $50 billion (Є36 billion) to commercial banks in what has become a regular effort to keep cash flowing on distressed interbank money markets.
• Trading on Russia’s main stock market is suspended after stocks plunge ahead of the vital vote by US lawmakers.
• European stocks edge higher, despite steep losses in Asia where Tokyo matched Wall Street by striking a three-year low.
• Switzerland’s biggest bank UBS says it will cut 2,000 more jobs as it repositions its investment bank which had been blamed for massive asset write-downs after the US subprime crisis.
• The Bank of Japan says it injected a further ¥800 billion ($7.6 billion) into the financial system as it tries to keep cash flowing.
• The chief executive of troubled Franco-Belgian bank Dexia says he will forgo a “golden parachute” payoff after resigning following a government bailout.
• The US bank Wells Fargo agrees to buy its distressed rival Wachovia for $15.1 billion in stock, ending a deal between Wachovia and Citigroup.
• Britain increases its government guarantee for bank deposits, following a similar move by Ireland.
• The leaders of France, Germany, Italy and Britain prepare to discuss the crisis at a mini-summit on Saturday despite disagreements that killed off talk of a Europe-wide bail-out package.
This is the longer version of an essay by the author released by the British Broadcasting Corporation (BBC) on Feb. 6, 2009.
Week after week, we see the global economy contracting at a pace worse than predicted by the gloomiest analysts. We are now, it is clear, in no ordinary recession but are headed for a global depression that could last for many years.
The fundamental crisis: overaccumulation
Orthodox economics has long ceased to be of any help in understanding the crisis. Non-orthodox economics, on the other hand, provides extraordinarily powerful insights into the causes and dynamics of the current crisis. From the progressive perspective, what we are seeing is the intensification of one of the central crises or “contradictions” of global capitalism: the crisis of overproduction, also known as overaccumulation or overcapacity. This is the tendency for capitalism to build up, in the context of heightened inter-capitalist competition, tremendous productive capacity that outruns the population’s capacity to consume owing to income inequalities that limit popular purchasing power. The result is an erosion of profitability, leading to an economic downspin.
To understand the current collapse, we must go back in time to the so-called Golden Age of Contemporary Capitalism, the period from 1945 to 1975. This was a period of rapid growth both in the center economies and in the underdeveloped economies — one that was partly triggered by the massive reconstruction of Europe and East Asia after the devastation of the Second World War, and partly by the new socioeconomic arrangements and instruments based on a historic class compromise between Capital and Labor that were institutionalized under the new Keynesian state
But this period of high growth came to an end in the mid-1970s, when the center economies were seized by stagflation, meaning the coexistence of low growth with high inflation, which was not supposed to happen under neoclassical economics.
Stagflation, however, was but a symptom of a deeper cause: the reconstruction of Germany and Japan and the rapid growth of industrializing economies like Brazil, Taiwan, and South Korea added tremendous new productive capacity and increased global competition, while income inequality within countries and between countries limited the growth of purchasing power and demand, thus eroding profitability. This was aggravated by the massive oil price rises of the seventies.
The most painful expression of the crisis of overproduction was global recession of the early 1980s, which was the most serious to overtake the international economy since the Great Depression, that is, before the current crisis.
Capitalism tried three escape routes from the conundrum of overproduction: neoliberal restructuring, globalization, and financialization
Escape Route # 1: Neoliberal Restructuring
Neoliberal restructuring took the form of Reaganism and Thatcherism in the North and Structural Adjustment in the South. The aim was to invigorate capital accumulation, and this was to be done by 1) removing state constraints on the growth, use, and flow of capital and wealth; and 2) redistributing income from the poor and middle classes to the rich on the theory that the rich would then be motivated to invest and reignite economic growth.
The problem with this formula was that in redistributing income to the rich, you were gutting the incomes of the poor and middle classes, thus restricting demand, while not necessarily inducing the rich to invest more in production. In fact, it could be more profitable to invest in speculation.
In fact, neoliberal restructuring, which was generalized in the North and south during the eighties and nineties, had a poor record in terms of growth: Global growth averaged 1.1 percent in the 1990s and 1.4 percent in the ‘80s, compared with 3.5 percent in the 1960s and 2.4 percent in the ‘70s, when state interventionist policies were dominant. Neoliberal restructuring could not shake off stagnation.
Escape Route # 2: Globalization
The second escape route global capital took to counter stagnation was “extensive accumulation” or globalization, or the rapid integration of semi-capitalist, non-capitalist, or pre-capitalist areas into the global market economy. Rosa Luxemburg, the famous German radical economist, saw this long ago in her classic “The Accumulation of Capital” as necessary to shore up the rate of profit in the metropolitan economies.
How? By gaining access to cheap labor, by gaining new, albeit limited, markets, by gaining new sources of cheap agricultural and raw material products, and by bringing into being new areas for investment in infrastructure. Integration is accomplished via trade liberalization, removing barriers to the mobility of global capital, and abolishing barriers to foreign investment.
China is, of course, the most prominent case of a non-capitalist area to be integrated into the global capitalist economy over the last 25 years.
By the middle of the first decade of the 21st century, roughly 40-50 percent of the profits of US corporations came from their operations and sales abroad, especially in China.
The problem with this escape route from stagnation is that it exacerbates the problem of overproduction because it adds to productive capacity. A tremendous amount of manufacturing capacity has been added in China over the last 25 years, and this has had a depressing effect on prices and profits. Not surprisingly, by around 1997, the profits of US corporations stopped growing. According to one calculation, the profit rate of the Fortune 500 went from 7.15 in 1960-69 to 5.30 in 1980-90 to 2.29 in 1990-99 to 1.32 in 2000-2002. By the end of the 1990s, with excess capacity in almost every industry, the gap between productive capacity and sales was the largest since the Great Depression.
Escape Route # 3: Financialization
Given the limited gains in countering the depressive impact of overproduction via neoliberal restructuring and globalization, the third escape route — financialization — became very critical for maintaining and raising profitability.
With investment in industry and agriculture yielding low profits owing to overcapacity, large amounts of surplus funds have been circulating in or invested and reinvested in the financial sector — that is, the financial sector is turning on itself.
The result is an increased bifurcation between a hyperactive financial economy and a stagnant real economy. As one financial executive noted in the pages of the Financial Times, “there has been an increasing disconnect between the real and financial economies in the last few years. The real economy has grown … but nothing like that of the financial economy — until it imploded.” What this observer does not tell us is that the disconnect between the real and the financial economy is not accidental — that the financial economy exploded precisely to make up for the stagnation owing to overproduction of the real economy
One indicator of the super-profitability of the financial sector is that while profits in the US manufacturing sector came to one percent of US gross domestic product (GDP), profits in the financial sector came to two percent. Another is the fact that 40 percent of the total profits of US financial and non-financial corporations is accounted for by the financial sector although it is responsible for only fiv percent of US gross domestic product (and even that is likely to be an overestimate).
The problem with investing in financial sector operations is that it is tantamount to squeezing value out of already created value. It may create profit, yes, but it does not create new value — only industry, agricultural, trade, and services create new value. Because profit is not based on value that is created, investment operations become very volatile and prices of stocks, bonds, and other forms of investment can depart very radically from their real value — for instance, the stock of Internet startups may keep rising to heights unknown, driven mainly by upwardly spiraling financial valuations.
Profits then depend on taking advantage of upward price departures from the value of commodities, then selling before reality enforces a “correction,” that is a crash back to real values. The radical rise of prices of an asset far beyond real values is what is called the formation of a bubble.
Profitability being dependent on speculative coups, it is not surprising that the finance sector lurches from one bubble to another, or from one speculative mania to another.
Because it is driven by speculative mania, finance driven capitalism has experienced about 100 financial crises since capital markets were deregulated and liberalized in the 1980s, the most serious before the current crisis being the Asian Financial Crisis of 1997.
Dynamics of the Subprime Implosion
The current Wall Street collapse has its roots in the Technology Bubble of the late 1990s, when the price of the stocks of Internet startups skyrocketed, then collapsed, resulting in the loss of $7 trillion worth of assets and the recession of 2001-2002.
The loose money policies of the Fed under Alan Greenspan had encouraged the Technology Bubble, and when it collapsed into a recession, Greenspan, trying to counter a long recession, cut the prime rate to a 45-year low of 1.0 percent in June 2003 and kept it there for over a year. This had the effect of encouraging another bubble — the real estate bubble.
As early as 2002, progressive economists were warning about the real estate bubble. However, as late as 2005, then Council of Economic Advisers Chairman and now Federal Reserve Board Chairman Ben Bernanke attributed the rise in US housing prices to “strong economic fundamentals” instead of speculative activity. Is it any wonder that he was caught completely off guard when the Subprime Crisis broke in the summer of 2007?
The subprime mortgage crisis was not a case of supply outrunning real demand. The “demand” was largely fabricated by speculative mania on the part of developers and financiers that wanted to make great profits from their access to foreign money — most of it Asian and Chinese in origin — that flooded the US in the last decade. Big ticket mortgages were aggressively sold to millions who could not normally afford them by offering low “teaser” interest rates that would later be readjusted to jack up payments from the new homeowners.
How did problematic mortgages become such a massive problem? The reason is that these assets were then “securitized” — that is converted into spectral commodities called “collateralized debt obligations” (CDOs) that enabled speculation on the odds that the mortgage would not be paid. These were then traded by the mortgage originators working with different layers of middlemen who understated risk so as to offload them as quickly as possible to other banks and institutional investors. These institutions in turn offloaded these securities onto other banks and foreign financial institutions.
The idea was to make a sale quickly, get your money upfront and make a tidy profit, while foisting the risk on the suckers down the line — the hundreds of thousands of institutions and individual investors that bought the mortgage-tied securities. This was called “spreading the risk,” and it was actually seen as a good thing because it lightened the balance sheet of financial institutions, enabling them to engage in other lending activities.
When the interest rates were raised on the subprime loans, adjustable mortgage, and other housing loans, the game was up. There are about four million subprime mortgages which will likely go into default in the next two years, and five million more defaults from adjustable rate mortgages and other “flexible loans” that were geared to snag the most reluctant potential homebuyer will occur over the next several years. But securities whose value run into as much as$2 trillion had already been injected, like virus, into the global financial system. Global capitalism’s gigantic circulatory system was fatally infected. And, as with a plague, we don’t know who and how many are fatally infected until they keel over because the whole financial system has become so non-transparent owing to lack of regulation.
For Lehman Brothers, Merrill Lynch, Fannie Mae, Freddie Mac, Bear Stearns, Bank of America, and Citigroup, the losses represented by these toxic securities simply overwhelmed their reserves. Iceland’s banks and many European financial institutions have since joined the list of victims. Some, like Lehman Brothers, have been allowed to die, but most have been kept alive with massive injections of taxpayers’ cash by governments that want the banks to lend to keep the real economy going.
Collapse of the Real Economy
But instead of performing their primordial task of lending to facilitate productive activity, the banks are holding on to their cash or buying up rivals to strengthen their financial base. Not surprisingly, with global capitalism’s circulatory system seizing up, it was only a matter of time before the real economy would contract, as it has with frightening speed in the last few weeks. Woolworth, a retail icon, has folded in Britain, the US auto industry is on emergency care, and even mighty Toyota has suffered an unprecedented decline in its profits. With American consumer demand plummeting, China and East Asia have seen their goods rotting on the docks, bringing about a sharp contraction of their economies and massive layoffs.
Globalization has ensured that economies that went up together in the boom would also go down together, with unparalleled speed, in the bust, the end of which is nowhere to be discerned.
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Walden Bello is professor at the University of the Philippines, Diliman; senior analyst at Focus on the Global South; and president of the Freedom from Debt Coalition. He can be reached at firstname.lastname@example.org.