A total meltdown has been prevented – well, for now. But thanks to highly efficient networking by IT-enabled services and thorough integration of financial markets, the contagion spread at electronic speed all across the planet and soon affected the real economy too. Financial institutions, in the US and Europe in particular, still have no idea of what they are sitting on. That is to say, they do not have any estimate of the reliability of their assets base, which include unknown but large quantities of toxic securities. This has led to a reluctance of banks to lend to each other and to private individuals or firms. Liquidity in the real economy has thus dried up leading to a slowdown, which is further aggravated by declining consumption on the part of US citizens shaken by foreclosures and end of credit-dependent spending spree. And thanks again to successful globalisation, (in the sense of capital's success in the "conquest of new markets and... more thorough exploitation of the old ones") this time around there is no country like the erstwhile Soviet Union to escape from the grip of crisis.

Depression Economics

The National Bureau of Economic Research in US has recently announced that a contraction had actually begun in December 2007. At 12 months, the recession is already the longest since the 16-month slump that ended in November 1982. The US economy shed 533,000 jobs in November -- the largest monthly job loss since December 1974 -- bringing the year's total to 1.9 million. The latter figure surpasses the 1.6 million jobs lost in the 2001 recession. The extreme volatility of commodity prices in world trade in the recent past was an important indication of the turbulence in the global economy.

According to a survey published in December 2008 by the Chinese Ministry of Human Resources and Social Security, more than 10 million migrants are out of work. A recent public security report published by the Chinese Academy of Social Sciences (CASS) said that the global financial crisis has caused the closure of 670,000 small- and medium-sized firms in China, many of them labour-intensive ones based in coastal regions. Since September, the number of minor criminal cases in the Yangtze and Pearl river deltas was up 10 per cent on the same period of 2007. The first half of this year might well see more social unrest triggered by the financial crisis, the report said. President Hu Jintao and Premier Wen Jiabao have called on officials to maintain social stability and help cope with the financial crisis.

World trade is projected to fall next year for the first time since 1982 and capital flows to developing countries predicted to plunge 50 per cent, the World Bank said in a forecast released 9 November 2008. Developing countries will grow at an average rate of 4.5 per cent next year — a pace that almost constituted a recession, given the need of these countries to grow rapidly to generate enough jobs for their swelling populations. "You don't need negative growth in developing countries to have a situation that feels like a recession," said Hans Timmer, who directs the bank's international economic analyses and projections. As the World Bank's experts struggled to find a historical parallel to the slump, they said it had more in common with the GD than with the severe recessions of the 1970s or 1980s.

The UN’s World Economic Situation and Prospects 2009 estimates that the rate of growth of world output which fell from 4.0 per cent in 2006 to 3.8 per cent in 2007 and 2.5 per cent in 2008 is projected to fall to -0.5 per cent in 2009 as per its baseline scenario and as much as -1.5 per cent in its pessimistic scenario.

Well, can we call this a depression? Given the highly sophisticated monetary management techniques and huge levels of state intervention extensively resorted to these days, traditional distinctions between a recession and a depression have become largely superfluous. To avoid unnecessary academic hairsplitting, we have used the term “depression economics” after Paul Krugman to mean a broadly depression-like situation. The IMF in its November 2008 forecast said that output in advanced economies would contract on a full-year basis for the first time since World War II. A number of countries have already seen capital flight and currency depreciation of such severity that they have been forced to turn to the IMF (Iceland, Ukraine, Pakistan) or enter into emergency financial arrangements (Hungary, South Korea).

Gargantuan Bailouts

US Treasury Secretary Ben Bernanke put up a sombre face and told the law-makers at the peak of the September crisis that if the government did not save the (financial) markets then there might not be any financial markets in the future. He was speaking the truth. Bush and other hardcore neo-cons were compelled to change their stance and agree to a bailout package that is remarkable both for its sheer size and the opposition it evoked. Here is an assessment given by frequent CNBC commentator, Barry Ritholtz on his blog:

2008 Bailout versus Other Large US Government Projects

It should be noted that Ritholtz’s figure of $4.6165 trillion as total bailout amount might be an understatement. According to New York Times (October 18, 2008) the all inclusive bailout figure was already "an estimated $5.1 trillion” by October -- and it is growing!

As widely reported in the press, the "Emergency Economic Stabilisation Act of 2008" was passed in the face of tremendous opposition. At one time, calls and emails from constituencies to the Congress were running as high as 300 to 1 against the bailout. There were many street demonstrations too. Some 400 economists, including two Nobel Prize winners, opposed it. The package was then 'sweetened' in the Senate by granting another $110 billion in tax relief and renewable energy incentives to get enough House vote for passage.

The basic opposition against the bailout is that it transfers huge amounts of public money into the hands of private financiers responsible for the catastrophe instead of punishing them. The message goes out that the executive fat cats of Wall Street can earn themselves royal fortunes through reckless – often illegal – business practices and then get away scot-free when their firms go down, bringing untold miseries to their customers. Moreover, it leads to a spiralling public debt. Even the actual implementation of the $700 billion bail-out of the US banking system has already been seriously questioned by the Government Accountability Office (GAO). It is being carried out without adequate oversight and monitoring, the Congressional watchdog observed, and added that the Treasury "has no policies or procedures in place for ensuring the institutions... are using the capital investments in a manner that helps meet the purposes of the Act."

As for other rich countries, by early December 2008, finance ministers from all 27 European Union countries met to discuss proposals for a stimulus plan totalling 200 billion Euro (250 billion dollars). At the moment central banks in US and Europe are heading towards zero interest rates. In India a series of stimulus packages including interest rate cuts have been announced to arrest the pronounced downturn, with hardly any tangible results.

China too launched an economic stimulus package worth nearly $600 billion. Unlike the bailout packages in the West, here the stress is on investments in domestic infrastructure and lowering of exchange-rate. The latter measure is vehemently opposed by the OECD countries because that will make Chinese products cheaper and more competitive. China on its part insists it has every right to use the exchange rate as a tool for boosting the economy when many other countries are pushing their currencies down. It believes that it can make the biggest contribution towards a fast turnaround of the global economy by sustaining China's own growth – in whatever way it can.

Even after the rescue operations, credit markets are still fundamentally broken. Economists have also pointed out that at bottom it is more a problem of solvency than a mere credit crunch. The assets of colossal financial institutions have depreciated in a big way on account of massive fall in the value of the loans (including securitized loans) they have advanced. Therefore, flooding the system with debt liquidity will not help; it may indeed be counter-productive.

When the Emergency Economic Stabilization Act of 2008 was passed, the US Chamber of Commerce did not express any great optimism. It merely said, "With the American economy on life support, Congress took the necessary step to stop the bleeding." Well, the bleeding was indeed controlled (not stopped altogether) but the patient's condition did not improve. Recently in Delhi, Joseph Stiglitz likened the bailout packages to giving mass blood transfusion to a patient who was haemorrhaging internally.