When Americans Over-Spend

The Rest of the World Goes Bankrupt!

by S. Hewage

(October 14, Colombo, Sri Lanka Guardian) A few years ago, leading academics and policy makers in the West predicted that economic globalization would be the ultimate path to global wealth, economic prosperity, and above all, to the establishment of democracy around the world. The United States was in the driving seat steering towards the new global economic order, with the full backing of the international financial institutions such as the International Monetary Fund (IMF), the World Bank, and the World Trade Organization (WTO). The key policy makers of the U.S. government, together with the top officials of the IMF and the World Bank, developed a package of crucial policy guidelines to be followed by all governments in the world to ensure smooth implementation of global economic policies.

One of the fundamental recommendations they put forward was to keep the governments out of the free market activities. This policy package, known as the “Washington Consensus,” was praised by leading conservative “Think Tanks” in the west. A leading proponent of the “Washington Consensus” is Francis Fukuyama, the author of the disputed “End of History” thesis that claimed liberal democracy had defeated communism, and the west had won the battle against the cold war. Fukuyama argued that the “world made up of rational democracies…have much less incentive for war, since all nations would reciprocally recognize one another’s legitimacy.” While Fukuyama later admitted that he spoke too soon about the lack of desire for wars among the leaders of liberal democracies and the respect for the internal sovereignty of nations, a great deal of neo-liberal economic policies were driven by ideology and dominant class interests. They had very little to do with real economic strategies designed to increase economic productivity and reducing global poverty, and income inequalities. In the year 2000, one percent of the world’s population owned 40 percent of the global wealth, according to a report by the Helsinki-based World Institute for Development Economic Research of the United Nations University. Americans account for 42% of the world's billionaires and own 37% of the total global wealth. By contrast, the bottom half of the world adult population owns barely one percent of global wealth.

The latest crisis of the global financial market that began in the banking centers in the United States suggests that the neo-liberal economic policies of the last twenty years were driven by sheer greed, to say the least, and they were not based on realistic assessment of economic activities. The epicenter of the crisis, the United States, has been consuming the global wealth at an alarming rate that has exceeded its real economic strength. Whether it is to finance its war in Iraq and Afghanistan, or to fund their domestic programs, the spending in the U.S. has surpassed its national revenue to the level that the American national debt today stands at $ 10 trillion, and is increasing at the alarming rate of $ 3.29 billion per day. To put it another way, the share of every American citizen in the national debt is approximately $ 33, 661.

This is a crisis of over-spending, and this crisis is most evident at the individual level: the sub-prime mortgage that was the beginning of the current global financial crisis is simply a crisis brought on by individual citizens of the U.S. buying homes that were beyond their means. The sub-prime and adjustable mortgages that began in early 2005 at the height of the U.S. housing bubble was a part of the complex lending incentives adopted by the financial institutions. According to this system of lending money to individuals buying homes, the borrower had easy initial terms such as very minimum down payments and lower interest rates. As the housing market was going up, the sub-prime mortgages encouraged many to assume difficult mortgages hoping that they would be able to refinance at rates that were as favorable in the future. As the interest rates started to rise and housing prices began to go down, refinancing became more difficult, resulting in loan defaults and foreclosures. The fact of the matter is that the sub-prime mortgage mechanisms encouraged a vast majority of people to borrow money to purchase homes, who would otherwise not have been able to get home loans in the first place. In this case, both borrowers and lenders acted with excessive greed. This is the ultimate consequence of a deregulated market enabling greedy executives of major financial institutions to design lending policies without any oversight. To finance these schemes, U.S. sub-prime related commercial papers were sold to millions of investors around the world by banks and brokerage firms.

Major financial institutions around the world faced an unprecedented liquidity crisis as the loan defaults and foreclosures in the U.S. began to mount—and the global economy came crashing down. However, supporters of the “Washington Consensus” such as Fukuyama continued to support the policy of deregulation as late as 2004. He insisted that the “state sectors of developing countries were in very many cases obstacles to growth and could only be fixed in the long run through economic liberalization.” His main criticism against countries in Asia and Latin America is that those countries have excessive regulation and are not opening up their economies to the global market. In this case, the economies that are now the least affected by the current global financial crisis are the very ones that are the least open to global financial markets. Need I say more? - Sri Lanka Guardian