Financial crisis: Turning from capitalism to socialism

It is true that we have been dodging the key issue of the financial crisis (housing meltdown), in the United States of America and what has been dubbed the great depression since late 1920’s. This happened when the world-experienced stagflation coupled with high levels of inflation. It all began when financial institutions (banking sector) gave out credit facility (loans), to people who in the first place did not qualify to access the loans. The banks were aware that they were giving out loans in a wrong way. This credit risk especially in house mortgaging was the problem. They could not to recover the money lent out! Credit creation dealt a major blow and almost collapsed into insolvency (remember the Lehman brothers, jb Morgan-leading financial institution crumbled) thus becoming a major market failure. Forces of demand and supply could no longer hold an indicator that unregulated capitalism. It was actually a fallacy. The world economy is thus no stranger to economic/financial shocks, whose contagion effect is perhaps more felt due to more integration and globalization today ,than ever before. International financial liberalization like other forms of economic liberalization has a positive effect on the efficiency of resource allocation and the rate of economic growth. But both recent and historical experience shows an undeniable association between capital mobility and crises, especially when domestic institutions are weak and the harmonization of capital account liberalization and other policy reforms is inadequate. In spite of the US government’s bid to take more measures in order to prevent a total paralysis of the international economy, much of globalization and concomitant increases, in flows of capita and trade have led to high volatility in international financial markets. Some of these have erupted into crises, in the form of runs and banks-both national and multinational-as well as attacks on currencies. The resultant effects have included the significant increase in contagion and the collapse of both venerable private banks as well as national institutions. The public sector ( US government) therefore, had no choice but to work on a bailout plan of these institutions worth 700bn dollars, and recaptured state control of these institutions to keep the economy from the blink of collapse-one can be justified to call it nationalization in the face of capitalism failure. Isn’t this Socialism? The greatest socialist ideology of all times, KARL MARX had envisaged this trend of events in his communist manifesto on the chapter entitled “Historical Materialism”, where the invisible hand as foretold by ADAM SMITH an architect of free market forces (Non-government intervention in the economy), had argued that the economy was self-regulating and self-sustaining. That there was essentially nothing like market failure since the economy would correct itself. He says that law maintained that, “supply created its own demand”. Therefore, there can never be a crisis in the real market. All these people had it wrong; the current trend has demystified them and vindicated the great Karl Marx. I wish he could be present to witness his prophesy coming true. Marx had prophesied that capitalism must eventually pave way to socialism as a matter of fact, due to the inevitable social forces of production because of surplus production (indicating exploitation of the proletariats by the bourgeoisie). The gains from trade and economic reforms have to be lost now; it’s a painful process to the monetary consensus (commonly referred to as the Washington consensus). Most predictions have been that, socialism is the end process of development. The very reason why now governments are taking over the banking institutions is to recover from this mess of laissez faire…ordinarily, government control (regulation) of the economy is a preserve of the socialist economies (in fact a major characteristic of socialist economies is government ownership of means of production). The structural adjustment programs and the neo-liberal economic policies, no longer hold as we talk because they are based on the very market model of deregulation (what some called man eat man society), where market participants behave as if they are in a jungle paving way for survival for the fittest-Darwin’s theory in retrospect. We are beginning to see a shift in capitalist architects moving towards the left (embracing government control of the economy) due to the worst economic crisis since 1930’s. The new world order ushered in after world war two may be heading for u-turn. My Hero’s Julius Nyerere, cheguevara, Karl Marx, Mao tsetung, Lenin and Nkrumah may be celebrating the return of socialism at the centre of capitalist states. Turning back to the crisis in relation to our continent. There are three major scenarios, am envisaging. Countries will suffer most due to dependency on: Foreign Aid There is going to be a reduction in the G8 (first world economies’) budgetary allocation to development spending on foreign aid, due to the bailout plan. Actually, the 700bn dollars bailout plan is more than the foreign aid, which was given to developing countries in the last five years. Therefore, countries with more than half of their budgetary spending financed by foreigners are going to feel the pinch. Tourism income Most African countries whose economy is greatly boosted by tourism, will suffer a reduction in income. This will be felt more in the trade balances that adversely affect macro-economic stability in the end. Remittances Most of our African brothers and sisters in the Diaspora (working outside their countries) will most likely reduce on the money they have been remitting back home. This money has been boosting major sectors of our economies, especially the industries. The effect will further be felt in the balance of trade, where there will be a reduction and deficit. This will eventually dribble down into the governance of our own domestic resources.It will be a slow process to recover from these ills of capitalism, but ultimately we have to pay the price, for not heeding to Karl Marx’s postulations way back in the 19th century. However, we shall recover and get back to reality as Karl Marx predicted. The author works with Labour Market Information system as a specialist for WDA and can be reached at, mugabiwamuka@yahoo.co.uk