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Call it the revenge of Carl Marx, the economic laissez faire that the US has
practiced and championed for years is seeing a reversalas the government finds
itself in the midst of an economic crisis caused by misadventure of some of the
countries biggest financial firms, whose survival is now under question.
And the US governmentin its wisdomwants to rescue them, or bail them out.
If there is one word that is floating in the air these days, it has to be
bailout. The governments in other developed nations are following suit.
Of course these are exceptional times. The consensus is that this is the
biggest economic crisis that the modern world has faced, ever. It is difficult
to put a number to that crisis. But if anyone had any doubt about the enormity
of the financial crisis gripping the world, the bailout packages themselves
offer a big clue. The global bailout packages announced are already close to the
$3 tn mark. That is three times the size of the Indian economy. Till date, the
US administration alone has announced bailout packages of close to a trillion
dollars. Continuing a spate of billion-dollar rescue plans, the UK
administration has also come up with a mammoth 500 bn pounds bailout package
(about $876 bn) primarily to shore up the fortunes of the nations banking
sector. Then, there are the French. And others. Even developing and emerging
countries are joining the bandwagon. China, as usual, is leading the pack.
To be sure, we are not even talking of the new stimulus package of president
Obama. We are referring to the ones like TARP (Troubled Asset Relief Program).
This piece of legislation was crafted to aid the financial sector and was put
into effect on October 3, 2008, when Bush was President. While the stimulus
packages are being recommended and yet being unsuccessful, its the bailouts
that are hitting hard on the surface. The stimulus packages are expected to
boost demand and create jobs while the bailouts are aimed at rescuing companies
in troubled waters.
Earlier, the US government had moved the historic $700 bn rescue plan in
response to the deepening credit crisis which has seen the fall of Wall Street
biggies like Lehman Brothers, Washington Mutual, and the distressed sale of
Merrill Lynch.
Further, joining the likes of the US and UK, Russia has approved a host of
measures estimated to be worth $86 bn to salvage the countrys banks hit by the
credit squeeze. Recent media reports said the Lower House of the Russian
Parliament, Duma, has given the green signal for the billion-dollar rescue plan.
It would entail making about $50 bn available to banks and firms which have
to refinance foreign debt, the remaining amount would be given as loans to
banks.
Besides, a handful of European countries have also already announced packages
worth a similar amount in an effort to save their troubled financial entities.
Japan and Germany, likewise, are also in the midst of bailouts, both having
already announced stimulus packages.
There are expectations for more such instances coming from the governments in
Europe, as the crisis is said to be fast spreading in the region after a
full-blown blast in the US.
What it all Means
The bailout packages have come with a different set of news for different
entities. While the markets seem to be tiring of these packages, the banks,
which are facing more turbulent times, are looking forward to more such
announcements. According to Haresh Sonejis observations on CNBC-TV18, the
market sentiment on bailout packages news is on the decline.
Most economists also concur on the analysis that, historically, bailout
packages havent worked out well. Recently IMF also hinted at sound policy
measures rather than injecting bailout packages in the economies.
Many countries, including India, have already expressed concerns of bailout
packages having an adverse effect on poor nations. But, till now, everyone seems
to be undecided on the exact effect these bailout packages shall have.
Paranjoy Guha Thakurta, an independent economic analyst supports this view:
Nobody really knows the intensity, the width and the breadth of this recession.
In fact, people were in a state of denial until recently, he says.
Thakurta thinks that this is the time when all notions about how to run an
economy and the free market theories need to be revisited. Its John Maynard
Keynes who needs to be remembered now. So while he re-emphasises the
back-to-basics approach, he also throws some light on the darkness the world was
(is) living in till now. The IMF, in April 2008 predicted that the US economy
will grow by 0.6% in the year 2009. In October 2008, it revised that rate to
0.1% growth. In November 2008 it declared that the US economy will shrink by
0.7% in 2009. And again, in January 2009, it said that the US economy will
shrink by 1.6% in this year.
When IMF couldnt read the writings on the wall, it does give an indication
of the ignorance level of the world!
Encouraging Protectionism?
Yes, says Thakurta: This is a crises in international capitalism, the likes
of which we have not seen since the great depression of the 1930s. And in such
a scenario it is natural for any country to switch on the protectionist mode.
Every country, in times of recession, takes protectionist measures, be it India
or the US, he adds.
Dharmakirti Joshi, director and principal economist, CRISIL agrees: Given
the current scenario, there is a fear of rising protectionism across the world.
But this, say experts, is also a natural condition. In times of a downturn, the
internal economy matters more to any given country. Stabilization, not a healthy
world trade scenario, scores on the priority list in such times.
The H1-B visa hiring restrictions placed by the US government on companies
covered in the bailout packages is one such measure. The clause puts any company
getting bailout relief under the H1-B dependent category (as against the
traditional definition of having more than 15% H1-B visa employees for an
employer to be declared H1-B dependent). Although the complete ban proposed
earlier in TARP (troubled assets relief program) has been reworked, it is still
going to have a multi layered impact, especially for the Indian IT industry
which belches out the maximum number of H1-B jobs for the US.
The H1-B rules include clauses likethe employer cant displace any similarly
employed US worker with an H-1B hire within 90 days before or after applying for
H-1B status or an extension of status. Also, the employer cant place any H-1B
worker at the worksite of another employer, meaning it cant outsource a worker
for a client, unless that employer first makes a bona fide inquiry as to
whether the other employer has displaced or will displace a US worker within 90
days before or after the placement of the H-1B worker.
Ganesh Nataranjan, chairman, Nasscom and VC and MD of Zensar Technologies
says, While the immediate impact of this on our business will be negligible,
considering the conditions that are applicable to fresh hiring, the direction is
certainly disturbing.
However, there are various strings attached to such measures, and the heat of
consequences is going to be felt, sooner than later. The massive bailouts
announced by currency strong countries (US and UK) can lead to significant
changes like a multiplier effect on poorer nations and a rising rate of
inflation. The generation of new money can help recovery in the short term, but
this protectionist measure can spell trouble in the long run.
To pay for its multi-trillion dollar bailout and stimulus packages, the Obama
administration will print money at an unprecedented rate, a course that will
drive up inflation and drive down the greenback while shifting a large part of
the financial burden onto foreign investors, finds a report from CIBC World
Markets. Also, measures like this might increase the unemployment rate in other
countries.
But then, like in war and love, probably, everything is fair in an economic
slowdown. At least that is what the current policy stance of US and other
developed nations suggest!
Mehak Chawla
mehakc@cybermedia.co.in
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