History of the world economy

Examining the fallout from the global financial crisis

By Daniel Vila, in People's Weekly World
6 December 1997

Although the damage caused by a nuclear explosion is pretty nasty, the radioactive fallout that remains in the environment poisoning all forms of life, water and soil for decades is even more disastrous.

Likewise, the global stock market crash that took place Oct. 27 will have a negative impact on the economies and lives of working people throughout the planet for many years to come. In fact, barely a month has passed since the historic event, and the lethal radiation has already spread around the globe.

The stock market on Wall Street has recovered the losses of Oct. 27, so the corporate media are doing their part to downplay the implications of the crash, giving Americans a false sense of security regarding the economy.

As Nelson D. Schwartz wrote in the Nov. 24 edition of Fortune magazine, "No big deal ... Our momentary fascination with numbers scrolling across on CNBC seemed like a sporting event, an exciting diversion to fill the brief interval between the World Series and the start of the NBA season."

But economies are reeling, billion-dollar companies in Asia are melting away and the U.S. economy, according to the federal government, is already receiving the fallout from the crash.

The global crash was precipitated by the fall in the Asian markets. And it is indicative of the madness of the capitalist system that, despite the fact that the financial interests that dominate global stock exchanges knew months, and possibly years, in advance that a crisis was approaching, they just continued their business as usual. For example, an article in the March 1 issue of The Economist is titled "The Asian Miracle, Is it over?" It states that in the past year, Asian economies "have come down to Earth with a bump." And a major editorial on the economies of the region in the Aug. 4 edition of The Japan Times warned, "That crisis has underscored two dimensions of Asian economic policy. The first is the need for Asian authorities to rein in the profligate spending of the recent past ... Bank lending has been reckless and the resulting hangover of bad debt threatens financial industries throughout the region."

Prophetic words. Soon after the global crash, the current troubles first struck Thailand, then quickly spread to the Philippines, Indonesia, Malaysia, Hong Kong and Korea. At first, the countries that were formerly known as the "Asian Tigers" because of their economic performance, denied the need for foreign intervention in their economies. But as banks and other financial institutions began to collapse, one after another, the tigers were transformed into domestic pussycats, and soon lined up in front of the International Monetary Fund (IMF) applying for billion-dollar loans.

Speaking in Java on Oct. 28, President Suharto of Indonesia rejected help from the IMF for his country and said his government would accept a $10 billion loan from Singapore instead. But three weeks later, an advisor to Suharto said at the Asian Pacific Economic Cooperation (APEC) summit held in Vancouver, British Columbia, "It's a real shock. Our economy kept growing by about 8 percent a year for 20 years. All of a sudden it stopped. Prices are rising and we'll be lucky to avoid a recession." Apparently Suharto's advisor had not read the editorial in the Japan Times.

South Korea followed the same script for most of November. Even the head of the IMF, Michael Camdessus, backed up the South Korean denial in an attempt to bolster confidence in that government's economy.

But after denial came acceptance. Thailand, the Philippines and Indonesia have obtained emergency rescue funds totaling $48 billion. But the real shocker so far has been South Korea, which will be forced to borrow some $60 billion from the IMF. With the strict conditions requiring economic restructuring imposed by the IMF, South Korea is carefully negotiating the conditions of the loan in an apparent attempt to avoid becoming an indentured servant of the international financial monster. David Hale, chief economist at Zurich Temper, has stated, "Korea makes this an entirely different ball game."

Clearly, we are witnessing a very destructive economic phenomenon that is difficult, if not impossible, to control. The big question is what will happen to Japan.

David E. Sanger wrote in the Nov. 22 New York Times, "Korea is a critical firewall to keep the contagion from engulfing the world's second largest economy: Japan."

But the firewall crumbled on Nov. 24 and the dung began to hit the fan! Japan's Yamaichi Securities collapsed, sending shudders throughout Asia and Wall Street. It was Japan's biggest corporate failure since WWII. The brokerage firm reported $24 billion in liabilities.

Meanwhile the country's largest brokerage firm, Nomura Securities, is in the middle of a corporate racketeer scandal that has rocked Japan's financial industry. Making matters worse, another top-ten brokerage company, Sanyo Industries, went bankrupt Nov. 9, and on Nov. 16 Hokkaido Takushoku Bank became the first major bank to go under.

Japanese banks have been hurting for some time due to bad loans which date to the speculative land and stock "bubble" in the late 1980s.

So the recent bankruptcies are just the tip of the iceberg. Japanese financial institutions need government help desperately. The almighty banks are now asking for a government bailout. Even the U.S. Deputy Treasury Secretary has urged Japan's finance minister to make public aid available to the ailing banks.

The U.S. business concern stems from the fear that bankrupt Japanese and Asian economies will not import U.S. goods. The results would be felt on factory floors and Wall Street.

In fact, a survey of economic conditions by the Federal Reserve released Dec. 3 said that the "Asian financial turmoil and currency weaknesses have adversely affected demand for manufactured and agricultural exports." And U.S. companies have recently launched a new round of layoffs and apparent downsizing.

Kodak has announced the firing of 10,000, Kleenex will get rid of 5,000, Levi-Strauss will do without 6,400 and Citicorp without 9,000. Many other companies have announced layoffs.

In the Nov. 13 Wall Street Journal, Fred Bleakley frankly described two of the forces responsible. "One is the spreading contagion to the world economy of a slowing growth rate in the South East Asian countries," he said. The other, according to Bleakley, is the "boom in the mergers and acquisitions underway in banking, telecommunications, and other fields." But the fundamental cause of the global crash will not be directly addressed by the Wall Street Journal or other corporate publications. The problem of overproduction has been plaguing U.S. manufacturers for over a decade. In 1982, the U.S. Commerce Department conducted a survey that concluded 41 percent of all U.S. productive capacity lay idle. A similar conclusion was reached by the Federal Reserve Bank in 1992 regarding commercial and residential overbuilding.

In recent weeks, the crisis in overproduction has finally overtaken the Asian economies. The real estate booms or "bubbles" of the 1980s, not to mention the overproduction of products related to the computer industries, have begun to burst.

The "contagion" has reached the U.S. economy, and corporate America's solution is layoffs and labor-bashing. Last October's global crash and its initial fallout should be interpreted by workers everywhere as the beginning of a period of more intense class struggle due to capitalism's deepening crisis. We should not be fooled by the images beamed by the mass media. Our conclusions should be based on the realities of the workplace. All indications point to the need for greater working class solidarity on a global level in order to defeat the even greater corporate offensive right around the corner.

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