POST-1990S CASINO CAPITALISM

Let us discuss the 1997 East Asian crisis, the recent record gasoline prices and the current global economic crisis to see how casino capitalism is playing havoc with the common people.
With the entry of China in the US consumer market in the 1990s, its trade surplus started increasing at the expense of other East Asian countries, notably Thailand, South Korea, Malaysia, Indonesia and Philippines. In 1994, China devalued its currency Yuan by 35 percent whereas other East Asian countries delayed devaluation until 1997; however, the damage was already done as their imports began to exceed their exports and they became vulnerable to currency speculators. Thailand had the weakest economy in the region because of its high debts, which were about 38 percent of GDP. When currency traders saw the vulnerability of the Thai economy, they bought several forward contracts worth more than $15 billion and flooded the international market by selling bahts, the Thai currency, in May 1997. Thailand’s central bank initially spent more than $16 billion in its failed attempt to prop up its currency. When its FOREX dropped into the danger level, it had to unpeg the baht from the dollar, resulting in a free-fall for the Thai currency. It led to domino effect in entire region, leading to sharp devaluation of currencies, massive loss of jobs and stock market crashes. In Thailand, people invested a lot of money in real estate, but since there were not enough buyers, the real estate market crashed. It was due to Thailand’s real estate sector that most East Asian economies eventually suffered, but currency speculators made a lot of money.
After watching the IMF at work during the 1997 East Asian economic crisis, Joseph E. Stiglitz, 2001 winner of Nobel Prize in economics, wrote in April 2000:

“I was chief economist at the World Bank from 1996 until last November, during the gravest global economic crisis in a half-century. I saw how the IMF, in tandem with the U.S. Treasury Department, responded. And I was appalled.”

“The IMF may not have become the bill collector of the G-7, but it clearly worked hard (though not always successfully) to make sure that the G-7 lenders got repaid.”

It was he who described the crisis best:

“The IMF first told countries in Asia to open up their markets to hot short-term capital [It is worth noting that European countries avoided full convertibility until the 1970s.]. The countries did it and money flooded in, but just as suddenly flowed out. The IMF then said interest rates should be raised and there should be a fiscal contraction, and a deep recession was induced. As asset prices plummeted, the IMF urged affected countries to sell their assets even at bargain basement prices. It said the companies needed solid foreign management (conveniently ignoring that these companies had a most enviable record of growth over the preceding decades, hard to reconcile with bad management), and that this would happen only if the companies were sold to foreigners—not just managed by them. The sales were handled by the same foreign financial institutions that had pulled out their capital, precipitating the crisis. These banks then got large commissions from their work selling the troubled companies or splitting them up, just as they had got large commissions when they had originally guided the money into the countries in the first place. As the events unfolded, cynicism grew even greater: some of these American and other financial companies didn’t do much restructuring; they just held the assets until the economy recovered, making profits from buying at fire sale prices and selling at more normal prices.”

In his U.S. Senate testimony in May 2008, Michael Masters, a hedge fund manager, blamed speculators for the record rise in oil prices, citing U.S. government data that over the last five years demands from speculators (848 million barrels) were almost the same as the Chinese oil demand (920 million barrels) over the same period. In his weekly New York Times column, Paul Krugman criticized Michael Masters’ theory of hedge funds as being mainly responsible for the oil price rise, by claiming that the price of iron ore paid by Chinese steel makers to Australian miners had jumped by 95 per cent. Iron ore is not traded in the global exchange. But Krugman failed to consider the fact that the price paid by Chinese Steel makers to Australian miners was the delivered cost to China and it reflected the higher transportation costs due to record gasoline prices. Gasoline prices had more than doubled in the last one year when this deal was signed.
Four dollar a gallon gas prices created havoc in the US economy. The best-selling gas-guzzling SUV market dropped drastically, causing auto manufacturers like GM, Ford and Chrysler to close down their manufacturing plants and showrooms and lay off tens of thousands of workers. Although oil companies were raking in record tens of billions of dollars in profits each quarter, higher gas prices were causing a rise in transportation costs, raising the price of all food products in super markets. This increased inflation. It affected the sales of supermarkets like Walmart and Kmart as higher food and gas prices left fewer dollars in the pockets of lower income people to spare. All over the world, hundreds of millions of people fell below the poverty line because of double digit inflation due to rising food costs. Oil-importing countries like India had to spend up to 2 to 3 percent of its GNP as subsidy on gasoline as a substantial rise in gasoline price would have destabilized the entire country.
Derivatives are behind the recent global economic crisis. Derivatives are financial contracts whose values are derived from the value of something else (loans, bonds, commodities, equities (stocks), residential mortgages, commercial real estate, interest rates, exchange rates, stock market indices, consumer price index, weather conditions or other derivatives). These can be termed as modern financial casino games. Warren Buffett famously described derivatives bought speculatively as "financial weapons of mass destruction."
As an example, a credit default swap (CDS) is a credit derivative contract between two parties. In mid-1990s, CDS was invented by a JP Morgan Chase team. The CDS buyer makes a series of payments to the CDS seller, and in return receives a payoff if the underlying financial instrument defaults (a mortgage, loan, bond, etc.). Unlike insurance, the CDS buyer does not need to own the underlying financial instrument (i.e. loan, bond, etc.). In mid 2008, the global derivatives market was close to $530 trillion. The global CDS market increased from $900 billion in 2000 to $55 trillion in mid 2008. In comparison, the value of the New York Stock Exchange was $30 trillion at the end of 2007 before the start of the recent crash. American International Group (AIG), the world's largest private insurance company, had sold $440 billion in credit-default swaps tied to mortgage securities. When the housing bubble burst, the CDS’ tied to mortgage securities began to send shock waves throughout the global market. To prevent a chain reaction, the U.S. government had to rescue AIG and get a $700 billion fund from the U.S. Congress to bailout Wall Street firms, as AIG and several others were running out of money after being downgraded by credit-rating agencies because of mounting losses, which triggered a clause in its credit-default swap contracts to post billions in collateral.

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