GLOBAL FINANCIAL CRISIS: ITS CAUSE AND CURE

American dollar is the principal cause of the present global financial crisis.

Since dollar also happens to be the preferred currency for world trade, it is the most sought-after commodity in the world – thus enabling America to earn huge profits by way of trade, commerce and investment.

Oil rich countries like Saudi Arabia have legal arrangements to invest their surplus profits in American bonds. Developing and even developed countries preferred to park their savings in American dollars as it was considered to be the safest currency in the world.

Thus a huge chunk of money found its way into American coffers like water flowing into the sea.

Americans did not have the need to live within their income. On the other hand, they invested their surplus money in building up a formidable armament industry, space and pharmaceutical research, real estate, automobile and civil aviation enterprises.

With their newly found wealth and invincible military power they dominated the United Nations and its organs, and created institutions like the World Bank and IMF which acted as the banker of the banks of the world.

All this happened because America believed in free market economy and allowed its entrepreneurs to do whatever they liked so long as they brought profits, dividends and capital gains into the American coffers. America became a superpower. They did not have to compete with anybody except themselves. This led them to become reckless, irresponsible and over-ambitious.

American banks lent money to people to buy over-inflated properties at ruinous rates of interest when they had no tangible source of income. When such insolvent homeowners could not pay their monthly instalments, the banks failed. And when banks would not lend money to each other, the whole financial system collapsed like a house of cards.

In the meantime, another event took place. Being saturated with their own markets in the West, America wanted to have access to the resources and markets of the developing countries of the world. This gave rise to concepts like globalization, intellectual property rights, and WTO and pollution control. They attempted to get control of the oil rich countries in the Middle East by promoting democracy, human rights and freedom of speech. Thus the whole world got enmeshed with American interests in one way or the other – leading to a ripple effect. Thus, when American economy collapsed, it had its repercussions in other parts of the world.

What is the cure?

Pumping more money into the financial system and lowering interest rates will only aggravate the situation and maintain the status quo.

The solution may be very simple. We need to have a neutral universal currency. All other currencies should be pegged to this currency so that no single country gets an undue advantage. There should be a universal bank with a board of governors representing some strong currencies of the world such as dollar, pound, euro, yen, Yuan, etc.

The universal bank should fix the rates of exchange of these currencies and these rates should hold good for at least six months or one year at a time. Money should be used only as a medium of exchange and not as a commodity to be sold or speculated upon.

I believe such a step will go a long way in stabilizing world economy.