The question is, irrespective of the quality of the bypass (interest rate cuts) and the pacemaker (more and more liquidity support for the banking system, official notice of the Fed. of 12th December) coming out from the operation theater (board room) of the Federal Reserves, the failure of the fractional banking system at the heart of present capitalism looks imminent. 
First came market followed by economic growth with the innovations with support from moderate bank credits. Then came the flood of bank credits without much of innovations and productive growth from thin air (one study of British banks showed out of all the credit growth, only 3% was debt free and created by Central Bank, and rest 97% came from fractional banking system. More the credit banks create, more naturally is their top line and bottom-line, assuming there is no crisis). 
Nothing probably succeeds for ever. The hard reality is the credit, in the early phase of capitalism, was used to drive productive growths. Now same credits are used in global financial markets, creating asset bubbles in the form of speculations. The trouble didn’t start with economy slowing down or being in recession where a productive asset may get valued less, the problem started from ‘liquid’ asset bubbles. 

Change management is never an easy task. With the collapse of the Soviet Block, capitalism as followed in the US became the only recipe that lasted the test of time, so long. However if one remembers the failure of Bretton Woods (closure of gold-window in 1971 by Nixon-administration), one may not be wrong to say that fractional banking driven capitalism would have died back in 1971 (2-decades prior to the collapse of the Soviet Block!) itself, had not there been the cold war specter, due to which leading world economies bailed the US out in that period. And global economy was still US-centric in the 1970s. 

Capitalism, as it’s practiced now led by fractional banking and ‘fiat’ money, in-spite of lasting longer than other forms of regulated economies, naturally has its own limitations. And the time has come, now, to look for other alternatives. Those may not be the ones that already proved their limitations (by failing many times before), but something which can be combinations of different forms that give more and more power to the markets, maintain equality and also environmental sustainability (score of fractional banking on these two is also poor). Market forces can and should be the only drivers, presently Fed. rather drives market forces by interest rates and liquidity. It’s not sustainable. 

The actions of the Federal Reserves, to overcome the sub-prime crisis (it’s high time media uses a different word as the problem is no longer limited to ‘sub-prime’ segment) and to avert a likely recession so far, resemble  one in which a kid plays with paper money. For the kid, paper is money and there is no accountability on its supply. For the Fed., paper is anyway money, and it thereby forgets that money is ultimately a medium of exchange. The actual products – goods or services exchanged – needs to be produced from natural resources, cost effectively, in a global world. And on that, giving American enterprises and its people due respect for their innovations, Federal actions of easy money policies has been rather counter productive. It has led to more speculations, and less investments and innovations. 

In 1971, western world and Japan was with the US (the other alternative was the USSR,  meaning there was effectively no alternative). By extending the easy money policy and supporting the actions of the Federal Reserves in their respective markets in 2007 (‘The coordinated action is being led by the Fed, which will lend $40 billion this month. The European Central Bank, the Bank of England, the Swiss National Bank and the Bank of Canada will lend $50.2 billion this month and next’ stated the NYT), when the best alternative rather is to let the rotting fractional banking system die (due to its overuse and misuse) and capitalism find new meaning; all major economies of the west are aggravating the problem.  

South America has already established the equivalent of its World Bank, China would at one point tire of lending products to the US against credit money, Russia is taking renewed posturing aided by energy resources, and WTO talks are facing critical hurdles. Japan’s economy also looks vulnerable; the only strength of the west actually comes from that of the European side. Against this backdrop, look at the major currencies, and they all are western ones. 

Changes are painful, at the same time one must change to survive. The major world economies would be better if its Central Banks give up the effort to put the fractional banking system under life support system. It will benefit the world economy as well.

Ranjit Goswami is a research scholar with the Indian Institute of Technology (IIT), Kharagpur, India; and is the author of the book “Wondering Man, Money & Go(l)d”. 

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