:: Nitish Sengupta

Lucky Obama was saved by Wall Street

Nitish Sengupta

The Wall Street collapse of October 2008 had many political and economic fallouts. One direct, and I guess unintended, fallout was the impressive boost that President-elect Barack Obama’s campaign for the White House received. Till late September, John MaCain was running neck and neck with Mr Obama. He had almost caught up with Mr Obama’s earlier lead, and some poll opinions gave him a lead of three per cent or so just before the financial tsunami came in October. By October 7, however, Mr Obama had taken an overall lead all over the nation. Clearly, the October collapse had pulled the trigger. But did anyone do so consciously as part of an election strategy?

There are some hints at it. A recent column in the Washington Post by Anne Applebaum, titled The Iceland syndrome, gives a cryptic hint at market manipulations by players, both internal and external, in order to destabilise countries to achieve geo-political goals. It says: "All governments have enemies, internal and external, or at least are faced with elements that do not wish them well: political opposition, the country next door, the former imperial power. For someone there will always be the temptation to bring down the government, destabilise the country and thus create political chaos… Even when there hasn’t been political meddling, someone will suspect that it has occurred anyway. Here, then, is a prediction: Political instability will follow economic instability like night follows day. Iceland is not alone — Serbia, the Baltic States, Kazakhstan, Indonesia, South Korea and Argentina are all in financial trouble; so, too, are Russia and Brazil…"

"And here’s a final, unpleasant thought: Pakistan. This is a country with 25 per cent inflation and a current in free fall; a country with a jihadist insurgency on its border with Afghanistan, permanent hostility on its border with India, nuclear weapons and a tradition of street demonstrations in response to suspect newspaper articles. Dozens of people with all kinds of agendas have an interest in using financial markets to destabilise Pakistan, and Afghanistan along with it. Eventually, one of them will".

Others have hinted at the pernicious role played by hedge-funds, many of which are based overseas and are, to that extent, outside the direct purview of the Federal Reserve, the Securities and Exchange Commission and other regulatory agencies. According to one estimate in the Wall Street Journal, Cayman Island, a safe haven, alone has $1.9 trillion managed from New York, and another $1.5 trillion are tucked in four other safe havens. These are the biggest perpetrators of short selling which largely contributed to the October meltdown by targeting financial stocks such as the Lehman Brothers and Morgan Stanley. The names of George Soros, famous investor and chairman of Soros Fund Management, and Henry Paulson, US Treasury secretary, have already been mentioned in this connection although there is no direct evidence. Incidentally, Mr Soros is not only an influential member of the Democratic Party but was a strong supporter of Mr Obama. Also, hedge-funds are known to be a major source of donations for the Democratic Party.

These are some wild guesses but it is difficult to say that anyone consciously manipulated the Wall Street market in order to influence voters in favour of Mr Obama. The crisis of October 2008 was too massive, too overwhelming to be due to any single act of trigger pulling. It was a copy book illustration of the kind of economic crisis Marx, Engels and Lenin prophesied in the working of the capitalist system from time to time. Overwhelming greed, a total disregard of the fiduciary principle which is a bed rock of finance management (exercise, in respect of funds owned by others but placed with you, the same degree of care and caution that you will exercise in respect of your own funds), and certain amount of nonchalance that goes with any uninterrupted story of success, contributed to this great crash.

Housing loans were issued by smaller banks with total disregard of the principle of keeping adequate security. When it was realised that something was wrong the analysts of those banks simply packaged these deals in such a way that they looked attractive and then passed them on to the larger investment banks, like the big five. The big five also purchased them, without batting an eyelid, with their own funds. When the trigger was pulled by some elements who wanted their funds back, it was found that there was no money in the vault. The impressive structure of investment banking, including the big five, built over several generations, collapsed like a house of cards. Similarly, credit cards were utilised beyond all reasonable limits, creating enormous amount of paper money which also contributed, in no small measure, to this collapse.

Mr Obama was plain lucky to become the unintended beneficiary of the October meltdown which occurred just when Mr McCain was due to overtake him in the polls. Public pointed fingers towards the Republican administration as being responsible for the circumstances which led to the spectacular collapse of the Wall Street. The Republicans lost all credibility. Mr Obama’s forthright pronouncements pointed to a way out of this crisis and hence public opinion overwhelmingly settled in his favour. Interestingly, Mr Soros, one of the most prominent backers of Mr Obama, also benefited enormously, but this was only incidental.

Nitish Sengupta, an academic and an author, is a former Member of Parliament and a former secretary to the Government of India