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The news was unsurprising. The US Fed and the Bush administration unleashed a series of policy moves including more than US$240 billion in cash for beleaguered investment banks, tighter regulation of the financial sector, and new taxes. The European, Canadian and Japanese central banks followed the US lead in setting up a global fund.

The market reaction was also expected. From gloom to bloom, all stock markets went up.

Is the crisis over? By no means. It bought time but the root causes of the crisis remained. What the measures did was to emphatically underline the end of the free market as Reaganism defined it, and with it, the unmasking of the state underwriting of neo-liberal economic policies of the advanced capitalist countries.

It is a graphic economic lesson of the peril of the financial market far outstripping the limits of the real economy–you cannot forever add artificial value (by trading on uncreated capital) based only on market confidence. When that confidence fell, the whole financial house of cards collapsed.

The current business model of the investment banks has proven to be fragile when measured against the forces of collapsing stock values, illiquid mortgage bonds, and cash shortage to meet panicky demands by its individual investors. In collapsing, the industry threatened the stock values of all its network companies and banks–virtually the entire house of finance capitalism, created rapidly rising pressure on the banking system’s liquidity, stressed loans and investment opportunities and otherwise induced fear and unease among consumers, depositors, and investors.

By invoking the massive intervention by the State, the Bush administration and other governments stood  free market capitalism on its head. What happened almost reached the level of a state capitalist model–far, far beyond a normal capitalist order can expect. The taking over of AIG, Freddie Mac and Fannie Mae–even if temporary–smacks of state capitalism and a complete opposite of the mantra of privatization of state assets.

However, it must be made clear that the beneficiaries are not the small people in America or even its beleguered middle class. The principal beneficiary are the titans of capitalism themselves. The American people will shoulder the costs in terms of higher taxes, higher prices, diminished incomes, and lost jobs. They will have lost the American dream.

The Philippine economy, particularly the stock market and affected businesses, will immediately benefit from this development. However, the contraction of the American market and economy will penalize the domestic economy in the medium term, in terms of less investment, withdrawal of foreign capital and closing of marginal businesses. There is also the negative impact on the Filipino overseas labor market, foreign trade, and foreign direct investment. The Filipino dream may be lost as well.

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