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Saturday, May 14, 2011


       With financial Tsunamis hitting the world main financial centres, the much acclaimed triumph of capitalism over other economic models is nothing more than euphoria. The happenings of recent days have been characterized as the worst financial crisis since the great depression. During the last few days, two financial power houses have gone under. The investment giant Lehman brothers had to file for bankruptcy protection from the US authorities. The world biggest insurance group AIG was demoralized and bankrupt to such an extent that US government was left with no alternative but to dole out a whopping $85 Billion of tax payers money as a bail out. This was done to avoid lost of confidence in the financial system that can lead to run on other financial institutions. While price of shares traded on the world major stock exchanges collapsed. This is happening ten years after one of the most devastating financial Tsunami hit Asian economies. In what is today term ‘Asian financial crisis’, whose impact is still being felt in Asia. Signs of the present financial imbroglio started to manifest years ago. Like four years back, major financial indicators have shown that the boom in the US housing Market has reached saturation level, but banks continue to doll out depositors’ money to
Mortgage finance.  Regulators on their part kept a blind eye. There was debate then on whether central bank [The Fed] should regulate asset price inflation, or should restricted itself to conventional inflation i.e. consumer price inflation. Alan Greenspan, the then chairman of the Federal Reserve and his team, were buried in his now famous ‘Irrational exuberance’, to lend a listening ear to call for a brake on the other Exuberance in the housing market. When the market boosted banks were left with valueless papers as collateral against their loans. The countries of US and UK who are advocate of shareholders capitalism are most hit by the crisis. Last Year, the British bank Northern rock was forced to declare bankruptcy, in what observers See as aftermath of excessive exposure in mortgage lending. Thus started the beginning of a serious housing market crisis. To put a stop to it, in April this year the bank of England had to lunch the special liquidity scheme of $100 Billion in an attempt to arrest the problem. A costly rescue with tax payers’ money. As one financial analyst has rightly Observed, in capitalism profits are private affairs, while risk like the present impending doom on the world economy, are social matters, to be settle with tax payers money. In the US, in March this year, the government had to lunch a rescue plan for Bear Stern, another actor in the financial market. In July, another giant Indy Mac Bancorp, a Californian thrift was taken over by regulators, to avoid a contagion. In midst of the Bear Stern crisis, the Fed in a desperate attempt to show the public they are on top of their job, injected $200 Billion term securities lending facility into the economy, with little to show after. Bank of England adopted the same method the following month, when it lunched the special liquidity scheme.

          Fed rescue plan notwithstanding, the two biggest mortgage institution in the US Fannie Mac and Freddie Mac were swept away in that financial hurricane. In July the American treasury led another emergency rescue plan to save them. The twins giant owe or Guarantee outstanding mortgage worth some $5.2 Trillion. The European banks, UBS and Credit Suisse were affected, in some ways, by the crisis. In the last one year, UBS wrote down bad loan worth $38 Billion. One thing that is clear all through the crisis, is the intensity of the crisis in UK and US compare to other developed countries like France, Germany, Holland, Denmark and Finland. One of the many explanations for this is that their economies are not controlled by greedy unethical capitalist found in the Anglo-Saxon countries. The European countries mentioned, are advocate of the soft capitalism; in which, though private sector is the major actor, government do intervene to guide economic activities. But even in the US, there is an intense debate on whether government should actively regulate economic activities. The Democrats favour regulation, while most Republicans are in favour of deregulating the Economy a bit further. This is not new, for many years there has been a serious debate between the neo-liberal economists who call for sidelining government from economic activities and the neo-Keynesians and their offshoots who support government participation. Some overzealous advocates of deregulation even called for abolition of central bank and with it central banking all together. This is not realizable in this our era. It was the deregulation of the financial market in Asia in the 80s and 90s that Caused the Asian financial crisis I made mentioned of. We should not forget how Russia burnt it fingers in 1998, when it tried to experiment with deregulation. There was also the Mexican financial crisis of 1994.Those countries that went contrary to deregulation, during the Asian crisis, fair better than those that followed, religiously, the IMF/WORLD Bank prescriptions to deregulate their economies. Instead of leaving her economy at the Mercy of speculators, China introduced heavy capital control measures and pegs her currency to the Dollar. At the end of the crisis, it is China that rejected the Britton wood institutions Tsunamic advice that escaped the crisis. Malaysia quickly adopted the same method to save herself from falling into the same trap as Indonesia and Thailand. Trillion Dollars of tax payers’ money have been lost to financial crisis around the world, over the years. Despite that some greedy individual speculators still call on government to allow individual capitalists to do as they like; to be their own self regulators. How do you expect a hungry and salivating Tiger to control herself away from attacking it prey. Many studies have shown the devastating impact of financial crisis on economic growth. It has been demonstrated, how financial crisis washes away years of hard earn economic growth. These should have acted as lessons to our policy makers, but because they have their own interest to protect, they never care. Which other countries will join the US and UK? Which financial institution will be next on the queue of collapse banks? Are questions, whose answers are not far fetched. The great depression of 1930s was caused by government inability to control the haste and greed of investors. The same crops of ruthless investors are at work today. What we are witnessing today is only a glimpse of the drama to come.
(Published in September 2008 editions of Daily Trust and All website)