TO BEGIN with, let’s accept the truth that we are going through the worst financial crisis witnessed by the world since the days of the Great Depression. The fall began with USA but later on it spread to all over the world. What caused it? What are the consequences? There are several factors responsible for this vicious global financial crisis. If the truth be told, the world economy is trapped in a predicament of its own making.
Safe to term this financial problem as ’Economic Recession’, the first signs of it were visible some 17 months back. USA had a relatively smooth economy with added advantage of low inflation since the last two decades. That factor contributed to administration and regulators becoming complacent about regulatory norms. That was the first mistake. Soon enough, ever increasing greed of investment banks took over the basic sense of economics. Increasing profits on their balance sheets made them take hugely risky projects.
Initially, this risk propensity approach paid rich dividends but with other problems like, mortgage bonds and housing issues surfacing, the bubble had to burst. With the biggest names of world economy; Lehman Brothers, Merrill Lynch, Bear Sterns, AIG, Freddie Mac, Fannie Mae, etc going bust, government and its policy makers had no option but to wake up and try to inject some sense in self-created financial web. But, it’s almost like a case of too late and too little.
Even generally considered as more regulated, European banks and financial institutions have started to wilt under the load of huge assets and loans on their balance sheets. Everywhere, governments are injecting funds, releasing bailout packages and nationalizing doomed banks. It’s like fear and mayhem running across the financial streets of the world.
The point is no one is sure about the extent of damage and the exact time frame of economic revival. Governments are loosening their purse strings and many more steps are underway to help all those struggling behemoths. In hindsight, it’s quite similar to socialism. Interestingly, the path of socialism is being pursued by world’s most capitalist countries. Capitalism is not known for interfering in market forces and rescuing companies. This was more of a socialist trait employed by erstwhile USSR and east European countries. But now what we are witnessing is father of all capitalists, USA is pumping huge sums of money to rescue private firms which will consequently help in easing credit crunch.
Americais using all the possible models of economy including, socialism, capitalism and mixed economy. Tools being employed are liquidation, mergers and nationalizations of falling giants. Weaker banks are merged with strong banks (Washington Mutual to JPMorgan Chase, Wachovia with Wells Fargo); nationalizing mortgage companies (Fannie Mae and Freddie Mac); allowing few other majors to go kaput (Lehman Brothers and Indy Bank), ending the era of investment banks (Goldman Sachs and Morgan Stanley), releasing bailout package to purchase doomed assets from fragile banks with hope that it will enhance their capital are some other frantic steps undertaken by USA policy makers.
The idea is to shore up the credit condition at the cost of taxpayers’ money and making these financial institutions stable in the long run. Yet, despite all the efforts of injecting liquidity in the system, revival is no more in the sight. It has been estimated that it may take another one year to stem the fall and bring the confidence back in the minds of general public.
(This article was published in merinews.com)
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