Financial Crisis Gyaan Part1

I was thinking topic for my next post and decided upon to write about something that has affected us badly especially all 2009 graduates. Almost three financial quarters have passed to fall of great Lehman Bros but still discussion about the crisis have not ended and neither crisis itself. I can recollect every professor coming from US giving their own perspective (“gyaan”) about the crisis. Initially as management student we were quite interested to know their views but later became wary of the same. Financial crisis was topic of discussion be it academician, industrialist, regulator, blogger or politician. Now that I am MBA I am obliged to share some of my esoteric gyaan on the topic. So out of innumerable articles and studies that I have read today I plan to write from Dr. D Subbarao (Governor, RBI ) speech delivered at one of the RBI-BIS seminar. He presented 5 points of debates and this post I aim to cover the first one. His views are more from macroscopic view of crisis and he rather question imbalance at economy level. I think I need not expand more than just few sentence since we all are aware of the same. He commented on high amount of spending by US and their high trade account deficits on one end and high saving and huge trade surpluses by China on other end. In order to provide liquidity in their system, highly sophisticated financial products that were engineered by financial experts created base for the crisis. There is broad level agreement on this but important is the questions this generates for the future. Consider we have magic wand which can get us all out of this present crisis and we are entrusted to develop system that would prevent such crisis in future. So what’s next? How do we act upon this imbalance?

Consider demographics most of the developed countries have aging population which are going to consume more than they produce and emerging economies have young population which would produce more than it can consume. Consider psycho-graphics, population in developed countries are used to luxurious lifestyle and have high propensity to spend. They have not faced many hardships during their life and thus do not attach more importance to saving. While population in emerging economies have fought their way through difficult times and therefore have more tendency to save. How are we going to change this? Is there any solution once we overcome this short term financial crisis? We can neither change the demographics in few years nor psychology of the population. So what it points to that after we overcome present situation we would have few good years maybe decades but again such crisis would surface since there is no way we can change or alter global imbalances. Maybe in few centuries we could also see reversals of roles among countries or Asian economies being replaced by African and American-European economies being replaced Asian economies. Who knows? Maybe good topic for Harvard guys to research and publish.

Also I am wondering after reading the post how would you view now the recent news item that increase in American spending has been observed after three quarters and China and India also showing increase in industrial production. Every news channel showed this with stock markets going up and most of the people were considering this as end of crisis except for one individual that is me.