‘Big Banks cannot fail’- It is believed by lot of people the part of the financial crisis was due to this assumption. But the crisis has proved this assumption to be wrong. It has also proved that if such banks fail it could lead to system failure. So what has action has been taken? No banks are allowed to act as investment banker like before on Wall Street. So did it have any impact? Have we ensured that we don’t create such huge banks whose greed can affect entire world? I have attached image below and it’s up to you to see and come to your own conclusion
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We have ended up with bigger and fewer banks. Some would say that it was survival of fittest and the better players have survived and it’s good for everyone. But it concerns me even more. Just imagine impact of these even more larger banks failing in future years. Any lack of prudence and responsibility by these banks can lead to even bigger crisis and I doubt world would be able tackle the same.
Liquidity game – Let’s go back to history and understand the lessons from previous crises. The end of Great Depression had seen lot of tough policy changes, socio-economic changes etc. but do we see such drastic changes today? I really doubt. It was dotcom burst at start of 2000-2001 which had created huge recession scare. So how was that avoided? By increasing liquidity in markets, pushing federal rates close to 0%. But did it achieve its purpose? Yes and No. In short term it avoided recession but in long term it led to this housing bubble. So what have we done this time? Nothing different the same policy has been followed by all the central banks across the world. The interest rates brought to lowest level, huge borrowing was allowed for banks and bad loans were restructured for longer duration to ease liquidity pressure and avoid bankruptcy. I believe there was no other option to stop the “run on the banks”. So if I use same deduction reasoning then would I be wrong to believe that the recovery is nothing but temporary bubble or perception due to excessive liquidity in the markets?
US-China duopoly - Isn’t this crisis an indication that correction is required here? In any markets, fundamental theory believes that asset attains its true value then for how long do we have to wait for correction for US economy which has huge fiscal deficit and China which has huge surplus. Both of them have avoided this correction for too long I believe. China is throwing its huge surplus in its local markets to fuel consumerism and get rid of this huge surplus. But this can lead to nothing but one more local bubble. Won’t we have to face similar financial crisis when this correction occurs? Everyone believes world economic order is set to change but it’s time we are trying to buy with this temporary recovery. Maybe to be ready to handle the bigger crisis better!! I still haven’t considered the demographic factors like ageing population and its distribution across the world. It looks scary. Just go through recent Mckinsey report which indicated the year when China’s population would be aged and their conclusions.
I do believe this crisis hasn’t changed the world much. Our inertia to avoid changes and inclination for short term gains or maybe our short sightedness has led to same state as we were before the crisis. When markets plummeted people believed it was correction and now again we are reaching sky crappers so was that correction not correct? No one in the world is isolated in this globalised economy so there can be no India story without considering these macroeconomic factors. So guys pour in your comments on this pessimistic blog of mine. I would be more than happy to be proved wrong though.
