A Jurassic sized drama is being played out, Gargantuan sized companies going kaput & filing for bankruptcies, others being bought or sold in the marriage of Titans and the biggest of all, the US Fed reserve amidst all this drama appears in its bailout act as the benevolent Godzilla in the financial Armageddon.
Alan Greenspan may have termed this “Once in a Century Crisis” but he could well have sown the seeds of it during his tenure as the Fed chairman. His era of low interest rates spawned an economic boom that built up the Housing bubble, and the free markets fed on it with typical capitalistic carnivorous appetite that left several,now defunct Investment Banks & Financial Institutions choking with toxic assets.
The moot point in all this “How did a systemic collapse happen in one of the most mature markets in the world? Where were the checks & balances in the system?”. Now I am speaking of a system that has given the world standard practices like SOX compliance, GAAP etc., ignoring systemic risks. Talking of risks, author & economist Peter Bernstein wrote in his book “Against the Odds’ how the financial sector has spawned a new breed of experts who make it a job to peer into the future and figure out the kind of risks that lie arrayed there.
Didn’t they see it coming? or to be more precise, what were they doing when the so called ‘excesses’ took place? . Well at least you didn’t need an expert to figure out what would happen if NINJA (a type of low credit history customer with no income & job) class of borrowers were being financed by the system. All these kinds of assets went bundled as complex products and sold perhaps in search of new sources of profit. And the contagion spread, now threatening global financial markets.
The apostle of free markets, Milton Friedman had systematically built up a case for free markets that became the bedrock of US policies after the Great depression . Milton had argued for free markets that are devoid of govt interference by holding the case of great depression against Govt mismanagement. But today as the financial system chokes of toxic assets & slides into a very likely recession, the Govt in a U turn has swiftly gone about effecting bailouts, brokering deals and pursing for tougher regulations perhaps as anti thesis to Friedman’s views. Will the US of A revert to pre depression era laws signaling the end of free markets remains to be seen .