Secondly, even if both strategies -- bailing out the banks and re-regulation of the financial sector -- are implemented reasonably well, neither resolves the "Second Wave" problem:
The banking system will get caught in a vicious circle of credit contraction that invariably accompanies the massive de-leveraging that will be needed. Depending on how the re-regulation is implemented, it may actually inhibit banks from providing the finances needed for a reasonably fast recovery of the real economy.
In any case, given the size of the losses to be recovered, it will take many years, in the order of a decade, certainly more than enough time to bring the real economy into real trouble.
In practice, this means we are only at the beginning of a long, drawn-out economic unraveling. The social and political implications for such a scenario are hard to fathom.
The last time we faced a problem of this size and scope was in the 1930's, and that event resulted in social and economic problems that ended up manifesting violently in a wave of fascism and ultimately World War II
The first objection to nationalizing banks or their toxic assets is the well known "moral hazard" problem.
If banks know that they will be saved when in trouble, they may be tempted to take higher risks than otherwise would be prudent. When these risks pay off, the profits are held privately and translated into generous dividends for the banks' shareholders and extraordinary bonuses to management.
But when they fail, the losses end up being absorbed by the taxpayers. The current salvage programs confirm that this problem hasn't gone away and is unavoidably further strengthened by new bailouts.
Christine Lagarde, Minister of the Economy, Industry and Employment in the current Sarkozy government in France, stated "Moral hazard has to be dealt with later... Maintaining the functioning of our markets is the top priority." This is exactly the argument that pops up at every systemic crisis...
Showing posts with label Global Financial melt down. Show all posts
Showing posts with label Global Financial melt down. Show all posts
Friday, February 13, 2009
Friday, November 21, 2008
Who is asking you to become interested ?
One of the prime reason of Global financial meltdown is excessive importance of self-interest and ignoring the higher interest .
The root of the problem is the lack of self regulation . The irony is these is what the Government expected , when they outsourced the regulation job of the credit expansion to the Bank itself . It started from 1980's when there is a group of policy changes from Global powers to facilitate free market . The banks where given complete freedom and they where asked to do there own risk management practice as if they don't do it , they will loose money.As it happens in all cases , when the power went to the banks they became greedy.So , they didn't cared for risk management , and they went on expanding credit crisis , which lead to global credit crisis 2008.
When the consulting community alerted the banks on possible setback , they might have said " I am not interested".
There are seminars and workshops and synopsium which focused on the issue of ethics . People laughed and joked and said ... " Come on lets do business , we are not interested to hear this "
Unfortunately, I was workshop leader for some of this workshops where I explained the collective mal-practice has a ripple effect over the entire community .
Nobody is interested to hear my theory .
Why ?
Bcoz , there are only few people in the world , who has the time to think about the things which can effect us collectively . We have become urgent oriented community and not a importance oriented community . So until unless somebody does not hard press , we don't understand the importance of something which can effect us.
Sometimes our conscience has to be interested to go beyond our self-interest.
The root of the problem is the lack of self regulation . The irony is these is what the Government expected , when they outsourced the regulation job of the credit expansion to the Bank itself . It started from 1980's when there is a group of policy changes from Global powers to facilitate free market . The banks where given complete freedom and they where asked to do there own risk management practice as if they don't do it , they will loose money.As it happens in all cases , when the power went to the banks they became greedy.So , they didn't cared for risk management , and they went on expanding credit crisis , which lead to global credit crisis 2008.
When the consulting community alerted the banks on possible setback , they might have said " I am not interested".
There are seminars and workshops and synopsium which focused on the issue of ethics . People laughed and joked and said ... " Come on lets do business , we are not interested to hear this "
Unfortunately, I was workshop leader for some of this workshops where I explained the collective mal-practice has a ripple effect over the entire community .
Nobody is interested to hear my theory .
Why ?
Bcoz , there are only few people in the world , who has the time to think about the things which can effect us collectively . We have become urgent oriented community and not a importance oriented community . So until unless somebody does not hard press , we don't understand the importance of something which can effect us.
Sometimes our conscience has to be interested to go beyond our self-interest.
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