For several days we are witnessing big drama in US and Europe. The fiat money magic that was the center of attraction and had created unprecedented prosperity throughout the globe is in trouble now. For more than three decades we continued enjoying the intoxication that this fiat money gave and consequently the exponential growth built up so big that its falling of its own weight now. Mankind evolved so fast in the post WWII world and along with it there were so many brand new inventions. There were some that benefited us, like technology, and some that immensely(but negatively) benefited us. One such was the invention of "new age financial engineering products". The magicians (or conmen) invented new age financial instruments like derivatives of derivatives which seemed to change the very definition of economics. People found a new meaning to the word "leverage". The financial engineers applied their brains and created an all new dimension associated with leverage. They found if they could leverage some existing instrument, they could also leverage non-existing ones, what they required was only the "belief" and trust of market and people. The government of US in particular and others in general aided those engineers. It was always looking to result in what is happening today, but no one wanted to be left behind and dprived of his share of benefit. Banks increased their lending and stretched to the limits of what fiat money regime permitted. Central banks like Bank of Japan (BoJ) and Federal Reserve Bank of US facillitated such banks with lower interest rates and regulators like Securities and Exchange Commission (SEC) upped the leverage limit for bankers to 30! No one was worried with the exesses being created then. These people who are crying for support now - Bush & Co., Paulson, Greenspan, Bernake and other reknowned ones were there and there job was to keep eyes open to what was happening around the streets. But they were partying and did their best to make sure the party goes on. The new found credit was taken with both hands by "now poor" people and they spent the money they did not have on the things they did not need. Everything looks good in sunny weather.
Its not that such a crisis happened for the first time in this post goldilocks era. There have been several crises that were as bad as this one but all were taken care of. The S&L crisis (savings and loans) in 1980s was very similar to the current one. There was a bubble created in real estate and when it burst in late 80s, the govt bought bad investments worth $394 Bn!!! through creating a trust - Resolution Trust Corp. (RTC). It was about 7% of GDP then. What was the result? the crisis was POSTPONED and instead of letting the bubble burst, govt helped inflate it further. Then there was Japanese Real Estate Bubble which burst in 1991. The govt in Japan reacted with interest rate cuts to stop the crisis into entering mainstream econmy. The result - even after 17-18 years of interest rates near zero, the Japanese stocks are down. Then there were crises like Asian Currency meltdown etc. but somehow, so far, the new age engineers managed to postpone the bigger outcome - a global slowdown / recession.
The question is why did the govt not learn anything from past crises? Why were they sleeping when conmen around Wall Street were delivering magic of new found fiat money to the dumb consumers? Why did the consumers were spending beyond their means and with the money they actually didn't have?
The answer for govt is - the govt in itself is just a political party sitting in office. Every ruler in today's democratic world wants one thing - prosperity in his ruling period. who cares about the long term views and basics? Why would Bush care about what happens after he leaves office?
The conmen of Wall Street learned the lesson well, though. They learned from the S&L crisis that whatever mess they create, govt will bail them out - in the name of saving economy. And they were almost right, had this not turned out to be a crisis bigger than they could even dream about.
The consumers? what about them? Well, the consumers are not bothered about things that happened few years back. There is a saying - public memory is short. It actually is. Consumers / public tend to forget a crisis as soon as it's over. By nature humans are greedy and public wants their share of the pie as well.
Most of you belong to the third category - the public/consumer. Can anyone has the guts to go ask Bernake, Bush and Paulson why they repeatedly were reporting "No Danger at all" as late as last month? Why they were "sure" this crisis would be contained? Its not that all economists were happy with the credit growth in bubble forming time, many well known economists warned against it but they more or less became subject of laughter in the mainstream media. Even when the crisis was quite well known, there was another breed of greedy people who were looking for stock market bottom on every selloff.
Dear friends, now there is real panic in global markets and the new effort by govt to put forward a "CRISIS POSTPONEMENT PLAN" WORTH $700 BN (which they call bailout plan) will not be able to solve this trouble. Take my words for that. This is not a "once in a year" kind of thing. This is once in a century kind of thing. Some say it is equal to what happened in 1929, The Great Depression, but I say it will be bigger than that. The Great Depression was followed by WWII, will this also lead to such a thing? who knows? The geopolitical scenario favours the pessimists.