So have we learned the important lessons
from the western financial crises in 2008. Or are we still likely to repeat the
same mistakes in the future. In all possibility, the world will repeat 2008 and
here’s why…
Its been told to death through documentaries,
articles, experts, research papers etc. But I have been anxious too, to tell my
version of it. A bit late in the day but never too late, I guess.
We are all aware of the sub prime crises
that shook the financial world. It was one of the biggest financial crises of
all times which took with it, organizations like Lehman brothers. Lehman
Brothers which the fourth largest multi billion investment bank in US, with
total assets worth $643 billion and debts of $613 billion, when it filed for
bankruptcy in 2008. But this was not the end, only the beginning- Bank of
America, Northern Rock of England, Fannie Mae and Freddie Mac of US are just a few
list of companies which either went bust or had to be rescued by their
governments. We all know the consequences of what happened after that. The
Global economy crashed and still hasn’t recovered fully.
So, how did the financial system and the
banking system which is supposed to be the backbone of any economy ended up
breaking that very backbone. How did something like a banking system which is
built on trust and trust alone lose its core values. And why do I think that
this will happen all over again.
The history of it.
During the crisis of 2008 some of the
economics were affected more than the others. China for example was unscathed and
continued on its growth path. India also escaped unharmed and largely
unaffected, although the economy slowed downed considerably. Lets step back a
bit a and see why that happened. All economies work differently with different
ideologies. There are three major types of economic systems which are followed
by most of the countries. First, a mixed economy where the state government and
the private sector participation is mixed, example India. This is also the most
common economic system. Secondly, Command and control, where in largely the key
sectors and investments are driven and controlled by the state, example China
and Cuba. Thirdly, free market where the state intervention is the least and
private sector participation is maximum. These markets are also the least
regulated and business decisions are largely driven by desire for profit and
pleasing the shareholders, eg. America, UK.
So if the markets are less regulated and
desire for profit drives the biggest of corporations including the banks, greed
and vested interest are bound to take over the general well being of consumers.
Example, the financial crises itself. The
boom in the real estate industry after the 1970’s in US and the changing socio-economic
equation was the real opportunity for the banks in the US. Nuclear families and
growing incomes led to the desire of owning their own homes. Many did and the
ones who could not afford due their low incomes were left out but still felt
the need to buy their own homes.
Sub prime loans were given to consumers from
late 1990’s till 2008 who had negative credit ratings, low incomes and instable
jobs. Banks pushed home loans at higher interest rates to people who just
couldn’t afford to re-pay them back. Big profits were made by the banks by
lending money at higher interest rates to these sub-prime borrowers. These
loans were further packaged as derivatives by very clever bankers and sold as
CDOs to financials institutions, which were further sold to end users. So where
did all this actually go horribly wrong.
Simple, sub prime borrowers started defaulting as their already instable
jobs started to give away and they were no longer able to borrow because of
their fragile credit ratings. Defaults starting happening in large numbers and it
all fell down like a pack of cards.
It is an open secret (well now its not even
a secret) that the bankers knew exactly what they were doing and they colluded
with the statesmen to keep this going for years. Ofcourse, the congressmen were
paid huge sums to keep the liquidity tap open. Its also no secret that the
politians are auctioned like the IPL players and big corportes houses bet on
the most electable Politian on the condition that they have to pay back the corporates
when the time is right.
Over the last 10-15 yrs bankers and top
executives have been paid huge bonuses to push complicated financial products
to consumers who did not understand much about them or were not explained much
of it. Not surprisingly, many of the bankers became millionaires overnight from
the huge bonuses they received by selling these derivates to naïve customers. The
greed game consisting of politicians and bankers went on till it went all out
of control. It was a game similar to the one in a big casino, where, one sometimes
starts the game with winning big money and ends up losing everything by the end
of it, e.g. lehman brothers.
So the question which really bothers me is
that what has really changed in the last 5-6 yrs which will make us less
greedy. What has really changed which will stop us from betraying people’s
trust and play recklessly with their hard earned money. What regulations have
been put in place by the governments to cap the bonuses of the bankers and top
executives, Infact immediately after the US government bail out in 2009,the banks
which were rescued doled out $33 billions in bonuses. Has there been a change in
the way the Politian’s are elected and the elections are funded. Yes, maybe the
banks have tightened their grip on credit and they are being more selective
about giving credit to their customers but is that enough?
In next 5-10 yrs when the global economy
will be in a much better shape, all will be forgotten and our sins will come to
haunt us back, yet again. Mr Michael Douglas….GREED IS NOT GOOD. As the
Mahatama said- There is a sufficiency in the world for man's need but not
for man's greed.
