First anniversary of Global

Financial Crisis; lessons for future

Om Prakash Yadav
omjiyadav@gmail.com

omjiyadav.blogspot.com

The month September is not an auspicious month for

America, the 9/11 and the 9/15 are two dates which no
American will afford to forget. The first being the first but
worst ever terrorist attack on America in which two planes
hit WTC and Pentagon, allegedly by Al-Qaeda, the terrorist
organisation headed by Osama bin laden. It shook American
psyche as well as society which hitherto un-pained due to
such terror attack. The latter date 9/15 was not less lethal
than the former in terms of extent of damages done to
American economy and society. It was the day on which
America’s one of the biggest investment bank, Lehman
Brothers, collapsed and triggered a chain reaction of
economic, financial and psychological crisis which very soon
engulfed the entire globe. This is exactly what we called
Global Financial Crisis or GFC. September, the 2008 was truly
a black month for America as continuously plummeting
home prices after the housing bubble, which is believed to
have been created artificially by American financial system,
reached its peak in this month and hit mortgaged backed
securities (MBS). This affect also spread to insured MBS
against defaults called CDSs. George Bush, the then President
of USA, tried hard to save the situation but could not
succeed. Ultimately on 7th September, 2008, Fannie Mae and
Freddie Mac, the two largest mortgage companies, had to be
nationalised. These steps too could not save the situation and
prices of mortgage backed securities continue to plummet.
The inflated figures and risky lending due to excessive
financial leverage made the banks empty of liquidity. The
panic spread and withdrawal spree set in. The banks after
banks collapsed and first to fall were big giant investment
banks like Lehman Brothers, Merrill Lynch, and Stanley
Morgan etc.
In fact, the beginning of this ‘humungous crisis’ has
had started well in 2004-2005 itself in many parts of the
world. The artificial boom, the ‘housing bubble’ created by
Bankers and property dealers led to over assessment of
value of the real estates. The lending by Banks on the over
assessed value of properties continued for some time. But
when the Bank rates were increased, the borrowers found
it difficult to pay the EMIs to the Banks. When, in order to
recover the money, the Bankers tried to sell the mortgaged
property; they encountered the real problem, because no
one was ready to purchase them on the ‘highly inflated’
price. Thus the NPA started accumulating as the ‘non-
payment syndrome’ spread like a wild fire. Since many of
the Banks had sold many of their shares to other financial
institutions, the non payment led to fall in the prices of
these shares also. Thus the ‘housing bubble’ hadbust.
Banks started getting dry of liquidity due to ‘withdrawal
spree’ because news started ‘leaking’ that Bank would not
be able to ‘honour cheques’. The Lehman brothers
followed by Merrill Lynch and Morgan Stanley had
collapsed by now.
It is however, a wrong proposition that had Lehman
brothers been saved, the market would have not
collapsed. The problem by now had entrenched into the
essentials of the stock market itself. The ‘over greed’,
becoming billionaire overnight has dried up the ‘spring of
business ethics’ almost totally. The desert left is capable of
supplying sand and only sand, this contagion has spread
globally and even India, the land of ‘Chanakya’ and
‘Megasthanes’ has turned into land of scamsters like
HarshadMehta and a host of such bookies. The ‘blind race’
of minting money resulted into overstretched competition
among financial institutions which were unnecessarily
exposed to ‘unhygienic business environment’ causing
this disease to spread.
Street Wall, the citadelof US economy, had collapsed.
Walls were burgled and plunders were in. During
Napoleon days it was said that ‘when France catches cold,
the whole world sneezes.’ Now it should be said that
when thorn pricks the US economy, the emanating pain
reaches to whole of the markets including Bombay stock
exchange. Therefore; the whole world including European
Union, Russia, Japan, Middle-East and India is reeling
under acute financial turmoil following the crash in Wall
Street.
LESSONS FOR THE FUTURE- Joseph Stieglitz said that
the GFC was caused due to ‘privatising the profits and
socialising the losses’. This philosophy of free market
economy was evolved in the Bretton Wood Conference
which took place in 1944 after the first global financial
crisis of 1930, better known as ‘Great Depression of 1930’.
 The conference was attended by 730 delegates from 44
allied Nations who gathered in Mount Washington Hotel
in Bretton wood, New Hampshire on 22nd July, 1944.
This agreement led to establishment of two important
financial institutions viz IMF and IBRD. This ‘duo’ played
very important roles with respect to economic and
financial order of the world thereafter. Although, this
system sought to establish a just and equitable global
financial order, it was hijacked by US and some European
countries right from the outset. The IMF and IBRD (it later
became 5th Wing of World Bank) failed to serve the
interests of the entire globe, especially poor and
developing nations. The succession list of Managing
Directors suggests that no Asian has ever been made MD
of IMF.
These figure suggests that how the IMF is working and
how is the discrepancy.
MEMBER COUNTRIES OF VOTING SPECIAL
IMF( total members are 185) RIGHTS IN DRAWING
% RIGHTS (SDR)
million US
dollar (USD)
USA 16.77 37149.30
UK 4.86
FRANCE 4.86
CHINA 3.66
INDIA 1.89 4158.20
GERMANY 5.88
AFGANISTAN 0.08
BRAZIL 1.38
SOUTH AFRICA 0.85

G-20 MEETING IN St Petersburg- Leaders of G-20

countries are meeting in Russian city of St. Petersburg to
discuss revamping global financial order. The half century
old financial order evolved during Bretton-Wood is not
going to work. The ongoing global financial crisis have
dwindled the economies of almost all the countries in the
world. Chinese and Indian economies are the only
exceptions to this downturn. The slow but impressive
growth rates of these two Asian Giants have deflated egos
of European as well as American countries. The duo has
started staking claim in the emerging world economic
order, a claim that is difficult to refute and deny.
POPULAR MOOD AND BAILOUT PACKAGE- a
couple of days ago, BBC world has conducted a
worldwide survey which speaks volumes about the mood
of subjects. People generally subscribe to the view that
there should some governmental control over financial
system and it should not be left to the abysmal pits of
greed of the market speculators and finance managers.
Regarding bailout package, people generally disapproved
the government’s bailout for banks and other financial
institutions. They opine that how can public money be
made available to them which caused this crisis to
happen. The Americans were angry particularly on some
financial institutions which misutilized the funds made
available to them as bailout package.
TRIBUTE TO GFC- every anniversary is marked by
paying tributes, therefore this anniversary would also
require paying some tributes. The controlled growth
blended with financial freedom and regulation would be
new mantras of the new global financial order. The
excessive pace of growth is risked with overheating of
growth engine which in turn jeopardise the entire system
itself. India could withstand this onslaught due this
mantra. Chinese too could hook this googly due to
application of this very philosophy otherwise both these
countries would have been capsized in this financial
tsunami. The tribute would therefore be to socialise the
profits and growth because no oasis can survive in the
sprawling deserts. Eat and let others eat; live and let
others live, though an old India saying, still is million
dollar sermon. Together weswim separated we sink.