Financial_Crisis

Results of Global Financial Crisis Exact one year has passed when the world economy witnessed an onslaught on the global financial system resulting from the collapse of the American financial firm Lehman Brothers. This event precipitated a recession of the magnitude that world had not experienced since 1930. Financial giants such as AIG and Citibank had to struggle for their survival. In decades, the world economy shrank for the first time. However worldwide efforts to rescue the financial systems have born results and the global economy seems to come out of bad effects of the recession. Let us take some pause here and draw some results from this crisis for our future strategy. Is this not a time to rethink accepted theories and principles about the free market economy' The first lesson is that the slogan of ‘capitalism is dead’ and the idea of the nationalization of the privately owned assets are highly misplaced and unacceptable. The government intervention should only be permitted to rescue the economy from the strangleholds and to formulate polices and guidelines for the consumer protection and to ensure the corporate social responsibility. The excesses and greed of the bankers did play havoc, but there is no cogent reason to expect that private ownership and market mechanisms of resource allocation would give way to permanent public ownership and an administered allocation system. Second, terms such as the spillover effects, the herd instinct and animal spirits have not only remained unscathed but have become more relevant. While irrational excitement was so obvious during the days when the markets were buoyant, excessive fear, risk avoidance and abundant caution became vivid during the recessionary period. Other unrelated markets were also affected by the sentiments and confidence factors. Third, three large economies-China, India and Indonesia- and emerging economies in general remained unscathed due to strong domestic demand. It deciphers that the overall impact may become muted in times of adversity in future if the emerging economies continue to grow rapidly. Fourth, undue emphasis on exports to the developed world alone is too risky. China faced a sharp decline in its exports when the American consumers decided to save in stead of spending on foreign goods. It does not mean that we should discourage exports but encouraging broad-based non-inflationary domestic demand will have an overall positive effect. Fifth, the US will no longer be the leader of the global economic growth. Its capacity to run current account deficits has been impaired by excessive debt and deficits resulting from fiscal stimulus. The real wealth effect resulting from the fall in housing prices will cause a shift from consumption towards savings. The global economy would need more than one consumer even to maintain a modest rate of growth. It is estimated that one billion new middle class consumers will emerge in Asia by 2015 to fill this gap. Sixth, the conservative thinking presented by former US Federal Reserve chairman Alan Greenspan and followed by other central bankers that asset price bubbles should not be pricked as they would cause more damage than good, has to be abandoned. Price and financial stability have to dealt with jointly. Seventh, the accumulation of huge foreign currency reserves was justified in the aftermath of Asian crisis. But the accumulation of these reserves by the central bankers in Asia produced serious distortions. As their assets were largely denominated in the US dollar the fear of capital loss deterred these bankers from adopting alternative courses. Had China, for example, allowed private savers to hold their assets in foreign currencies this large concentration of assets in one currency would have been avoided. Eighth, while the world economy is integrating rapidly and the cross-border intrusive factors are becoming more relevant, the global financial edifice is incompetent to manage this tide. National and regional interests have not given way to the institutions such as WTO to implement the global financial discipline. This phenomenon is evident from the difficulties faced by the European Commission in evolving consensus on regulatory reform within Europe. Finally, recession has aggravated the risk of protectionism by the developed world. An inclination towards protectionism in developed countries is likely to become an obstacle in the way of imports from the emerging economies. The powerful domestic lobbies are using the present crisis to magnify the doomsday scenarios for the future and exploiting the sensibilities of the legislators against open trading systems. The developed nations should change their policies in this regard to give a sigh of relief to the emerging economies.