The year 2008 was a real watershed in the history of financial markets and governing paradigm as a whole. The virtual suzerainty and infallibility held by neo liberal laissez-faire which had been doctored on the globe unchallenged for three decades suddenly lost into vapor. Its proponents publicly confessed of their ignorance. The virtual icon of deregulation era, Alan Greenspan had to admit what they believed was wrong. The market is fallible and its self regulation is an unfounded myth and an oxymoron. How else should we judge the dramatic meltdown happening right in front of us? Financial giants melted down leading to a virtual evacuation of Wall streets. Firms like Lehman Brothers which had withstood the storms of two World wars withered down with a whimper. One after another, starting from Bear Stearns, financial giants especially the most espoused Investment Bankers crumbled down struck by the Frankenstein they had been raising. For the time being Keynes has come back trouncing the monetarism of Milton Friedman and likes. The neo liberal regime which was unblemished since the Reagan era has established itself as a failed ideology.
Keynes had rightly pointed out the deficiency of capitalist system- its innate incapacity to distinguish between “speculations” and “enterprises”. As rightly predicated by him , “when enterprise becomes bubbles in whirlpool of speculation”, economy which is slated to be the by product of “ activities of a casino” will be visited by the violent turns of crisis. Whirlpool of speculation was such unleashed in the last decade comparable only to the scene of pre-1930s with the financial capital and markets, hegemonized all aspects of industrial capital and main street activities. Its whims and caprice were celebrated and keenly followed by global media which in turn acted as trumpet holders of the new order.
For a better clarity its inevitable to reflect on the financial market structure designed after the 1970s. Banking sector itself underwent a drastic paradigm shift in this era. Till then, US was considered a well regulated and stable banking sector. Soon, the deregulation fundamentalists dismantled even the last vestiges of existing frameworks. The sound monitoring network framed after 1930 depression underwent an overhaul with new catchy “self regulation”. “Lend and Hold” principles of core banking were forced to be jettisoned to suit the new order of financial “innovations”. It was believed “deregulation breeds innovation”. A new set of glamorous cavaliers appeared in the form of Financial Engineers. However as Joseph Stiglitz had pointd out recently “ the innovators were too intelligently designing new products to circumvent even the last resorts of regulatory frameworks”. They were such successful in their mission and the world collapsed! Regulatory frameworks were circumvented by the liaison of Financial and Banking services. One stop financial servicing centers captured the limelight, when processing fees and securitization commanded the sway over the outdated margins between lending and borrowing. ”Originate and Sell” thus becomes the underlining mantra for successful bankng model. Assets of security are no more held by the banks but pooled packaged and sold to the investors charging a processing fee along with it. Thus the risk was distributed all around the market among various stake holders, thus designing multi layered complex environment impossible to decipher. Associated frameworks of regulations of each layers were found inadequate to obtain the complete picture and the end result was the catastrophe we are seeing around us. Every one is at a panic stage not knowing when the risk pops up and running around the corners wailing for bail outs. The loss of confidence in the altars of financial capital was soon reflected onto the industrial sectors with the already weak real income generation.
Self regulation and much touted “new states of equilibrium” was breached once the loss of confidence resulted. The mutual insurance between the financial players not only spread the instability, but also brought the whole sector into a stand still once a domino was let to fall. Hypocrisy was soon let open by the fervent appeals from apparatchiks of laisseze faire denouncing all forms of regulations, but begging for Federal bailouts. Credit Rating agencies who are to be paid by the security generating bankers, kept on giving the much wanted AAA ratings till the last week of havoc and when their credibility itself was dragged to ignominy. Once the sub prime mortgages started failing, all the hidden risks started rising up in tandem, bubbles of assets got small pricks and the whole system was in turmoil.
Government action also saw a wild swing with al sorts of monetary measures running out of options with Federal rates plummeting to the lowest ever possible. Fiscal measures and active government intervention regained the space with vengeance. Demand for radical make over of International monetary frameworks ascended. The monetary readymade crisis solutions advised by IMF to developing countries so far was thrown into dustbin by now beleaguered Rich nations exposing the hypocrite and ideological fallacies promoted by these institutions. Now one wonder, how extensive was the damage posed on the South American and East Asian countries by advices of the IMF and international policy makers during the crisis of 1990s.
Thus 2008 showed itself to be a recrystallizing episode with its strategic lessons. The role of the state is to be ascertained more by the tragic episodes which was caused the recklessness of market. Glamour of financial engineers and mesmerizing products revealed the whirlpools we were subjecting ourselves. Greater call for regulations and controls with vigilant activism of state is demanded as well as for violent shake up of global medias who missed the crucial junctures rejoicing themselves in false prides of bubbles. It must be an eye opener to all financial media who couldn’t see any wrong with the massive hundred billion Ponzy schemes of Madoff! More over, at least as a rhetoric,
