Saturday, March 13, 2010

Why the buck doesn't stop

Here is a question no one is asking about the global financial crisis: How do we know so little about who or what brought on the crisis after all the literature that has been produced over the last two years. Is it because no one knows anything about the “Invisible Hand” or how long the current crisis will last as we don’t know how deep it is? Or because, as Nobel laureate Robert Solow (1987 for Growth Theory) put it, “the dangerous combination of the ‘real’ recession — the unemployment and idle productive capacity that come from lack of demand — and the financial breakdown, each being the cause and effect of the other, makes the situation more complex, more unstable, more vulnerable to psychological imponderables, and more distant from previous experience?” Put it any way you like, but about 17 causes of the crisis have been identified as John Lanchester says in Whoops! Why Everyone Owes Everyone and No One Can Pay (Allen Lane paperback, Special Indian Price Rs 450).

Of the multiple causes, the main suspects that just about every economist has pointed out are as follows, though not necessarily in the same order:

1. The crisis did not originate in the real sector of the economy. It was triggered by the excesses of the financial system. What stands out glaringly is the regulatory failure in relation to the financial markets. Some parts were either loosely regulated or not regulated at all. Along with this was the failure of the regulatory authorities to understand fully the implications of the various derivative products. The regulators did not exercise the required degree of oversight and control. Therefore, fixing the financial system is the first priority.

Full report here Business Standard

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