Running Out of Money

Wall Street always leads the world economy. The smart people sit­ting behind all electronic boards were worshiped like god. Through them, financial institutions have extended their tentacles in almost every indus­try, every nation on every continent. It seems no one else understands bet­ter than they do about economy. And this time, they are leading us again, on a roller-coaster. The free-fall after each ascend, where one’s heart fran­tically holds itself against one’s back, that is the part we are riding now.


Breaking news is falling like snow­flakes. Big names, one after another, were shivering. None escaped the storm. How did it happen? At the beginning of 2007, mortgage market started declining. April 2 2007, New Century Financial, largest U.S. sub­prime lender, filed for bankruptcy. In another half year’s time, 4-5 other prominent mortgage lenders had filed bankruptcy. Before we could fully digest what had happened to the market, the panic quickly spread to financial institutions, globally. August 29 2007, Australian Hedge Fund ap­plied for bankruptcy protection. After 15 days, British bank Northern Rock reported severe liquidity problem. Then a race of loss reporting started. In the following 6 months, more than half a trillion dollars had evaporated from bank’s assets. Few lucky ones like Bear Stern, Merrill Lynch were merged; the others like Lehman Brothers had to shut its door after one and a half century of business. Mac­ro-economy is reacting swiftly to the turmoil. U.S. reached 11% unemploy­ment (well, that Palin spent $ 150,000 in October is a story of another day); Iceland defaulted on its foreign debt; Hungary and Pakistan are on the row; China has suffered a 3rd consecutive quarters slowing growth rate. Couple of weeks back, Nikki index in Japan made 12% loss in a single day, which is the lowest level since 20 years.


Central banks had joined hands in an unprecedented collaboration to ward off the crisis. Then bold, and bolder rescue plans were announced; astro­nomical figures dominated headlines: $700 billion in the US, $ 205 billion in Sweden, $ 750 billion in Germany, $ 103 billion in South Korea… Tens of trillions of dollars have been poured into the market to ease the credit crunch. Central bank lending rates have been cut to historical lows. Fi­nancial minister in Japan had wished to give interest to borrowers to en­courage lending.


Those smart people did not save us. Nor anyone ever could. They merely stared unbelievably at the falling in­dex, with wide open jaws: no one has completely understood the mar­ket. Recession has become the most quoted word on news. What triggered by the subprime crisis has reached far beyond anyone’s wildest imagination. Despite all the joint high dose injec­tion, the patient still shows no sign of recovery.


Where did all the money go? What went wrong? Alan Greenspan, the once legendary chairman of Fed­eral Reserve, was summoned before U.S. Congress. He admitted that his assumption that each player in the market would take necessary mea­surement to protect themselves was wrong. In other words, the free market concept failed. The invisible hand pro­moted by Adam Smith 100 years ago failed to function. Critics reacted re­lentlessly to blame everything on free market concept.


Although the free market concept had been the corner stone of modern capitalism and served us gloriously in the past decades, it is wrong now. In simple words, free market theory re­frains government interference in the market. Each market player is expect­ed to ensure the best interest to itself: highest profit & lowest risk. The regu­lators merely enforce the free flow of information, market integrity and property right. Fundamental property right will be protected, then players left to choose what is best for them. Does it sound familiar with the struc­ture of democracy? In democracy, people are protected with all property rights: life, earning, privacy, house et al. Then people are free to choose the best for themselves. However, law can only protect people from external harms. But law cannot protect people from harming themselves. Not all de­mocracies have succeeded. Actually, it is quite disastrous in many places. Does it mean democracy is wrong? In the free market, regulations require banks to obtain adequate information from the prospective borrowers be­fore granting the loan. But those pre­cautions were abandoned. Everyone was abandoning them. Law or regu­lation cannot enforce the functioning of market, which largely depends on the people who are practicing it. The current turmoil is rather the fault of operators than the fault of the mar­ket mechanism. Thousands of years now, we have not escaped the temp­tation of greed. We still tend to blame everything else except – us. You may dispute what I have argued here. But we are all witnessing a soon to be well cited example in the text books and academic research.


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