Can we learn some lessons from the current Global Financial Crisis ? Or would History, as they say, would repeat itself?
Here are some things that could happen as long term fallout (after the current fire is doused in the short term):
Reverse globalization
· Non-American funds especially those catering to the old (pension funds) may be disallowed by their respective governments to invest in American securities except US government bonds. The Nordic countries who suffered the most would lead the pack. And this would continue for quite some time. Once bitten, twice shy. May be could be they find safer (read more conservative) countries like India. Currently they are exiting BSE but that is mostly because they need liquidity.
· In India full convertibility of rupee may get further delayed; perhaps will not happen in the near future more because of politics than economics. It is difficult to convince voters to integrate with a global system which failed to starkly.
Regulatory Impacts
· In America the credit market may become over regulated; especially the housing market. There could be requirements for higher down payments and stricter net worth criteria while doling out home loans.
· Central Banks the world over would be compelled to think hundred times before reducing interest rates. The Indian conservatism (Thank you Dr. Reddy) wins this round at least.
Business Impacts
· Boom in offshoring? All the more need to cut costs. May benefit India in the end.
· Further Stagnation or even decline of the domestic property market due to fall in demand of property for investment purposes
However, I think here are some things that probably should happen to improve the system:
· Central Banks worldwide not to allow banks to do credit rating of their own clients. It has to be done by an independent third party. Much like consulting being separated from audit work – a fall out of the Enron/Arthur Andersen fiasco.
· Investment Banks (if there are any left) would compulsorily follow a pre-fixed taxonomy and structure while creating their products with periodic random checks of the asset quality they sell
· Property market in India to be regulated as opposed to today’s fragmented and free for the developer one with no central authority like IRDA or TRAI. This anyway is needed urgently, crisis or no crisis.
But here are some things that may never change, viz.,
· Greed
· Fear
All leading to “Irrational Exuberance”
When was the last time a crash occurred? 2000. That was the great internet bubble – a totally different kind of crash. So what would be the next bubble made of? Crude Oil ? Gold..? … anything that goes up must come down. Or to rephrase it… anything that goes up abnormally in a short period (not matching GDP growth rates) must have a real demand backing it or it WILL fall.
Gordon Gekko we all know, was wrong after all. In the long term Greed is not good.
