The last few couple of weeks have offered a number of events that have provoked all of us into looking back at the year of financial turmoil that the world has just gone through. Most investment markets around the world are surging up strongly and the quantum of good fortune they have enjoyed since the dark days October 2008 stands out starkly. In India specially, the optimism in the stock markets has surprised most. The recession has been declared over in all the big western economies. The G20 summiteers have made some encouraging noises about the global economy. And of course, Barack Obama has stood on a podium on Wall Street itself and has promised to clean up the town. Generally speaking, the consensus view around the world is that we’re through the worst period.
However, one of the many things that this crisis has taught us is that the consensus view is frequently worthless. When it’s correct, it isn’t very useful and when it’s wrong it can be spectacularly disastrous. A couple of days back, maverick investment analyst Marc Faber had something interesting to say. In his unimitably direct manner he said that the global situation was an “utter and complete disaster” and that the situation we had just gone through was “just an appetizer to the big total breakdown of financial markets and of governments in five or ten years time when the whole system goes bust”.
While Faber puts things in his characteristically maverick style, he’s not the only one who is saying this. There are two ways to look at the crisis. One, you can see it by the numbers, in terms of bubbles and liquidity and credit quality and obfuscated instruments and so on. And the other, in terms of human behaviour. The fountainhead of this near-disaster were people who could take bigger and bigger risks secure in the knowledge that their profits are their own and their mistakes would be paid for by some government or the other using money created out of thin air, which will have to be repaid by someone at some point in the future.
Actually, the behaviour problem has gotten even worse. Before the disaster, the big American and European banks would have hoped that they were too big to fail. Now, they have had an actual demonstration that no matter how badly they have behaved, they are too big too fail and too powerful to fix. As is obvious from Mr. Obama’s fulminations on Wall Street on the disaster’s anniversary, no real reforms will take place.
Unfortunately, the financial crisis has also put paid to the formerly-beloved decoupling theory. If Faber and Co. are correct, then version two of this disaster will be much worse, then we in India are as much in its crosshairs as anyone else in the world.