US Financial Markets in Doldrums


The news about Lehman going for an almost firesale and a sale in any case, has been splashing since few days all over the media. Check out at : News about Lehman Crisis

This comes about right after the great rescue of Fannie Mae and Freddi Mac by the Federal agency of the US government. The move was anticipated as a stopper for more bad news and rotting companies but as it has turned out, investments continue to get sour and companies are still at high risk, along with the danger of whole of the market and eventually the economy going down a whirlwind path. To me, it is particularly astonishing because I thought, as did most of the people, that banks like Lehman were more prudent and perhaps would be able to manage the situation. As it turns out, it is not about the ability to manage. The forces of market are far more weighty and dangerous that a single firm could contain. The news is doing the rounds that Merrill Lynch and Washington Mutual are in for a similar fate if they do not get up and do something right now. If Lehman goes badly, Merrill may be next in line with all the pressures, although the situation there is not so critical, and may I add, YET. It was assumed that the credit crunch would stop after Bears Stearns was bailed out. But it did not.  And it is not to be predicted that how much longer and how much wider it is going to go on.

In all of this, a student of economics should ask that are there any lessons to be drawn here about free markets, capitalism, socialism, socialized capitalism, government intervention and globalization etc? I would say that when we will look at these events in hindsight, there will be many many lessons. However, what all this has certainly done is to question the robustness of capitalized markets and their efficiency to deal with the problems. Why is it that the fellow banks and financial institutions are not coming to the rescue of the beleaguered Lehman when its collapse could spell a bigger doom which will take them down too. Why are they asking the government to support the bad credits and intervene for stabilizing the markets. Is it not the inherent and imminent rule of capitalism that the profits as well as losses will be shared by the markets. Why then are then the  losses expected to be  turned over to the government?

Financial markets have often come to the stage of creating havoc in the whole of economy. They seem to be periodically going into a crash state after a boom state. Had it been a completely free market without any government intervention at all, things would have been different and I mean better by that? Is it this unexplained camaraderie between the two which is responsible for bad turns. Or can we ask the question that capitalism is not able to deal on its own and that it is most of the times the government which supports it?

Altogether, it is a very interesting time for not only financial analysts but also for general economists. What amazes me often is that the complexities of the financial instruments( like exotic derivatives) have grown so much that it is hard to estimate and calculate their worth even by those who are creating them. Something like the Frankenstein’s monster. Aren’t they?

I am waiting for the Monday morning and the markets to open and see what is the fate waiting this crisis. Meanwhile, the decision about Lehman should hopefully become clear in the coming day.

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