Monday, 10 October 2011

Crisis Economics

As Frank Borman, the chief of Eastern Airlines, said back in the early 1980s, "Capitalism without bankruptcy is like Christianity without hell."
Crisis Economics: A Crash Course in the Future of Finance (Nouriel Roubini)

Nouriel Roubini, an economist at Stern Business School, NYU was unique, as he was amongst the very few who accurately predicted the great financial doomsday of 2007/2008 and the ensuing crisis that is now unfolding, in America and Europe.

He explained that rather than just being the lender of the last resort, the Federal Reserves, European Central Bank, Bank of England, and other central banks have become the lender of the first, second, and the last resort; ie banking and non-banking companies all try to borrow money from the central bank, as all other financial institutions have grown wary to lend cash to anyone.

Roubini argued that, the central banks should have been more selective in putting guarantee blankets over the financial sector. If zombie banks and corporations were allowed to stay alive, under continuous lifelines from the government, there is a very high likelihood that another greater and bigger crisis is looming around the corner.

The commercial and investment banks alike might have been spared the crisis, relatively unscathed, thanks largely to the massive bail-outs by the taxpayers, but can Europe and America prevent their economies from falling into a liquidity trap, ala Japan's lost decade?

**Last week, Bank of England had just announced another round of Quantitative Easing (QE) which basically means printing more money to inject liquidity into the system, and I reckon the Fed will be forced to do QE3 in the near future.
I see them going down the drain, just like Japan post-real estate bubbles in the 90s, and that is rather very unsettling.

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