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The big escape

Zafar Anjum | Feb. 4, 2009
Looking at the way the financial crisis is being (mis)handled by world leaders, there does not seem to be any escape from misery in sight. This is the first part of a series of blog posts on this theme.

Call me a pessimist but the reality that I see around myself does not raise much hope in my bosom.

The banking crisis is getting worse: the cold, hibernating snake of prosperity (read lending) needs more stimulus to come out of its pit. While President Obama is talking of yet another round of aid for the banks, shameless Wall Street guys are cashing in fat bonuses.  

The hope of discovering a solution to the worlds financial catastrophe also died with the recently concluded meeting of global leaders at Davos (as though one needed, in the first place, to be in the Swiss Alps to come up with a solution). The deliberations ended without any solid solutions to tackle the crisis. But thanks for the effort folks!

The answers are there

The tragedy of this compounding conundrum is that the solutions are there, they are in the public domain, like elephants in the room and yet governments are not keen to recognise them.

As British Premier Gordon Brown said in a recent speech, a new world order will emerge after the crisis. He is damn right but does he know how to get there? Perhaps he does but like his fellow politicians he is not ready to bell the cat.

The solution to the banking crisis, as suggested by some economists such as Nobel Laureate Paul Krugman, lies with the government. So far, the governments lemon socialismtaxpayers bear the cost if things go wrong but stockholders and executives get the benefits if things go righthas not been working. Obama and his Treasury secretary Timothy Geithner are ready to pour in billions of dollars into the banking system to rev up its engines but are not ready to take public ownership of the banks. Why, asks Krugman in his recent the New York Times column,  Bailout for Bunglers. If taxpayers are footing the bill to rescue the banks, why shouldnt they get ownership, at least until private buyers can be found?

Geithner says that we have a financial system that is run by private shareholders, managed by private institutions, and wed like to do our best to preserve the system.

Preserve the system? Thats the problem. Systems should be dynamic; they should respond to change; and systems that dont work or that are rotten, need to be thrown out, or at least rebooted. We have done it in the past. We chucked the League of Nations and instituted the United Nations when the need arose. We developed the Bretton Woods institutions. We chucked the gold standard when it seemed wanting. So, whats the problem now?

This prejudice in favour of private control, even when the government is putting up all the money, seems to be warping the administrations response to the financial crisis, said Krugman rightly.


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