It’s been a year since the demise of Lehman Brothers, a catastrophic event that deepened the credit crisis, sent the financial markets into a tailspin, froze credit and caused governments across the world to bail out big institutions that were hitherto deemed ‘too big to fail’. What is more, since then a debate has raged worldwide whether preventing Lehman Brothers from bankruptcy would have alleviated the crisis that ensued.
As reported in the Economist, while from a purely economic point of view the failure of Lehman hit global economies very badly, from a political point of view bailing out financial institutions then drew considerable criticism as it created moral hazard. Infact, the Economist further reported that at some point political pressures would have required a big firm to go bust. After all, it was only after the Lehman incident that global governments got into damage control mode.
Interestingly, investment guru Jim Rogers believes that the global financial system needs more failures like Lehman Brothers to restore a functioning free market. This is what he said, “Market fundamentals are that failures should collapse and be replaced by creative new forces rather than being propped up as zombies. Financial institutions have been failing for centuries and the world has survived.” We believe that bailing out the financial system was inevitable given the enormous pain that would have followed. Having said that, mechanisms will have to be built into the system that will ensure that such a financial blunder is not repeated in the future.
Good regulation is what saved the Indian banking sector from throwing up the likes of Citibank after the global subprime crisis. While the formal Fed chief Mr. Alan Greenspan has criticised the excessive regulation in countries like India, we also have credible voices supporting our cause. Mr. Raghuram Rajan, the former chief economist of the International Monetary Fund (IMF) who also chaired a committee on financial sector reforms in India, believes that all India needs is ‘clever’ regulations. The economist who was amongst the few to predict the financial bubble in the West, has in an interview to a business daily, said that the global economic damage was largely inevitable due to the underlying rot already present in the system.
According to Mr. Rajan while government intervention, particularly in Western economies has helped quell the panic, the same was not without having long term impact on fiscal balances. Further, Mr Rajan has advocated RBI’s focus on expanding access to financial services like savings and insurance rather than pushing credit down the throats of the poor. His views certainly hold significance in the light of financial sector reforms required for the evolution of Indian banking sector.
Also please refer to the article I wrote in October’08, how RBI, particularly the then RBI Governor Dr.Y.V.Reddy saved our banking system from collapse, when world over Financial institutions were crumbling. This article was appreciated by many and I’ve given the link below, if you are interested in reading the same.
http://wisewealthadvisors.wordpress.com/2008/11/29/thank-you-drreddy/
(with inputs from Equitymaster)
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