Well, the debate is still on regarding the status of the sub-prime crisis, or the bigger credit crisis, or even the bigger cheap liquidity driven US consumerism that drives US and global economic growth significantly, or take the biggest of it as the whole of US spending more than it can afford is nearing an end or not. The debate is about its bottom, at least for the time being.

No one definitely knows the answer for sure, barring the US Federal Reserves and the policy makers in Washington. Because the debate has its origin in their efforts to change rules as often as possible and as much as possible. Otherwise, no doubt those things would have been much worse, at least for the shorter term, by the measure prevailing in financial markets. As no one could gauge that the Federal Reserves or its counterpart in the US government would be bending the rules so much to safeguard the crisis (Federal Reserve innovated rules to safeguard Wall Street innovations!), no one would be knowing how much further they can go if it again resurfaces, even in a different form or in a worse shape.

Much of global media repeatedly term this bail out of Wall Street firms to be at the cost of the US tax-payers. But is it limited  only to the US tax-payers? I believe the actual cost of the profligacy of the Wall Street and its bail-out by different agencies is borne by all the people of the world who save money and/or pay tax in any form.

If we take a minute away from the sub-prime crisis in the US and wonder had such a strike happened in any other economy of the world, how would that economy react? The answer would be simple – it would have collapsed.

But then why not the US? The logic given by Federal Agencies in bailing out Bear Stearns is equally applicable in the case of the US as well. As Bear Stearns was too big to fail (failure does not mean its own failure alone but the subsequent bank run which would have caused others like Lehman and many more to fail, in different scenarios), similarly the US is also too big to fail. Now Bear Stearns could have resulted in many more collateral damages, similarly the collapsing of the world’s largest economy may lead to many more collateral damages.

So when one section of the media blames the actions of Federal Agencies in bailing out profit-driven high-handedness of the Wall Street at tax-payers’ money as immoral; a bigger look of the problem reveals that the Federal Agency has actually done what a smart Central Bank would be doing. The actual blame lies in all the nations who believe that the US is too big to fail and thereby bail it out again and again by holding dollar or dollar-denominated securities. Just as the Wall Street banks take advantages of their scale, the US have been exploiting its scale advantages for years from the rest of the world.

Now what everyone asks is how long this process of small bailing out the big can be sustainable. Remember it’s the series where the big fish eats the small fish in our eco-system that we studied in schools. Actually it very much prevails in global capitalism. The small tax-payers often bail out the big risk-taking firms without any return on their risks, the small tax-payer again bails out the government as the government goes on various unnecessary spending overdrives (take Iraq for example which may be for the benefits of few US oil giants but the cost comes from the tax-payers and soldiers’ lives).

That was for the US. Now when one focuses it for the economies for the other nation, it even gets worse. The Chinese saver saves 50% of his money assuming his/her money would buy him/her security in later years, but sees it getting eroded by inflation and his Government willingly allowing same money to be borrowed by rich US to overspend in an unsustainable manner. The Japanese people lend money to the US expecting their exports to be healthy so that they can remain employed. The Indian government holds dollar as it runs a trade deficit. The OPEC holds dollar because it believes if it does not, the dollar would collapse and thereby pours more oil into bad money before it gets worse.

The US, due to all of these, force feeds the rest of the world almost $2 billion a day. That comes to almost 1/3rd a dollar per person per day that the world lends to the US because it is too big to fail. Without this lending, it fails or slows down towards that failure. And in India alone, nearly one-third of the people live every day at less than that figure of earning or spending (nominal).

The US is too big to fail! Can one explain it to this one-third of India’s 1.1 billion people, or to similar sections all over the world?

Something can be too big to fail, but if something is not sustainable or adaptable to the changes, it must fail. The dinosaurs did fail – so size should not be the only criterion for the survival of the fittest.

The question that the US tax-payers ask is also asked by the tax-payers and all savers all over the world. Don’t take my share of money by printing more money or burden me with inflation to protect the big because they are too big to fail. How long can we do that? How long can the world lend money to the US because it’s the currency of the big, and if rest of the world doesn’t; ithe US fails with unthinkable collateral damages.

The US has not faced much of the upside and downside due to the excessive risk-taking nature of the Wall Street firms (barring this time in housing, last time it was dot-com, etc.). It actually happened in the emerging markets where real estate prices in Mumbai caught on with Manhattan and share prices went sky-high as these markets are small, and lacks the depth that billions and trillions of dollars inflow or outflow can create. And the corrections have also happened here again as China, India both corrected by nearly 30% or more. The story is broadly the same elsewhere.

A part of the money borrowed from various windows from the Fed. eventually lands in many of these emerging nations; as same investment banks buy assets there. It’s the same market where many of us in emerging nations buy assets with our hard-earned saved money. One borrows cheap, endlessly to play in integrated global financial markets in search of higher profits knowing he is too big to fail; ordinary investors like us compete with them in same markets. It is high time that these local governments must ban one entity out of these two diverse ones (as China has done for its domestic market, however that experiment has also not been great lately) because FIIs cause market distortion in these emerging nations; and in a way Fed. support that by providing them with cheap endless supply of dollar.

The Federal Reserves could have also decided not to bail out Bear Stearns and let market adjust to the collateral damages from trillions of dollars of open derivates it had. It didn’t do so. And it’s likely that it won’t do so in future as well in similar conditions.

The rest of the world allowed the US to be big by allowing the US never to bother in balancing its earnings with expenses. The US government could do it because rest of the world was always ready to lend money (rather competed!) to the US. Once US government could do it, it percolated down to the US consumers; and the days of saving money concept was gone from the US.

One may well ask – what’s the alternative? The alternative is not Euro or Yen. The shift from dollar has not been even in double digit, and Euro climbs by 60% or more, leaving aside the increase in base in forex reserves. The alternative is to allow acceptance of mutual currencies. Some section of media suggest experiments where travelers between Brazil and China carrying the other’s currency directly without buying dollar as an intermittent currency; Iran, Russia, China and Venezuela again trading oil in their respective currencies; etc. However these are too small initiatives, at least as of now, to have any impact.

And the solution lies there itself. As China increasingly becomes the largest trader of the world, it need not be concerned of losing exports to the US provided it accepts others currencies or trade in Yuan. Rather, it may find more export demand! One must be ready to pass through the intermittent turbulent phase anyway. And in the long run, China may find better solutions to curb its inflation as well. China and India both can trade in their respective currencies as well! China, with its huge trade, must allow Yuan to be more openly available for trade globally.

It’s unfortunate that global currency basket does not include any where the future is.

The unsustainability of the dollar liquidity can only be felt if the nearly $4 trillion dollar in the form of forex reserves with various emerging nations flood US market as an increase in Money Supply. The US inflation would be simply unmanageable! The other alternative is they dump dollar, which sort of ends before it begins because the existing slump in dollar anyway against competing currencies.

When the big exploits the small, it’s time for the small to act together. The Federal Reserve would always bail out the big financial entities of the Wall Street with tax-payers’ money; however let that not be the practice for the other national governments to bail out the Federal Reserves and the US government, again and again.

When the rest of the world acts together not to bail out the US; the US would be forced not to bail out the Wall Street. That’s the only way we can protect us from similar direct and indirect taxing events of future.

Ranjit is an Associate Professor at Indian Institute of Foreign Trade, and is the author of the book Wondering Man, Money & Go(l)d Opinion is personal.

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