There is panic in market. Is it comparable with the Great Depression? The question can only be answered with time.

Most of us haven’t seen the 1930s, and I personally believe the contexts are largely different.

The panic is so much palpable can easily be understood as market participants in Asia stay glued to US-markets late at night to understand how much the bleeding would be next day morning. I myself did so yesterday night, and went to sleep with more uncertainties.

Globally, people with leveraged exposures search all global news sources to understand any direction – if there is any at all in this madness. Many investors also do – to exit or to pump in more money.

Time is the essence. These are times like a financial riot. In India, we are familiar with riots of different types. People get killed – and rarely get justice in times of riots. SEC was sleeping or was it the Fed. won’t matter when one gets killed financially.

Online news-reports suggest there aren’t any liquidity, no inter-banking lending, effectively no trust. Our currencies effectively work on trust – otherwise they are just papers. So are our financial commitments on some instruments.  Gold surged yesterday by nearly 10%. I read about such possibilities, but never dreamt it was so near.

And here are a few fundamental questions. To all policy-makers around the world across nations from the US to Europe to Japan to China to Russia to India and all the rest – from sections of global citizens who have exposures in financial markets as well as are tax-payers.

  1. Are financial markets needed? If yes (which I think to be true), what mechanism do they have to protect investors? After all financial markets aren’t casinos. But the bail-outs showed investors getting wiped out. So the investor-tax payer citizen lost twice when a bail-out takes place.
  2. A hooligan can always put a gun at a citizen’s head and rob. Panic/lack of liquidity is something similar to investors/financial markets. This panic is lasting for weeks now – what are the policy-makers doing to restore liquidity, globally? (There’s a Bloomberg article that makes sense here). And there’s renewed hope as the Federal Reserve signal more role, but question remains on how effective it would be this time).
  3. There are certain noises coming from China – one article in one of their politically controlled dailies and now one more seminar speech by another influential man.
    1. The noises are valid, but the question is, as raised by another professor, should we 1st try to extinguish the fire globally; or debate and blame each other rather than acting first to douse the fire. For non-regular market participants, unless one makes the funds available within stipulated time in financial markets, the chain cracks. So participants have been racing against time to hoard cash to survive by minutes now.
    2. Above point is more relevant if we revisit creative destruction (for a new financial order in the world) as suggested by Schumpeter. Creative destruction happens in times of stability or turmoil? I myself believed for long that the US is living beyond its own means; but are there any alternative systems? Are the same Chinese policy-makers ready to allow Yuan (or renminbi) to be traded freely? Didn’t they help maintaining a strong dollar with pegged currency?
    3. While talking about free markets, just like the Yuan is controlled, so are various other instruments in the name of manipulations. If we allow the market indeed to be free, without bail out and interventions, the crash would happen quickly and they there will be a new beginning. Not in one day, but within months at most.
    4. Today there is no dearth of money as various figures show, what’s not there are options to invest those even for minimum returns.
    5. Common citizens would love to get a return which safeguards against the inflation.

4.      So effectively, our policy-makers globally have designed a system where when we save; we can’t be guaranteed a minimum sustainable return that protects our money from inflation.

5.      I myself have often lately taken positions in derivatives; knowing fully well its dangers, and lost money (the author right now has few long positions in certain Indian stocks). Still I would say, ban derivatives. Heed to what Buffet say. I won’t try to justify my greed, but stop the temptation itself with regulations.

6.      Can we sell something which we don’t won in the 1st place? At least many of the barter markets that still operate within rare few tribal belts in India do not allow that. Stop all short-selling (one may argue that my present long position motivates me to write this. Just a week ago I was short, and I had same position on banning shorts. Yes, I may not be following my own principles – but that’s how most of us are, when regulations are nonexistent!). Yes, I partly agree with the argument of short-sellers offer, but a vanilla market is the best market, for investors (and not for speculators). No leveraging and no derivatives.  

7.      The interventions and their effectiveness make the situation more uncertain. I thought about exiting my longs today (I have been thinking this last couple of days) but so far couldn’t – hoping (against hope) that this time the authorities would be able to bring down the fire. One can’t go short also because of same uncertainties as there can be sharp bounce-back. Remember Buffet again (‘derivatives are esy to enter but difficult to exit’), but even Buffet failed to see that there’s possibility of more bail outs after Bear Stearns.

Does it mean that our policy-makers have created a Frankenstein monster in the name of markets (which now operate globally in an integrated manner) and have no means to control that? The monster remains calm and quite mostly and behave predictably (actually under chained conditions but with the name of ‘free markets’), and after every few years or so – it gets mad. The chains no longer work, even the most powerful chains of the Fed., the SEC or the Treasury and a global coordinated effort to calm down this wild beast fails as it’s happening now. The beast takes its due pound of flesh from the market and then again calms down.

Whose flesh would it be this time? I was badly injured just a couple of years ago. Can I get an answer from global policy-makers to take appropriate action before the beast mauls me again? Yes, I take my own responsibility first as I entered a riskier instrument.

And I offer my empathy for those who suffered my lot, globally. We all need an answer. Is there anyone listening?

The objective of this article is not to (1) create any panic in anyway, (2) to let global policy-makers know that the present crisis is a creation by the US but supported by all the rest, including China, and (3) to find immediate short term solutions, but not stopping there when normalcy returns. There must be fundamental changes globally (and within nations like the US) to ensure we minimize global imbalances.

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