Business | Investment
Cowboy bankers and snake venom
We are currently witnessing a huge crisis of investor confidence sweeping across global markets. When basic trust in the systems around us fails, everyone runs for cover.
- By Babu Das Augustine, Banking Editor
- Published: 23:32 September 26, 2008
We are currently witnessing a huge crisis of investor confidence sweeping across global markets. When basic trust in the systems around us fails, everyone runs for cover.
No surprise, then, that UAE investors have dumped shares in a massive sell-off, decimating the market capitalisation of the local bourses by more than Dh100 billion during the past couple of weeks.
The global turn of events that has unfolded and the consequences on local markets have forced many to change their view that we in this region are insulated from the rest of the world.
Markets across the world have been caught up in the wild gyrations, with investors scrambling desperately for reassurance, some kind of comfort zone. Thus, we saw even vague soundbites for and against government-sponsored bailout plans triggering global market rallies, but massive sell-offs too, almost instantaneously.
Adding to the global turmoil, locally in recent months, investor confidence had anyway taken a serious beating, as a few leading real estate and financial services firms came under the scanner for alleged corruption. The timing of these scandals couldn't have been any worse.
Last week, global markets oscillated between hope and despair. Lingering doubt as to the viability of the government's proposed and enormously expensive bailout plans continued to keep investor confidence low.
At time of writing, in the US policymakers are struggling to push ahead with a $700 billion bailout for its financial institutions. In a classic case of venom therapy, where herpetologists administer a fresh doze of venom to undo the effects of snake poison, central banks across the world are getting ready for additional liquidity infusion to solve a problem that has its origins in an overdose of liquidity.
Roots
Shorn of all its complexity, the current crisis is simply rooted. President Bush himself famously said a few months ago that the problem with the US economy was that too many houses were built. Just moments before I contemplated this column, I heard him say it again as he appealed for the Congress support for the bailout plan. Though his answer sounds simplistic, I thought he was on the dot, and it seemed to me that he was implicitly admitting that the Fed failed, both as a regulator and in the conduct of monetary policy as it flooded the market with liquidity that led to the housing bubble. When the bubble burst, the excessively leveraged loans made on the basis of overvalued assets went sour, precipitating a crisis.
The US government and many other governments around the world are caught between two conflicting forces. They need to inject liquidity to keep the banking industry afloat to meet its capital needs, because assets like houses and the loans they supposedly guarantee, are worth less than actually they were thought to be. On the other hand, letting them fail would pave the way for collapse of the entire financial system.
Governments are now faced with the moral hazard of subsidising the sins of cowboy bankers with public funds. But, being the only buyers who have the resources to take on and wind down these huge mass of troubled assets perched on bank balance sheets, they will have to decisively act as the final guarantors of investor confidence.
In a classic case of venom therapy, where herpetologists administer a fresh doze of venom to undo the effects of snake poison, central banks are getting ready for additional liquidity infusion to solve a problem that has its origins in an overdose of liquidity.
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