Business | Opinion
The flaw lies within Federal Reserve's supervisory system
Just a few months ago, Lehman Brothers, Morgan Stanley, Merrill Lynch, Goldman Sachs and AIG Insurance were powerful financial institutions, which formed the basic pillars of the US economy.
- By Mohammad Al Asoomi, Special to Gulf News
- Published: 23:39 September 24, 2008
Just a few months ago, Lehman Brothers, Morgan Stanley, Merrill Lynch, Goldman Sachs and AIG Insurance were powerful financial institutions, which formed the basic pillars of the US economy.
In a short time, these economic pillars have fallen one by one, which led to shaking the global financial system.
Even financial institutions in poor countries were affected by the financial crisis endured by these leading financial institutions. Also, global stock markets suffered a loss of $3.6 trillion (Dh13.24 trillion) in less than a week.
Over the past few months, the US Federal Reserve Board and European central banks tried to solve the crisis through temporary solutions that could be termed as just painkillers, but not radical solutions.
However, the financial crisis continued to deteriorate, heralding a dangerous structural flaw in the US financial system, which requires a radical reform.
This flaw lies within administrative and supervisory systems followed by the Federal Reserve Board, which is similar to the Central Bank.
This raises a question: How come property mortgage and loans worth $13 trillion - a huge amount equal to the US Gross Domestic Product and a 25 per cent of the global economy - were offered without enough guarantees?
This leads to another question: Where is the supervisory department in the US Federal Reserve and what was its veteran chairman Alan Greenspan doing? Alan is one of the world's most prominent professional bankers.
This can be understood if such a matter happened in a developing or poor country, because it lacks modern administrative systems. But when such a crisis takes place in Wall Street - the world's finance and business centre and in a country with the most powerful economy - this raises many and big question marks.
Previous crises
However, previous world crises, especially the economic stagnation in the early 1930s had happened for objective reasons, while the current crisis is caused by defects in supervisory systems.
The crisis took place due to the dangerous rush by investors to earn astronomical profits irrespective of expected results, which may lead to catastrophic consequences on the global economy as a whole.
As a result, financial institutions involved in the crisis will be the first losers due to their rush towards gaining huge profits apart from any important economic and financial considerations.
Another important question: How can an institution like Lehman Brothers, whose assets totalled more than $630 billion and has been operating for 158 years in different parts of the world, be so fragile?
The $500 billion pumped last week and the rescue programme announced by the White House at an estimated value of $1,000 billion may help contain this crisis, but this will have many effects on the global financial system.
The disappearance of giant institutions from the global system will lead to the emergence of new ones to fill the gap.
These institutions will not necessarily be American and will more likely emerge in other parts of the world less affected by the financial crisis such as Europe and Asia.
The US economy was weakened in the past 8 years by war costs and financial violations in its most important institutions starting with Amron, and not ending with the property mortgage crisis, which almost could lead to the collapse of the US economy and the entire world financial system.
The writer is a UAE economic expert.
Share this article
More from Business Opinion
More from Business
Popular in Business
-
General
Precious jump
Gold prices at new high as India's central bank buys $6.7b worth of gold
Business Editor's choice
-
Sweet life in the Middle East
A sweet look at the confectionary industry in the UAE and Middle East
-
Passion for pets can be expensive
Responsibility and time spent add to costs for furry friends
-
Facebook farm game under cloud
Mobile phone contracts can be used to buy virtual money
