Last week, billions of dollars were wiped out in the face of a financial tsunami. A near melt-down in the credit markets forced central banks to step into a fire-fighting operation. The epicentre for this gradually building tsunami is centered in the world’s largest debt-ridden economy – the United States. For the past several weeks, the so-called sub-prime mortgage market in the US is in a tailspin.

Moneys lent to people with limited or no income to purchase residential property is at the core of the problem. In the case of sub-prime mortgages, people borrow against the increased value of their homes to pay off other borrowings.

The global problem
The puzzling aspect is why it should become a global problem. It is here the financial capitalism and its seamless interconnections come into play. A small bank in Germany – IKB Duetsche Industriebank – heavily invested in these sub-prime mortgages in the US on the hope that there would be high returns. In fact, several big banks such as HSBC or BNP Paribas in France are also major actors in this financial contagion – which is  transmitting shocks to other countries or the cross-country correlation.

In the complex dynamics of financial markets of the 21st century, which is dominated by private funds and hedge funds, the small and big banks in varying degrees borrow in the short-term for the acquisition of highly rated paper.

Many banks world over acquired the American asset-backed securities, which were undermined by the sub-prime loans. Hit by a sharp rise in default rates from the sub-prime borrowers and their asset-based mortgages, it became all pervasive in which small and big banks in the international financial market got trapped in an enveloping credit crunch.

Faced with the grave consequences of the 1930 type of depression, the central banks – starting with the European Central Bank – had to pump hundreds of billions of dollars into the money markets $131 billion in a matter of few hours to ensure credit. Subsequently, the stock markets too felt the tremors with a sharp slide in the stock prices in all major markets.

It seemed as if Vladimir Lenin is turning in the grave to prove what he prophetically said way back in 1916. Living as a fugitive in the Swiss capital Berne, Lenin said imperialism is the last phase of capitalism in which financial capitalism rules the roost.

Prophetic words
Of course, the financial markets a century ago were underdeveloped without any complex financial instruments or trillions of dollars trade in unknown funds. Lenin was then accused of exaggerating the problem. But nearly ninety years after what is said on imperialism and financial capitalism, events last week in the financial world may provide some evidence of the dangerous times ahead in the financial world.

Surely, the impact might vary from one country to the other. The industrialised countries would be in a better position to handle any crisis as witnessed in the manner in which their central banks rescued their private banks. The ECB’s action seems to have eased the cash crunch for the time being. But it might not end there unless the mother of all problems, namely, the American mortgage market and the complex of web of investments derived from them are all tacked on a war footing. With the elections next year and with the worsening travails of the Bush administration in Iraq, it is highly unlikely that there would be any swift action.

India, which is dependent heavily on the US market for all its software exports, will have to gear up a on a war footing to avoid the adverse effects. Already, the real estate prices in India are rapidly rising and its mortgage market is also heating. Other, poorer countries will have to bear the brunt of a downturn because of the financial developments in the richer world. Ultimately, the poor – who have no role to play in the casino capitalism – will be the worst sufferers.