Crash lessons

The collapse of the iconic US financial services firm Lehman Brothers this day last year will remain a cataclysmic event in  economic history, much like the Nazi invasion of Czechoslovakia, which triggered World War II, turned last century’s political history. The shockwaves that emanated from the Lehman Brothers shook the world’s economic and financial system, humbled the Wall Street and many financial institutions, especially in the developed world. The global recession deepened, creating scary scenarios of the Great Depression. The housing bubble in the US, built on greed and untenable financial calculations, had burst, creating individual and family miseries on an unprecedented scale. Falling production, rising unemployment, distrust among financial institutions, and a general crisis of confidence marked economic activity in the subsequent months till finally the world is now thought to have moved back from the brink.

The experience of the last one year will be useful for economic management in the coming years. The faith in the self-regulatory and rational nature of free markets has taken a hard knock. The trillions of dollars that governments spent to bail out failing institutions and sinking economies underlined the need for public supervision of and control over private economic activity. The interdependence of the world became clearer, with a ripple in one place creating a wave elsewhere, and the effect getting magnified by the faster flow of funds, information and sentiments. The solutions that came up showed the dangers of protectionism, which is the economic equivalent of hypernationalism and xenophobia. What is seen now is only a tentative turnaround. The world economy is still declining, and is expected to grow only fractionally next year. But the worst may be behind and the lessons learnt from dealing with the crisis can help governments and businesses to manage their activities better in future.

It also became clear that countries like India and China had inherent strengths that helped them to withstand the mayhem. They were affected but were not overwhelmed. The existence of a regulatory framework for financial institutions, lack of high dependence on trade and the availability of strong demand at home helped India to develop a level of immunity. Even through the year of crisis India and China had the world’s fastest growing economies. The positives should be strengthened if the resilience and momentum are to be sustained.

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