Archive for December 2008
CREDIT CRISIS – THE WORST IS YET TO COME
Financial System Upside Down
by Alar Tamming, Tavex and Dr. Krassimir Petrov,
Prince Sultan University
December 8, 2008
Mark Twain once said that “if you don’t read the newspaper, you are uniformed. If you do read the newspaper, you are misinformed”. It is no surprise then, even to people who don’t follow the news, that a truly serious financial crisis is sweeping the world.
The headlines of newspapers and internet portals speak for themselves. Readers are inundated with facts about what is taking place. At one moment, bank write-offs to the extent of trillions are being discussed. The next moment, notice is given of guardian-angel intervention by governments and interest rate cuts by central banks. Aid packages in the trillions exceed the calculation skills and comprehension capabilities of ordinary people by a factor of several times. The main message conveyed by all of this “information” is mostly emotional. While write-offs may lead the reader to pessimism – what will become of my life, the government creates a feeling of security with the aura of a paternal figure, adding trillions of dollars to banks and “guaranteeing” that bank deposits and security holdings won’t simply vanish. Those geniuses are on the task and will never let the system collapse, the reader thinks, so he turns his attention to the next page of the paper.
What is missing is a deep analysis of the causes of the crisis, as well as possible future scenarios – papers look neither in the distant past, nor in the distant future. The cause of the financial crisis is claimed to be driven by two emotions – fear and greed; blame goes to poor regulations and greedy Wall Street investment bankers; rhetorically is added the fact that crises accompany capitalism, that they have regularly occurred in the past, and that they will continue to occur in the future. Some stock broker releases investment advice that from a long-run perspective, now is a good time to buy stocks.
Unfortunately, investing in stock markets is never as simple as it sounds. If every time we buy when stocks are down and afterwards stocks go up, then we would be all fabulously wealthy. Naturally, it is forgotten that this is accompanied by inflation and a drop in the purchasing power of money. Moreover, the fact that the world’s largest companies and banks can go bankrupt is never mentioned in financial publications; neither is the possibility that the assets of shareholders could be completely wiped out. Bankruptcies of large companies and banks are regarded only as a theoretical possibility and relegated to the pages of abstract economics textbooks.
Fred Thompson on the Economy
