Sunday, October 12, 2008

G7 Governments Do Not Understand Market Dynamics

financial markets spiraling out of control
The western governments and the G7 are doing it all wrong.

Instead of breaking the downward spiral they are actually reinforcing it.
This is common with all reinforcing feedback cycles that have a delay. Each action reinforces the other. The actionee does not realize that they are feeding each others action. The only way out is to break the cycle.

The root cause is lack of confidence. Liquidity crunch is a symptom.

Everytime the US and European Governments make big announcements of how they are taking the necessary action to stem the rot and describe the grand actions they add to the fear of the ordinary investor. The ordinary man on street sees these actions as the proof that things are going bad. So there is more panic selling in the market as investors try to extract whatever they can. That is then taken as evidence of what the finacial wizards were saying in the first place - that things are going bad to worse. So the government takes the next action and so and so forth ... you get the picture.

It is not that fianancial institute after financial institute is failing. The rotten ones have dropped off or will drop off. It is not that all banks have zero cash in reserve. And what is this liquidity problem all about? The banks are afraid to lend to each other and the businesses are not getting short term money.

So what should the governments do? The governments of the G7 should get the CEO's of their banks together in a closed door and let each bank state their current position - bad debt, solvency and all. The banks can then see exactly where each stand. This data can be shared with the G7. Once the banks get confidence in each other, the liquidity problem should disappear. Nationalisation of banks is not the solution.

Too simplistic?

Sometimes what is required is a simple solution aimed at the root cause.

Note: The picture used in this post belongs to Lena Povrzenic. Please go here to see more such photographs.

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1 comment:

Myriam said...

Hi Amitabh,
Thank you for your comment on my blog, I can relate to what you wrote about the ballast that you had to jettison. I'm impressed by the force of your ideas and views, and it's great that you have found a way to express yourself beyond the boundaries of your job. Even if you enjoy your work, I can understand that it is in certain ways limited, while your energy and passion for explorations and expression are much bigger. I wish you all the best in your life. Many greetings from Italy, Myriam

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