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Are we on the road to perdition?

Zafar Anjum | Sept. 19, 2008
If you ask me in terms of imagery, this financial crisis is akin to the 9/11.

Good question. But I have point here. The game is not over yet.

In a revealing piece, Shanmuganathan N., director of Benchmark Advisory Services in India said that we are still in the early stages of a protracted downturn in the US economy and what has happened to Lehman Brothers (an institution that survived the US civil war and the Great Depression) is merely a forerunner of what is in store for the US financial industry.

He further concludes: With the national debt at around $10 trillion, and a budget deficit expected to touch $1 trillion, there is no legitimate way (taxation or borrowing) to service this debt. The US government would either have to default on its debt (in which case the US treasury becomes subprime) or default through massive inflation (in which case the US dollar becomes subprime). My guess is that it would be the latter, as that would be the path of least resistance, with the result that there would be a collapse in the purchasing power of the US dollar.

Not a good scenario, right?

These sentiments are somewhat reflected by David Leonhardt in his opinion piece of 16 September (Perhaps, Its Time to Play Offense): Before A.I.G., before Fannie and Freddie, before Bear Stearns, there was Chrysler…In 1979, when it was still the 10th largest company in the country, Chrysler found itself on the verge of collapse, largely because high oil prices had made its gas guzzlers unappealing. Company executives and union leaders came to Washington, hat in hand, arguing that Chryslers demise would wreak unacceptable damage on the American economy. Congress and the Carter administration responded by arranging for $1.2 billion in subsidized loans. The Reagan administration helped further in 1981 by restricting Japanese imports. On its face, the Chrysler rescue was a huge success… The Chrysler bailout may have saved the company, but it did nothing, after all, to stop Detroits long, sad decline.

That is a sobering thought. The sword of Damocles is still hanging over the worlds financial markets, and doomsday scenarios of recession, or worse, may still come true.

The other point being raised, on the Feds bailout of the ailing and failing financial institutions, is the issue of moral hazard. Many are not comfortable with the idea that taxpayers will fund another run on the casino (hat tip to FTs John Kay for this expression).

I am no financial market pundit but if you want a good Q&A on the current crisis, read this blog post on Freakonomics at the NYT.

The impact on IT

All these murky developments will definitely have an impact on the IT sectorto begin with, the IT workers of many of the affected banks.

 

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