This is verily the Autumn of Discontent for American Financial Capitalism if not for America itself. A crisis not witnessed in seventy-five plus years, a country and an economy on the edge of the awful vertiginous precipice of a possible Great Depression — one can easily ask the question, Quo Vadis America.

I happen to be visiting the US giving me an “insiders” view. Guess what, I have written three articles and have had to discard each of them as events seem to make them irrelevant. Lehman was followed by Merrill, which was followed by AIG and is now followed by Washington Mutual. The pride of America: its Financial Services Industry, its high wage, high return, high profile answer to departing manufacturing (to China) and departing services (to India) is now under assault. And the assault is not from external competitors. The malignancy seems to be inside. Mountains of debt, endless chains of leverage, incomprehensible algorithms of mathematical finance and, above, all the sheer size of the problem leave you wordless and flabbergasted. Millions are a rounding error; billions are the basic unit of accounting; hundreds of billions are a matter of easy discussion; and now trillions are being mentioned in a perfectly natural way.

Let us get back to basics if only to help set the framework. Booms are part of the business cycles of modern capitalism. Booms turn into bubbles when interest rates are low for a prolonged period of time and money and debt become plentiful. Bubbles result in excesses and frenzies, when despite all the lessons of history, people start believing that inflated good times can and will go on for ever. When bubbles burst, those who have borrowed indiscreetly (and that’s a lot of people, for that is what happens in a bubble) are unable to repay their debt. A chain reaction develops as their creditors (again a lot of people) in turn are unable to repay their loans. It takes some time before the downward spiral which is a mirror image of the earlier upward spiral comes to an end. And this adjustment is painful as economic activity invariably slows down, sometimes shrinks (described as a recession) and once in a while shrinks a lot (described as a depression). We know all this and yet we are for some reason unable to steer a course that reduces volatility. This is pretty much what has happened now. How come the highly regarded pundits of academia and their highly paid counterparts in business could not or did not anticipate all this and ensure a less precipitous outcome?

... contd.