The epicentre of the worst global financial crisis in decades lies in the US, UK and to a lesser extent in France and Germany. The aftershocks of the financial tsunami, however, have now gone beyond and struck relatively small — and from an Indian perspective distant, even disconnected — economies. Suddenly, the limping, almost bankrupt economies of Iceland, Hungary and Ukraine are making front page news in the West. And the IMF, which seemed irrelevant in September, is back in business playing doctor to some very sick economies.

Interestingly, none of these countries is in trouble because its banks are over-exposed to toxic US subprime debt. The second-wave countries are suffering from old-fashioned currency and banking crises, brought about by a massive outflow of foreign resources. It is also difficult to blame crony capitalism: Iceland is a paragon of free market virtue. It undertook major reform in 1991, coincidentally the same year as we did in India. There was an extensive privatisation programme, introduction of a flat rate of corporate and income tax (18) and full capital account liberalisation.

Moreover, this crisis cannot be blamed on the fundamental edifice of free market reform. Iceland, Hungary and Ukraine benefited greatly from free trade and privatisation. What is to blame, instead, is a toxic mix of human greed, availability of abundant cheap credit (from abroad), and flawed central bank policy. Consider the dynamics of this implosive combination.

Let’s take greed first. Wall Street has taken much of the flak for conjuring up fancy instruments with clever mathematics to disguise blatantly unwarranted risk in a bid to become really rich, really fast. What is often missed in this discourse is the desire to become rich on the part of subprime borrowers in the US, who took home loans which they couldn’t fundamentally afford. The greed may be more basic in its end — say, a small house compared with a banker’s private yacht, but the idea of living beyond what one can reasonably and safely afford permeates all income classes.

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