Much has been already been written, in different parts of the world, about the imminent demise of global finance as we have known it. This newspaper completely disagrees with the doomsday scenario. If anything, capitalism in the US, with considerable assistance from the government?which despite temporary nationalisations remains thoroughly committed to the American free market project?will come out strong. Remember, the US bounced backed smartly from the Great Depression and more recently from the savings and loans crisis of the 1980s and the dotcom bust of the late 1990s. Global finance, while in turmoil now, should not be viewed as a dangerous threat?after all, much of the US economy?s dynamism and growth has come from this sector in the past. This is a particularly important lesson for India?we can hardly worry about what risks there might be in the future when we haven?t even thought about the enormous benefits financial liberalisation can bring.
Of course, the nature and method of international finance may change. And it should. After all, the financial system is in turmoil because a large number of financial institutions, particularly investment banks, took absurdly risky positions?on the real estate market, a market prone to sharp boom and bust in any case. Such excessive risk-taking needs to be curbed to prudent limits. Nationalisation cannot be a permanent state of being. Investment banks are already paying the price?Lehman is bankrupt and Merrill has sold to Bank of America. Morgan Stanley is actively looking for a buyer, which only leaves Goldman Sachs standing amongst the Big Four. Investment banks may now need to be a part of a larger deposit raising financial institution?a commercial bank for example?to have a steady supply and guarantee of liquidity. Apart from this, there are also questions about how investment banks stretched themselves well beyond what were initially just advisory and investment management roles into taking huge positions in the market themselves. This model seems dead and buried now. Small boutique investment banks may crop up, which will perform the advisory role and manage portfolios for others. But the greater risk-taking element will shift to commercial banks. For now, over the next few months, risks taken will be minimal. After that, people will look for higher returns?expect more cycles of boom and bust, but don?t write obtuaries to capitalist finance.
