2009 – A year of defiance

January 12th, 2010

Last year, around this time, the mood was sombre. The fear of a complete catastrophe from the financial sector meltdown had chilled the minds of many. But well, with 100 per cent returns from equities, one cannot really complain that 2009 has been a bad year.

The ‘greenshoots’ , as the Federal Reserve chief Ben Bernanke likes to call them, have been many. Unemployment in the US, though not down, looks less scary. A lot of liquidity is sloshing around the world, helping companies to raise cash through initial public offerings, rights issues, private placements and so on. And all the stories that the world will slip into deeper recession sounds quite far fetched.

But I am not convinced that all is well. While bankers around the world are rejoicing that they have managed to arrest the recession by pumping liquidity and printing notes, there seems to be a hollow sound to it.

There is a lot of talk about how the trickle-down effect of the Wall Street has positively impacted the Main Street. The argument being that giving liquidity to bankrupt banks led to more lending. Saving jobs of overpaid bankers gave them confidence to take risks. And interestingly, most of the banks who took Federal aid have returned the money.

Yes all this is true. But there is a small catch. I don’t think that business confidence is too high. While raising cash might have become easier, I really wonder how much of it has been used to add capacities and generate jobs.

Most employers or corporations would like to sit on this cash till the confidence improves. And in the absence of employment generation, the cash that has been pumped in will have zero or no multiplier effect.

That is the reason, Lord Keynes advocated that in times of uncertainty, the government should generate employment by simply hiring people to dig holes and fill them. However, private corporations will look at parameters like return on capital to boost their balance sheets.

While Bernanke’s model is better than the one employed by the Fed in the 1930s recession (when it tightened the liquidity), I wonder if it is enough. Because unlike China or Japan, most US banks are not government-controlled. As a result, they are more worried about their balance sheets and more importantly, their bonuses.

As many reports have pointed out, bankers – ‘the problem children’ – continued to earn hefty bonuses while lesser people suffered, lost jobs and went bankrupt.

Yes, allowing the banks to fail may not have been the best solution. But there has to be some repentance. Otherwise, we will soon be heading for another bubble and recession.

In my view, at present, we may have deferred the some part of the pain. But pain, there will be, sooner or later. We, as individual stakeholders, should prepare ourselves with sound savings and insurance. And hope, the banks and insurance companies don’t fail us.

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