If you ask me in terms of imagery, this financial crisis is akin to the 9/11.
By Zafar Anjum
19 Sep 2008
Gosh, yet another post on the meltdown on the Wall Street, as if we hadn’t had enough of news stories, commentaries, op-eds, analyses, talk shows, the whole shebang—the result of the media going berserk on a story like this!
I know you might say that, but believe me, I will be short on detail and long on conclusions in this post. And we will also try to see what it all means for the IT sector.
No matter how much you talk on this topic which is on everyone’s mind these days, it deserves this kind of attention. Why? The former Fed chief Alan Greenspan labeled the current financial crisis as “once-in-a-century” crisis. Many commentators have said that it is the worst crisis since the depression of the 1930s. According to Dwight M. Jaffee of the Haas School of Business at the University of California, Berkeley, this view is right as the dollar amount of the losses suffered on financial instruments this time is the greatest since the 1930s (corrected for inflation). An FT journo said that it was the worst financial crisis he had seen in his journalistic career spanning 40 years.
If you ask me in terms of imagery, this financial crisis is akin to the 9/11. That was not just an act of terror. As author Naomi Klein has noted in her seminal book, No Logo, “the attacks on the World Trade Centre and Pentagon were acts of real and horrifying terror, but they were also acts of symbolic warfare, and instantly understood as such…the towers were not just tall buildings, they were ‘symbols of American capitalism’.”
9/11 was an act of terror. It was an explosion attacking the nerve centre of American finance.
9/14, when the current crisis publicly started, spread horror in the hearts of the American and international money markets—it was an act of implosion, if you will. The American financial system caved in, under the weight of its own greed. I bring up the word ‘greed’ as as Tom Friedman noted in his Tuesday’s column: “Wall Street — the financial industry — became a bubble in recent years thanks to an excess of liquidity and the oldest bubble maker in history: greed.” (Italics: mine).
So, clearly, no matter what you say about it, it is a gargantuan problem. That is established. Fannie and Freddie, Lehman Brothers, AIG, Merrill Lynch—there was blood on Wall Street for a week. The global financial markets were impacted but correction has begun to kick in after the Fed’s bailout of AIG. Yesterday the Asian bourses bounced back. And today, as I scan the papers, I see that the Dow has swung back, closing up about 400 points. So, if the Fed has come in and mopped the blood away with buckets of dollars, and the credit markets are feeling a little better, why are we still talking about it?
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, It’s 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 Chrysler’s 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 Detroit’s long, sad decline.”
That is a sobering thought. The sword of Damocles’ is still hanging over the world’s financial markets, and doomsday scenarios of recession, or worse, may still come true.
The other point being raised, on the Fed’s 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 FT’s 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 sector—to begin with, the IT workers of many of the affected banks.
Denise Dube reported on this recently. According to Janco Associates, the financial firms' woes, along with HP's news it would lay off 24,600 over three years, would "gut the IT job market." Janco officials say that it is has been confirmed that a large number of IT professionals in both organizations will lose their jobs by the end of the year.
In terms of IT spending, the immediate news is also not great. Forrester expects growth in IT spending to slow down in the fourth quarter of this year and the first half of 2009, and then pick up again. "The tech market is not declining," said Andrew Bartels, vice president and principal analyst at Forrester. "This is not a replay of 2001/2002."
That’s good to know, but when so much uncertainty hovers over the markets, who knows how things will turn out. Meanwhile, it is still safe to stay optimistic.
What’s your take on this? Share with me here.
Zafar Anjum is the online editor of the MIS Asia portal.
