Lehman Collapse: 3 years hence. Where do we stand? - Views on News from Equitymaster

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  • Sep 13, 2011 - Lehman Collapse: 3 years hence. Where do we stand?

Lehman Collapse: 3 years hence. Where do we stand?

Sep 13, 2011

The current week marks the anniversary of two main historic events that changed the face of the world. The first event was undoubtedly the terror attack that had gripped United States in 2001. But the second event was the one that marked the onset of the current global financial crisis. We are referring to the collapse of Lehman Brothers . The financial behemoth went under nearly three years ago. The collapse brought into the spotlight the stark need for financial regulation. But it also brought with it the legendary economic stimuli that nearly every country dished out in order to revitalize their economies. But one thing that was common to every programme that was thought of - the need for globalization. No country thought of or planned to adopt protectionist measures.

Three years hence and times have changed. The world is still facing a crisis. And this time the solution is not so simple. The developed world is grappling with higher debt levels that combined with lackluster economic growth have sent tremors that shook the entire world. To add to this, the emerging markets are fighting a battle of their own with blazing high inflation rates brought about by higher commodity prices which in turn were a result of the economic stimulus measures offered in the 2008 crisis. As a result, dishing out more stimuli for the emerging market appears to be out of the question. On the other hand, the developed world already has so much debt that adding more to the base by dishing out another stimulus measure does not seem to be economically viable. And printing more money also has a limit to it.

So what is the step being taken by the countries? The answer to this is weird. They are adopting protectionist measures. In simple terms, protectionism is the practice of shielding a country's domestic industries from foreign competition. A country may do this through methods like imposing tariffs on imports, preventing foreign companies from take-over of domestic markets, imposing restrictive quotas etc.

The US may have in the past criticized protectionist measures adopted by other countries. But then the recent measures that the government has announced with regards to outsourcing and visa rules , etc are protectionist measures too. US has been trying to protect domestic industry with the hope that it would help boost employment in the country that is currently witnessing a sharp increase in unemployment rates. Even UK has followed suit by imposing strict rules on companies that send work out of the country. Other European countries like France, etc are also thinking about their own protectionist measures.

It is not just the US or Europe that have adopted protectionist measures. Other countries too have followed some form of protectionism or the other. Countries like Brazil and Switzerland have gone all out to protect their own currencies from excess capital flows. The reason they have cited is that if they allow this huge flood to enter their markets then it would lead to their own currencies getting dearer. This in turn would harm their export engines. There are several other nations like Malaysia and Thailand who have also announced similar measures as well. By the looks of it, this is just the first step. If the developed world continues to adopt protectionist practices, it would not be long before the emerging markets follow suit. After all, if the developed world closes its doors for industries of emerging countries, why would the latter allow the former's companies to flood its markets with their goods?

But what happens if the entire world decided to go back to the era of protectionism? Will that help to solve the global problems? Will that help the world in coming back on the track of growth?

Not really. The countries are no longer independent entities that can survive if they cut themselves off from the rest of the world. Each one needs the other for survival and long term growth. The politicians and their advisors seem to be adopting a myopic view on how to rectify the short term problems. Sure that will help as it makes them appear well off in the eyes of the voter community. But that does not solve the larger problem. Protectionist measures like economic stimulus are just short term solutions. The larger problem remains that the world has allowed itself to get too big for its own boots by taking on too much debt. It is best to let countries that have committed these mistakes go ahead and suffer its consequences. The others should try and make themselves more competitive and comparatively insulated to shocks by increasing their own competitiveness.

Protectionism is not a solution to all problems. History tells us that when the world had decided to adopt protectionism just after a financial crisis, the entire world sank into the Great Depression of 1939. Let us hope that the economists and country leaders have learnt their lessons from history and do not allow it to repeat itself. Otherwise, Lehman Brothers would not be the only financial behemoth to have lost its life. World over such events would become daily news. And like a pack of dominoes the whole world would start sinking lower.

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