I don’t understand the world of finance. I can’t even keep my own expenses straight, which is not much of a problem because I don’t make much and I don’t save much. This is to the eternal chagrin of my sister who has tirelessly nagged me through the years to grow up and plan for the future.

And I did pay for it dearly too.

Besides some meager savings in mutual funds (again made at being threatened at gun point by sis), all I had was a bunch of stock and stock options for the company I work for. In the past few months a massive fraud has been discovered in my company and its stock has lost 95% of its value, wiping out that part of my savings.

So when I say I do not understand finance I am not being merely rhetorical. I really do not. Even though I majored in business management in grad school, I never showed more than a passing interest to economics and finance, just enough to score the necessary grades in those papers. I did not follow much of financial news, never updated my financial records even my sister created it in the first place. All I did was refreshed, few times a day, the stock price ticker of my company’s stock, till it crashed due to the fraud revelations.

But these are scary times.

Not just because the threat of joblessness is very real, but because nothing is sacred anymore. Venerable institutions like Merril Lynch, Lehman Brothers, Bear and Stearns getting sold or closed down, the biggest banks and financial institutions all over the world are getting bailed out and still there are no signs of being able to survive without a respirator, entire countries (Iceland) are being led down the path of bankruptcy. There is rampant joblessness and record government deficits. One is left with no option but to sit up and take notice. 

But if one does not understand what is going on, one looks up to economists, heads of governments, captains of industry to tell us what is going on. It is apparent to all that this crisis will not be solved in a hurry, but populations of entire countries are looking up at their political, thought and business leaders to step up and say - “Yes we understand the problem, these the steps, and these will work”. But all we have seen for the last 6 months are a series of seemingly confused and bungled steps and very real palpable fear, helplessness and confusion in the eyes of these leaders. They have lurched from the “Japanese” solution of the 90s (which of course did not work), Swedish Bank Nationalization, to the job creation philosophies of Keynes.

But what is different this time. Everybody say’s “This is not your grandfather’s depression”.

But why is that. What is different this time?

1. Complex Financial Markets - I do not just mean that it is difficult for a lay man to understand. This world of derivatives, credit-default swaps, packaged and repackaged mortgages is beyond anyone’s comprehension and difficult to regulate and hence rampant in fraud, corruption and reckless suicidal risk taking. The ‘drunk with bonuses’ financial markets perhaps overlooked the fact that there is fine line between judicious risk taking and recklessness.
2. Global Economy - We are no longer national economies, largely self dependent and doing some amount of trading. Now we are global economy, so intertwined and interconnected, we are like a cat with a ball of wool, caught in our own trap. We’re all connected and no one is in control.
3. Spending Binge - Though things have changed over the last few decades it is still true that the United States (and maybe a few Western European countries as well) consumes and rest of the world produces to keep up with that insatiable demand. With fall of the Soviet Union and the victory of capitalism, the whole world too is moving in that direction as well. Everyone wants to replicate the American Dream. What is ironic is that in America itself the American Dream is a fallacy. The perpetual image that has been perpetrated that every American deserves a home of their own and it was seen as a birth right even though many cannot afford them. They even went a step further and overdosed on credit card debts, easy mortgages, ‘pay it later’ loans and home equity loans. People in developing economies have been known to be much more prudent and conservative in terms of credit based consumption and adhered to a much higher level of saving. That too has changed somewhat in the last decade in India and China in terms of higher consumption and living recklessly on easy credit.

So what now? 

Thomas Friedman writes “I have a friend who regularly reminds me that if you jump off the top of an 80-story building, for 79 stories you can actually think you’re flying. It’s the sudden stop at the end that always gets you”.

Is that going to be our end as well? As you must have figured, I don’t think I have any inkling. But the scary thing is I don’t think anybody does either.