The Bailout, The Stimulus

So now that we are in the middle of the global financial crisis, governments are scrambling to attempt the remedy the situation. Since we are in the internet age, problems have to be addressed by yesterday or the natives will become restless. Therefore, governments - notably the US Government have been engaged in a campaign to save the economy.

The question becomes this, how can governments faced with an economic crisis of unprecedented scale and complexity be expected to tackle this issue in a intelligent, pragmatic way? I think the answer has been partially answered already with the seemingly haphazard fashion that governments have responded so far.

The latest theory is to throw massive amounts of money into the economy with the hope that it will stimulate it. I am certainly not smart enough to figure out if this will work or not. But I think in the big picture sense this credit bubble was created in the first place by massive over consumption by everyone around the world.

A few years ago, when I was still back in New York and was observing the real estate bubble growing, what struck me was that the real estate around the world were also growing at an unreasonable pace. In the newspapers all you read about was that countries as varied as China, Ireland, UAE, England,India, Poland, Vietnam, etc were experiencing even bigger real estate booms than the US. I read stories of economies in those countries booming and its citizens enjoying an accelerated rise in standards of living. All of this consumption were directly or indirectly related to the cheap credit available at the time, and that is how interconnected we all were. Therefore, spending was more and more dependent on the house of cards named credit.

Now that credit has been effectively cut off, I think we are in a process of returning to normalcy. The problem is that from where we came from this is a drastic change of the credit landscape. The actions taken by governments around the world to lower interest rates and throw money into the system in hopes of stimulating the economy is the obvious short term answer to cushion that fall. The problem is that I hope that all of these actions will not act as a catalyst to return our economies to the broken model that pervaded globally in the past 10 years in the long run. I am not sure if the answer is to get people to buy more cars by lowering the standards of issuing credit again by stimulating the banks. Maybe its better to just go with the scorch earth way. Clean up everything in sight and start anew. Maybe everyone has to suffer in the short run and take a step back before moving forward again.

The other problem that we don't have is time to intelligently and carefully consider these issues in this day and age of the internet before people become agitated. Patience is a virtue that not many of us have these days.