Saturday, August 06, 2011

Fears of Another Financial Meltdown

Financial markets across the globe have taken a battering this week with a 500-point plunge on Wall Street overnight- its worst drop since 2008. The markets took a similar panic sell off when the US investment bank Lehman Brothers filed for the largest bankruptcy in Sept. 2008. Lehman went under when the US housing bubble burst due to the sub-prime mortgage crisis. It was reported to be the onset of the Great recession very much compared to the 1932 depression. A repeat of that scenario is being played out by the mayhem in the financial markets again. Fear and uncertainty are the prevailing market sentiments.

Nobel prize winning US economist Paul Krugman writing on New York Times:

"In case you had any doubts, Thursday’s more than 500-point plunge in the Dow Jones industrial average and the drop in interest rates to near-record lows confirmed it: The economy isn’t recovering, and Washington has been worrying about the wrong things.

It’s not just that the threat of a double-dip recession has become very real. It’s now impossible to deny the obvious, which is that we are not now and have never been on the road to recovery."

The gridlock between the two main political parties in Washington that we saw on the extension of the US debt limit demonstrates the difficulty in achieving any meaningful reform to deal with very complex problems.

Standard and Poors (S&P) one of the three rating agencies has down graded the US from the AAA status to AA+. S&P is not satisfied with the US debt reduction plan.

The fallout of this downgrade will be known next week. This could well lead to the perfect financial storm unless politicians rise up to the challenge.