Financial storm provides epiphany for the U.S.

Suddenly, the bubble popped. Financial institutions on Wall Street collapsed like dominoes. The fallout is being felt far and wide, across the oceans to Asia and Europe. The crash of the stock market in New York on Monday set off a chain reaction worldwide, including Taiwan’s jittery bourse that nose-dived to a new low.

Belatedly, economists have discovered the obvious. The boom of the financial markets was not sustainable because it was like a sand castle without a solid foundation. It was Wall Street magic played by a group of geniuses who were able to invent “derivatives” to swindle ordinary investors who did not understand what they were buying with their hard-earned cash.

How could the government watch this kind of game going on with folded hands? Well, it’s because the Bush administration believes that “Wall Street can regulate itself.” This hands-off policy is based on Reaganomics of supply-side trickle down theory that adopts a laissez faire position of deregulation.

For years, the credit bubble became larger and larger as Wall Street’s investment banks like Bear Stearns, Lehman Brothers and Merrill Lynch sliced mortgages thinner and thinner to “spread risk” and sold pieces all over the world. At the same time, Fannie Mae and Freddie Mac were awash with liquidity, giving zero-down or low-down mortgages to lenders with disregard for financial risk, known as “moral hazard” in the parlance of the insurance industry.

Allowing Wall Street to regulate itself is risky. It’s more so when the “fat cats” saw little risk doing crazy things, knowing that they could seek government help if they lose. Investment bankers nowadays are not like J.P. Morgan in the old days, who was honest and scrupulous. Now these fat cats are broke and seeking a bailout by the government with the taxpayers’ money.

The financial storm is not expected to die down any time soon. Suddenly, America got the epiphany that de-regulation is to blame; that Wall Street needs policing and the financial markets must have oversight. It may take a decade, if not longer, for the United States to rebuild its financial markets.

The current crisis could well change the world’s financial order. The unipolar financial world dominated by the United States may loosen up as a result. The dollar has been weak, and the U.S. national debt has been climbing steadily to close to US$10 trillion. A tri-polar financial order may emerge in Europe, Asia and America.

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