Reactions to the Financial Crisis

How do people from different continents, cultures and regions respond to a particular situation? We can analyze this with the example of a classic case - the response of Americans and Europeans to the financial crisis on hand.

Europe took a long time to understand and accept that they have been affected by the crisis in America. No one can dispute that the banking system is truly interconnected and we are facing the woes of trade liberalization and the other policies of a free-market. The global financial system seemed to be heading for a crash with just one economy, though a strong one, at that that became shaky. There is no doubt that the foundations and the fundamentals are built on weak pillars and emphasize a need for a better system.

The mortgage crisis, when it started, created a panic amongst the Americans, and the Government with a dampening effect on the Wall Street. The Government has lost its ability of far-sightedness and in an effort to resolve the bad-mortgage crisis, ended by buying hundreds of billions in bad-loans. They lost their analytical ability to realize that a far serious threat to the system was looming nearby, in addition to losing a heavy amount of investment. This created a 20% decrease in the Wall Street and created more panic. The Americans initiated the blame on the system, the corruptions involved and the ambivalent politicians who were keen on the interests of their parties rather than that of the nation. They did not own up-to the fact that they were simply spending more than what they were earning. The personal debt in the U.S. is an average $20,000 per household, with an average savings rate at 0% (from 10.8% in 1984). The world could not ignore the distressing signals which could bring down the global financial system, sooner than anyone could comprehend.

The Europeans took a longer time to face the reality but Gordon Brown; the British Prime Minister emerged as a wise man, when he decided to address the serious issue of recapitalizing the banks and re-establishing the liquidity in the money markets. From the beginning, the state ownership of the industry had been prevailing in Europe. They took this a step forward with Britain taking a natural lead and invested $250 billion in the banks, the best bail-out plan, ever. The markets responded accordingly, and ended the week up by 8.2% compared to a 4.5% in the Wall Street. European Capitalism seemed to be better suited as a system in the face of a crisis. In the U.K., there are serious contemplations by the media and the political class about the larger factors responsible for this debt on hand as against the Americans who were blaming elsewhere.

France and Germany, Spain, Switzerland and Britain are investing to the tune of $ 1 trillion dollars and thus, changed their normal glacial approach while making a policy. The Americans realized that far too long, they have characterized themselves as liberal and that being more pragmatic could be the key. They followed suit to the course led by the Europeans.

In the global economy, Europe has emerged with a new sense of leadership and America could lose its place as the standard bearer of trade liberalization. The Europeans need to build their confidence with the Americans cutting down on their over-confidence. Gordon Brown has emerged the savior to lead the world in these difficult times. There seem to be newer perspectives in the horizon and let us keep a look-out for the same.