Tuesday, Aug 09, 2022

Blind Man's Bluff

The meltdown holds up a mirror to market fundamentalists

Blind Man's Bluff Illustration by Sorit

The global financial meltdown that we are in the midst of is set to go down in history as one of the worst economic disasters. Despite the US government's $700 billion rescue package, the financial crisis is likely to spill over into the real economy, causing job losses and rising prices. This downturn is also expected to wash ashore in distant nations . India's growth rate is expected to drop from the recent 9 per cent to 7 per cent.

The mystifying feature of financial crises is 'contagion'. A problem in one industry or region can leap and escalate to others, like an influenza epidemic. The present crisis began in the US housing market. Starting eight years ago, there was a large expansion of loans to homebuyers in the 'sub-prime market', that is, the segment of borrowers who are considered 'high-risk'—people with uncertain incomes, for instance.