The Credit Crunch

First, it was the subprime market that fell, then it was investment banks failing, now it has spread to many major banks all over the world...leading to (possibly) the Bankruptcy of a sovereign country - Iceland. Next, they say, will be the economic downturns and recessions. In a global economy where credit and debt are the underlying forces moving it, this is definitely a recipe for disaster as the banks are hoarding their capital and interbank loan rates skyrockets. In the cycle of credit and debt, the economy is basically fueled by consumer spending - the more you spend, the more you need to borrow and therefore the more "profit" is made from the credit. This unchecked spending/lending has led to the credit crunch where even large banks are defaulting on their own debts. From a book I'm reading, it highlight two very important deficiencies of the present system:


1. A debt-based system needs an effective lender of last resort and right now, it's been proven that we don't have one. The banks are looking to the Governments to bail them out but as Iceland proved, even sovereign countries may go bankrupt.


2. A debt-based system need debt restructuring and workout mechanism which as can be seen currently, even the US is grappling with this issue.


Right now, there is talk of needing a new model or better regulation. However, without changing the fundamental and here, I mean, the debt-based system itself, I seriously don't think the economy can sustain itself in the long run even if we get out of this crisis unscathed.


An economy that can sustain itself, I believe, has to be founded on justice and equitability. Justice in such that the gap between the poor and the rich do not widen but instead will close. What constitute a just economy? Well, based on what I've read:
1. equality in opportunities for all and in utilizing the natural resources (no hoarding of resources by a few or due to "national" interest)
2. just exchange and distribution of goods (was thinking of how in the zero-sum "game" economy I wrote in my blog earlier, this just/equitable exchange is unlikely to occur.)

Definitely, a debt-based system where the poor gets poorer as they get further into debt fail this test of being a just system. With the kind of economy founded on justice, there has to be a regulatory body (global) to ensure justice is served. Perhaps, our leaders are brave enough and will take this opportunity to change the current system...not that I'd hold my breath on it.