When the bankruptcy of Lehmann Brothers brought the US economy and subsequently the global economy into a long and spiraling recession, the American administration led by the Treasury and Fed took unprecedented steps to shore up liquidity into the financial system. Within weeks, a bailout program nearing a massive trillion dollars was put together and in spite of the Bush presidency nearing its second term and the program being as popular as the president itself, sanity prevailed and for good reason, it seems in hindsight, the bill was passed by the US Congress and Senate. The bailout among others, capitalized the big banks, Citi and others, seen largely by the masses and rightly so as the culprits of economic crisis. The liquidity provided much needed help to the banks that would have otherwise probably gone bankrupt because of their overleveraged balance sheets. The bailout program also helped out the great American carmakers, the icons of the past that had lost most of its sheen during the crisis. Perhaps, the biggest beneficiary of them was AIG, the insurance giant, that spoilt brat of a company, which bet billions of dollars on packaged financial instruments that was none of its business. The American masses were aghast at this bailout of the so called ‘too big to fail’ companies that were saved inspite of the financial hara-kiri they committed while millions lost their homes and their jobs. It was not an easy choice, politically but it was to the credit of the Bush Presidency and subsequently, the Obama administration that backed the likes of Ben Bernanke, the Fed Chairman. Bernanke, widely recognized as the greatest scholar of the Great Depression, knew from history that the best way to come out of such a financial breakdown was to spend one’s way out of it.
The world was lumbering out of the recession, when a debt crisis started unfolding in Europe in countries like Portugal and Spain, most prominent among them being the country of Greece, which came within striking distance of defaulting on their debt. The debt crisis in Greece sent shivers in the financial markets around the world, both because its problem was not an isolated one but also because of the single currency across most of Europe, the Euro. Problems in these countries undermined the strength of the Euro and many started doubting the future of the Euro. Europe, like America responded with a mammoth bailout program. However, it is not always easy to buy one’s way out of a crisis; in the short term, it can lead to public criticism and it the longer term, it may just be a part time fix for a larger systemic problem. The problems in Greece will probably take years to solve. It has taken much more debt than is fiscally sound to fund populist programs, many of them rooted in inefficient public spending and largesse’s, that were doled out for short term political gains. Many European countries having realized this have started cutting back on spending and taking difficult political decisions. The new mantra for dealing with the crisis is austerity.
So, what is a better path to economic progress? Is it the path of massive spending or is it the path of austerity? Is it about consumers spending more to generate more work and business or is it still better to save for a rainy day? The answer probably lies somewhere in between. It is important to balance fiscal discipline without strangling spending. India is in a sweet spot, compared to many, especially with the huge amount of money generated with the 3G bandwidth auctions that can be utilized to reduce debt. However, with the huge number of subsidies handed out by the government, it isn’t too hard to imagine trickier times. The right thing to do is let economics and not politics drive economic policies, but more often than not, it’s the other way around.
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