What made 2011 a mercurial year and what should be done to avoid such situation in the future? — Part 2 –

The reason why the European economy ended in a free fall, yet again was the lack of any long-term financial tools. The free flow of the money from European Central Bank to the commercial and investment ones without a proper check and balance resulted in
a gargantuan pile of debt that looked unacceptable in the first look when a proper check was performed on the balance sheets.

Complex derivatives like the credit default swaps look to be the best solution for keeping the run of money uninterrupted but actually they were the main reason for bringing the goliaths of US economy like Lehman Brothers Holding Inc. to their knees and
it was the same CDSs that brought the European economy in to thick of this crisis.

However, the one currency policy adopted by the European nations is another reason why the current situation occurred and it is the same Euro that is hindering the possibility of any financial solutions. The one currency might be the best way to promote
the local production and its export in terms of continental economy but yet again it is a short-term solution.

In the long run, the money borrowed in the same currency by numerous countries, like Greece which has a relatively smaller hand in the global economy or European for that matter, increases the interest rates as compared to their gross domestic product. Hence,
a debt crisis that slips out of the prowess of ECB to control.

Second reason for such unstable situation like the one that US is experiencing is the scant assets and securities that can assure stable worth. Investors look for stability of a company via its assets and operations. However, these companies have not been
able to come up with any new solution that would win the confidence of the investors. 2011 was a mercurial year in the US stock exchange, where stability was as rare as sun on the North Pole.

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Posted by Usman Khalid on Jan 3 2012. Filed under Business. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry