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Auto Pilot

March 31, 2008

When I finished explaining, my cousin of 8, about auto pilot mode in planes, I could see a pure envy in his face. I could almost read his thoughts.

‘If only I had an auto pilot machine to do my homework’

He doesn’t know that few things in world ran with auto pilot. Part of what makes him lovable, is his innocence. But when grownups start showing such ‘innocence’, we hardly find it lovable. And we hardly call it innocence either. Ignorance? Yes!

But US economy till date, had been a perfect example of innocence, ignorance, arrogance and foolery, all mixed and dished to you in one fine recipe. To think that, economy is like Boeing, and you have that red button called auto pilot is foolishness. To actually leave it like that, is arrogance. And to top it all, to think, nothing is going to happen is ignorance.

It was 2000, when people were still smarting from dot com burst. That should have been a reminder for sensible people at the helm (read Fed). But no, Alan Greenspan and his cronies were busy in their own Friday 18 hole games and drinks. And while they partied another bubble came in.

The Great Realty Bubble.

But why blame the boom? After all there is money to be made and places to go. But it’s still a question of common sense, how one should go about to make money. But Wall Street made money and forgot to ask how they made it. So the result, they lent to people who couldn’t pay.

They lent to people who could never pay. People with no income, no jobs or assets, read NINJA. Nothing to hold those dollars as collateral.

‘But wait!’, the lenders shouted.

‘Hey America, you need this money for buying penthouses and duplexes right?‘,the lenders asked.

‘Oh yeah, swanky homes with swimming pools and jacuzzis’, America said.

‘Great, then. We will have those homes as collateral ‘, the lenders said.

See, the win-win situation? Increasing realty price means the money lent is also appreciating.

And the entire ecosystem flourished. Everybody was happy, everybody was satisfied, glad that they are having ‘free lunches’. And in the meanwhile US borrowed to buy all those plush duplexes on the strip.

But Economics 101 says, “There ain’t no free lunch”. And of course there were none. Today the very ghost of the free lunch is coming back to US with interest.

Result: debt of circa $53 trillion dollars. Ahem ahem… Houston we got a problem!

Lock Stock and Barrel!

Wall Street got its first bill in March, when Bear Stearns got sold to JP Morgan, off what seemed to be peanuts. $2/ share. Rs 80 in the going exchange rate.

Strike 1!

Lehmann Brothers is already under the scanner of Wall Street.

That’s Strike 2!

I don’t know if strike 3 is coming or still lurking under that bush. But Fed in all these years of money spinning not once did it look up from its weekly golf games. And you know what it said, all the time?

‘Boys! The economy is in auto pilot! Nothing to worry about. Go and party!”

Auto Pilot. Murphy’s Law. Bubble and there goes the burst.

Today, Alan Greenspan is nowhere to be seen. Fed is in firefighting mode. Bears are everywhere and sectors are seeing red. Not only this, even Indian subcontinent was also hit. ICICI has woken up from its amorous night with the devil, and told a gasping Dalal Street, about its misadventure. $2billion USD down the drain, cashing on sub prime crisis.

There are lessons to be learnt and knuckles to be rapped. One: profits always ran with sanity. Secondly: profits only ran with sanity.

This crisis too will fade away, one day, but I guess, the moral, that nothing in this world runs on auto pilot will continue to haunt us for time to come.

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