Is this the beginning of the end?

I have read a funny story circulating as email in the Indian software Industry. It is the year 2050 and the currency conversion rate is Rs. 1= $1000. There is a long queue in front of the Indian embassy in U.S.A. The software enginers are anxiously waitng for their visa interview.They are perfecting their Hindi and are practising Namasteys. All they want is to settle down in the land of opportunities that is India.

Although it is imagination stretched to a certain limit, I sincerely believe that the day is not far away when people in U.S.A will look outward from the safe coccoon of theirs and see that the world in which they seemed so secure, have changed. The economic crisis that is unravelling before us is proof that all is not well in the financial sector.

The United States of America is the mightiest country in the world. The only serious opponent to it's superpower status was Soviet Union, which disintegratd years ago. The best of the world drifts towards it, attracted by the tremendous opportunities it offers and the open mindedness of its people. Unlike the mighty empires of the past which relied upon their military supremacy alone, the United States reigns because it is an economic superpower too. Unfortunately the sub-prime crisis (in which banks lended recklessly to below average borrowers) has blown out to be a vast scale economic crisis and that power is threatened now.

The crisis has it's roots in the economic growth during the years 2001 to early 2007. The system was flush with liquidity and bankers looking for new avenues to disberse loans started lending to sub-prime borrowers (borrowers whose credit history is below par) for an interest rate higher than the normal lending rate. The loans were then converted in to securities which were then sold to secondary agencies. This in turn provided more liquidity to the original lenders and they lended to more sub-prime borrowers. The governemnt also encouraged it, believing that the young and the poor who otherwise would not be able to buy homes, would be benefitted.

However the bursting of the real estate boom led to a series of defaults as the value of the homes which were the collateral for the home loans went down and the borrowers were no longer motivated to pay back their loans at their higher interest rates. This led to the value of the bonds which were prmarily based on these sub-prime loans come down. This had a cascading
effect and ultimately led to the collapse of bear sterns, one of the world’s largest investment banks and securities trading firm. The crisis has led to Lehman Brothers filing for bankruptcy. Merrill Lynch was bought out by Bank of America of $50 billion.The insurance major AIG (American Insurance Group) is also under severe pressure.

The United States had always been the greatest borrower and spender. The foreign exchange reserves of most of the nations is in dollars and they invested this in the U.S bonds. This has resulted in an increase in the available funds for the average american, but instead of putting these funds to productive uses, they were often squandered away on consumer goods and
luxuries. During the good times the consumers spent every penny they possibly could and borrowed on top of that.The americans has also the highest credit cards debts. Between 1999 and 2004 household debt grew twice as fast as after-tax income. In good times it is a cause of concern but in bad times like these it is disastrous news.

So the big queston is, Is this just a temporary setback and will the economy correct itself? Or are the underlying problems so great that it is simply impossible to correct them and the system itself need to be overhauled? We the proponents of free market reign had always believed that minimal regulations will ensure a thriving economy. Is that the truth? Only time will tell.