Summary
It seems like a full circle - now more and more government action is getting recommended in the all important financial sector in countries where capitalism was born and thrived. Surely, the situation has to be absolutely desperate for even such a recommendation to be made. The fact that it is being welcomed means that it is total u-turn in thinking, perhaps dictated by survival instinct. So, the message remains there - it is a short-term measure adopted in an emergency and it must stay this way. If adhered to, we should not see more bail-outs in the coming days.
Analysis
While government bail-outs have been largely welcomed by industry and consumers, the fact that they had become absolutely necessary afloat means that things were allowed to drift for too long. And why would anyone allow this to happen? It is simple complacency in the way things are getting done and no review of procedures followed and their implications. As long as money was coming, the procedures were held to be prudent. There was no focus on what they were doing to future actions. Risk management theories have been developed in developed countries but seems like they remained in text books - there was no application of the theories - no application of prognosticating worst-case scenarios and analyzing the damage they can do; no loss-limits set. Possibly, this happened because it was believed that use of derivatives are in themselves risk hedging strategies. Everyone forgot that every technique is accompanied by prerequisite conditions because easy money was coming. Lesson - whenever things look too good, be on guard. There has to be an abnormal reason for abnormal profits and often the abnormal reason is our inadequacies of analysis and caution. Hence, bail-outs in the developed countries are not likely to be emulated by developing countries - central bankers in India and other developing countries have been focussing heavily on prudent banking measures.
