A lot of postmortem analysis has already happened on the fall of Lehman, and financial crunch that has happened after that, world over.

It is interesting that it took us fall of Lehman to realize the problem in investment instruments, and prior to that we assumed everything to be hunky dory. I see this as a failure of,

1) Credit / Rating / Risks assessing agencies / departments / resources,

2) SOX and other internal audits, and

3) Governance model adopted in a capitalist economy.

Whatever the technical reason for failure of this magnitude; I as laymen see it as an absence of market for “investments instruments” held by various financial institutions. This is one part of the problem, and may be a trigger point. Now, the nations after nations are realizing that they are in similar situation as US, because all of them either had had capitalist economy, or were having heavy influence of US economy, and had very little or none controlling regulations; especially, when it comes to financial institutions, and investments.

There is no harm in having this kind of model (read governance model); however, it has very “simplistic” underlying assumption, “Everyone works under the normative principles of rationality, responsiveness, and responsibility”.

Put is simply, it means, we have assumed that an economy can work under highest order of governance; that is, where people themselves can govern the actions of theirs with highest order of moral and social responsibility. The simple it may sound (that is why I termed it as “simplistic”); however, it is very idealistic in nature.

We live in a world where everyone is loyal to themselves first, and then for others. I would say nothing wrong with it, as it is a human nature. However, if it were true, then one cannot have this kind of governance even a small group, let alone an organization or an economy. Therefore, the fault lies with the choice of wrong governance model.

I would go to an extent of holding the rating / risk assessing agencies and auditing agencies equally responsible for this debacle. The reason being, their existence is to govern the actions of assessed organizations, and if they cannot do that task diligently, they cannot justify their value to the system, and hence their existence.

This failure depicts the failure of the system, and not that of single organization. The failure of a given organization has only exposed the inadequacy of the system (to put it very mildly).

How it has happened is not important; because, it is very obvious that everyone wanted to make a kill when the going was easy. Though, they had disguised it under the phrase of “creating shareholder value”; however, fact is it was pure personal greed. Therefore, the important thing is “WHY”; that is what I have tried to cover so far.

Now, let us turn the focus on aftermath. It is visible to everyone, there is a liquidity crunch, stocks are going down, people are apprehensive of new investments, production across industries are going down….. a perfect case for recession.

I can understand the liquidity crunch, as most of the “money” is buried under those bad financial instruments, which were created to make money. However, I personally believe the swings in stock / equity market are more emotional than rational. The reason being, the “decisions” of individual investors are more based on actions on the “news” at any given point in time, than any rational assessment.

The governments across has world have realized the gravity of the situation, and have also put in place the initial corrective measures. Initial, because, those are based on “initial” assessment of the situation, and during the course may require some moderation. The reason being, as economies progress more information would get revealed, which may initiate some more actions, or moderations to earlier implemented actions.

Though it is obvious to have a fear of unknown under these kinds of situations; however, one should also make an effort to look at things rationally. The things have gone wrong, a fact no one can deny; however, it is also a fact that nations have realized this fact, and are making an effort to correct it. Obviously, it cannot be put right overnight, but then it did not happen overnight either. Therefore, I believe if all think rationally, and if corrective measures are indeed to correct the ill effects (which I sincerely believe in), and are effective to address the root cause, then we can avoid to be the victims of our wrong actions (by encouraging recession due to negative thinking).

Of course, it is my personal assessment, and with my limited knowledge and access to information, could either be lopsided or wrong. However, one thing I’m sure about is that answer lies in “why”, and not in “how”. That is, address the “why” and put a brake on rumor mills.