Wednesday, September 24, 2008

Leveraging - The root cause for any crisis.

USA, the so-called role model for developed countries, is in the midst of a severe economic crisis. The magnitude of the crisis is such that it is hurting all countries across the globe one way or the other. We are going to feel the heat sooner or later, if not it being felt already.

I feel the root cause for the entire crisis is “Leveraging”. In fact, I feel that the root cause for any financial crisis is Leveraging. History proves it time and again, but many individuals as well as corporates cannot run away from this temptation for too long. I was wondering as to what would it have been, if there were no leveraging. One thing is for sure. The world wouldn’t have been as interesting a place to live in, as it is today.

Traders who resort to leveraging always get the feel that small traders are the ones who loose money in the markets and it goes on to fill the pockets of the biggies but the recent crisis has proved that none is above the markets. Bigger the pockets bigger the holes. Markets are supreme and anyone who tries to go over board and beat the markets is certain to get beaten. It is difficult to resist the temptation of leveraging and hence one must learn discipline and rules of the game ie.. entry and exit points. In case of the big bang investment banks, they certainly lacked the former. They were too aggressive and were trying to rule the markets. The extent of leveraging was such that even though they knew the exit point, there were no takers and the falls that ensued took everybody along. US was teaching lessons to the whole world but now it’s the time for it to learn. It surely completed a full circle.