I received an email from a friend in Hong Kong this morning:

Asia is watching in shock and wondering why if the problems are in the US, are the markets here selling off more dramatically.

It is back to fear tactics which immediately offset the fight or flight syndrome. In this case it is definitely all about flight. Asia in particular appears to be more volatile than other markets. It is based on sentiment according to Dan Parr, the Asia-Pacific head for BrandRapport, a consulting firm. Morgan Stanley might have released very positive third quarter earnings but nobody wants to believe that this is any indicator of their health. It is like withdrawing your bet from the fastest runner in the race because everybody else tells you that he’s surviving on steroids. Morgan and Goldman stock has come under such selling assault that their share price has gone down drastically. Investors are instead snapping up three-month Treasury bills with virtually no yield pushing gold to its biggest one-day gain in nearly 10 years. The only truly happy person must be the Indian housewife who has become rich overnight by virtue of her stridhan (gold jewelery inherited by an Indian woman at the time of her wedding).

My friend continues her email:

Also America’s credibility as bastion of free markets has fallen hard.

Indeed the Fed’s bail out of AIG, Fannie and Freddie are perceived by many as a free market detour. A free market economy refers to a system where the buyers and sellers are solely responsible for the choices they make. Free market gives the absolute power to prices to determine the allocation and distribution of goods and services. However, the notion of free market is mainly a theoretical concept as every country, even capitalist ones, places some restrictions on the ownership and exchange of commodities.

Whether the bailouts were a good idea or not remains to be seen. Some remained concerned about the depletion of the Fed’s resources, others remain incensed about the use of tax dollars. However one has to consider the the ripple effects of the failure of a Fannie, Freddie or AIG on the US and then global markets. Shockwaves in Asia are case in point. Personally, I am still annoyed that the Fed would not put up a paltry $4 billion to bail out Lehman Brothers. Had it done so, Morgan Stanley and Goldman Sachs might be having a better day. Not to mention the 15,000 Lehman employees who did not get bought by Barclays.

Share