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The markets seem to be questioning the government's ability to find a workable solution to this current turmoil; in other words, government's ability to find a fix. And this is becoming increasingly evident by the way markets have reacted in the past few
weeks. Although one might say that the market itself is Inefficient by design and Dysfunctional in the current environment. And there are also those who would say that the whole mess was created by the same market participants themselves in the first place; people who thought the party would never end and carried on with their reckless business practice.

So going by the norm that the market is always right is a probably flawed perception? Well, whatever one might say, it's hard to entirely disagree, especially when we have a market that is increasingly behaving like a yo-yo. It either gets too optimistic, or finds itself in a fluke rally, only to shed all its previous gains, or it takes an extreme negative view on everything loosing fore-sight.

Some would disagree with the above observation and some might agree. Whatever side you are on, one can safely say that without government support, the market may not have survived.

But even with government support, the market is not working as it should.

Is the government missing something?

Well, the government has not been able to address the core issue. Liquidity is not the only dark cloud hanging over the market, there is also a big question mark over the Sustainability of the whole system. While all the actions on the part of the government have so far been on resolving the liquidity issue, the government has failed to address the sustainability question. The market is extremely fearful of nasty surprises going forward.

Should we worry about the Sustainability of the system?

Besides bailing out the banks, the governments of the developed world and some in the developing world are borrowing heavily to finance their stimulus packages which are aimed at fighting the deepening recession. Their fiscal position is under a lot of pressure. Some governments in the developed world are now running double-digit budget deficits. And there are no reasons to suggest that these deficits won't increase further, especially when jobs losses are mounting and the recession is deepening and shrinking the tax revenues.

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Sanjeev Kumar is Chief Executive Officer of Delamore & Owl Group of Companies (Website: www.delamoregroup.com), Toronto, Ontario, Canada. He holds dual Master's Degrees - one in Business Administration and another in International Finance. He has been the recipient of the "Southeast Asia Young Achiever's Award" for Year 2002.
Article posted on March 14, 2009.