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Market Watch: Time for soul searching...

Derivatives are a very intrinsic part of a developed capital market but in a market dominated by extreme speculative fervour, it can be dynamite, writes Udayan Mukherjee.

business Updated: Jan 27, 2008 21:14 IST

When investors lose as much money as they did last week, they feel crushed. What follows that despair is anger. “Someone” has to be responsible for the debacle. Fingers are pointed at the government, at stock exchanges, at the market regulator, at stockbrokers and at the media. Since it is difficult to own up responsibility for a massacre of such proportions, the “system” is blamed. The administration, on its part, perhaps only to duck public ire, often responds by announcing witchhunts. Hunts to identify “who” was behind such a crash. Sadly, such witchhunts always end empty, as they have to. The reality is that those wounds are self-inflicted.

Let’s face it: we are a nation of speculators. We love to get carried away. Very few people in this country approach the stock market with a constructive, long term capital building mindset. A fact which perhaps explains why such a small percentage of our population “invest” in the stock market. In mature stages of a roaring bull market, speculators rush in by the hordes to make a quick buck, do it for a while, often create a temporary market top and vanish, having sacrificed all their gains in a market meltdown. It has happened in the past and will happen again. The only difference this time was that speculators had more fire to play with, in the form of a destructive toy called stock futures. Derivatives are a very intrinsic part of a developed capital market but in a market dominated by extreme speculative fervour, it can be dynamite — as we saw last week. Now,the temptation will be to throw the baby out with the bathwater but that's not a clever thing to do. That won't change anything, people will find some other ways. What needs to change is the attitude.

Having said this, could some things have been done differently this time? Oh, sure. Maybe brokers got carried away with the amount of easy margin they extended to clients, maybe exchanges were not as vigilant with their margin and risk assessment systems as they could have been. But that is not the central reason for the crash, it is at best a catalyst. The reason is pure, unadulterated greed. Greed which led people to ignore every basic tenet of financial logic, believe every crazy dream that was articulated and go out on a limb. My heart bleeds for people who have been financially crippled in this fall. Yet they have none to blame but themselves. There's an old saying "Burnt children fear the fire."I hope that holds true for Indian stock market investors.

(The writer is Executive Editor, CNBC-TV18)