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Chaos theory in action

With a global financial crisis unfolding, there is naturally a surge of interest in the ideas of any economist whose ideas can shed light on the current problems.

india Updated: Mar 18, 2008 22:26 IST

The United States is no longer sneezing but is seizing from a financial crisis that is spreading turmoil across global financial markets. Even though the sub-prime mortgage problem that surfaced a year ago affected only one private sector bank here, the spread of the crisis to the housing and credit market has reverberated in Indian stock markets. The bellwether Sensex registered its second largest fall on Monday following the bad news regarding the bankruptcy of US’s fifth largest investment bank, Bear Sterns. There are bigger US investment banks also on the verge of going under. All this spells bad news for our stock markets as they are not immune from the contagion effects of the financial crisis emanating from the world’s most powerful economy.

The big question on investors’ minds is where the market is heading. Nobody really has a clue. However, what seems certain is that any prospect of the Sensex climbing back to its January peak of 21,206 points is not on for a long, long while. The outlook remains distinctly bearish as the market hardly rallied on Tuesday. Analysts have been talking of 14,000 points as possible support levels. But there is no way to divine the market’s future direction when a financial meltdown is underway elsewhere. All that is possible to say for now is that volatility will persist as Indian markets take their cue from their Asian counterparts and, above all, those in the US. This synchronous behaviour should set to rest any lingering hope that Asian markets have decoupled from the US.

With a global financial crisis unfolding, there is naturally a surge of interest in the ideas of any economist whose ideas can shed light on the current problems. Perhaps the one who comes closet is the late US economist, Hyman Minsky, whose work indicated that financial fragility was integral to modern capitalism. Whether the unraveling of the current financial crisis will plunge the US and world economy into a prolonged recession, however, is a prospect only time will tell.