Markets may be rational. But its players need not necessarily be always rational. When irrationality rules the markets, its ill-effects will spread not only across the nation, but also across the shores. And that's what today the world is encountering. Obviously, such a giant-size crisis calls for unity of all rational beings in finding a way out.

All is not well with the global economy, for there appears to be no respite from the storm blowing through the American financial markets. One after the other, the iconic institutions of capitalism, are falling aside forcing the Fed Reserve and the US Treasury to bail them out in one way or the other. It is the classic phenomenon of a financial crisis: failure of one bank inflicting losses on the other bank that lent monies to it, which in turn may fail to repay its debts, inflicting losses on its lender and thus widening the circle of financial failures. This sudden appearance of counterparty risk has simply frozen the markets across the western countries. Despite the policy makers of the US implementing even unconventional measures, such as purchasing mortgage backed securities and launching "Troubled Asset Relief Program" to ease banks from their illiquid assets, no substantial improvement could be noticed in the credit markets. With no bank courageous enough to lend to other banks, deleveraging has left its scar on the market: selling of assets in want of capital leads to fall in prices to even lower levels, which means more and more need for fresh capital. This has obviously further tightened lending to real economy—producers and consumers—which means fall in investments by businesses and drop in demand. This has further slowed down the growth of the economy. As growth drops, businesses are sure to aim at cost-cutting exercises, which means layoffs. The insecure consumers will further reduce their spending. That is how the financial crisis is feared to spread itself to the Main Street—the real economy.

The morphing of the financial hailstorm, which started about 18 months back as the US subprime crisis, into economic slowdown is all but over: consumers are cracking under the pressure of non-availability of credit on the one hand, and steep fall in employment on the other. To arrest the spread of economic downturn and its intensity, the central banks and governments on either side of the Atlantic have redoubled their efforts, with bolstering from banks, by pumping in additional capital, providing greater fiscal stimulus to jump-start the economy, and cut interest rates further down. Yet, nothing substantial has been noticed in terms of improvement in demand. Of course, policy moves are known to yield results only after a time lag.

Analyst Magazine, American Financial Markets, Global Economy, Financial Crisis, US Subprime Crisis, Asset Relief Program, Banking System, Global Financial Markets, Foreign Direct Investment, FDI, Small and Medium Enterprises, SMEs, Market Economy, Chinese Economy.