Effective monitoring is sine qua non for stability in financial markets which again is essential for economic growth.

Reading a feature on the US subprime lending mess in a recent issue of the Financial Times that narrated how a small company in California offered services that can show a low credit-score borrower as an `independent contractor' on its pay roll and also provide a payslip as `proof' for a fee of $50 and give a glowing reference about him to the lender for an additional fee of $25—all to enable the low-rated home loan seeker to avail the loan one wonders if American borrowers are in anyway different from their counterparts in India. A true globalization of the art of seeking bank loans! This commonality doesn't end here: even lenders are reported to have made few checks about the creditworthiness of prospective borrowers while granting mortgage loans to such out-of-pocket borrowers. The net result is free flow of mortgage loans.

Anecdotes aside today's freely flowing information about the mayhem in the US subprime market raises a fundamental question: How come such a mature market allowed credit to flow so freely? And there appears to be no single answer for it is a culmination of one leading to the other and ultimately the whole impacting the financial system with so much more synergy that it is today sending ripples all around the global markets. If one looks at the whole episode dispassionately its origin can safely be traced to the US tech-stock bubble burst and the September 11 terrorist attacks that pushed the US economy into recession in 2001.

The Fed taking a cue from the experience of the Japanese central bank's inability to stimulate economic growth and shovel its economy out of deflation in its anxiety—as reflected in one of the statements "Even though we perceive risks (of deflation) as minor the potential consequences are very substantial and could be quite negative"—to checkmate recession turning into deflation has undertaken a series of interest rate cuts. The lowest interest rate of 1% almost stayed for a year. The theoretical underpinning behind such series of interest rate cuts is obvious: they are expected to encourage housing and consumer spending till at least the business investments and the resulting exports pick up momentum so that deflation can be kept at bay.

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