Does a new financial and credit crisis loom due to the measures designed to stop it?

It is with almost terrifying certainty that another crisis threatens due to the extraordinary measures that have been undertaken to prevent the current problems ballooning into a full system shut down.

Most of this can be traced back to the remarkable phenomena of bubbles, many of which still exist hidden between deep within financial markets. These speculative price illusions will always exist, due to the adeptness of certain firms at inflating the particular value of a specific asset.

This occurs on a day to day basis. Property can have a 10-15 percent price variance based on the value given by a particular market index or estimated review.

Even now this is occurring, as damaged markets try to recover.

For all of the severity of the crisis, and the harm caused to global stocks, banks, property and the gross domestic products of nearly every country in the world, there are still massive amounts of money in the world market.

Or more accurately, and dangerously, still abundant amounts of credit. True, large amounts of it have subsided, mostly due to the fact that banks have become more aware of the inherent risk (especially in interbank trading) but either way, the world’s growth is and always will be supported by the foundation of lent monies.

In essence, this could be traced back to the root of all the problems, as the modern day blur between actual money and credit has blurred.

As a New York businessman (who wished to remain anonymous) said “if it was measured in actual money, I would be close to broke, but in terms of credit, I am one of the richest men in the city!”

Many of the measures in place now throughout the world economy are a deadly combination of low interest rates, low asset prices, and incredible opportunity.

There is also the swing of debt from the private sector to the public sector. It is quite incongruous to think that arguably the chief architects of this crisis in the banking districts are now better off due massive influx of taxpayers moneys. The world’s debt, for so long part of the risk takers and entrepreneurs, now are saddled with the world’s governments.

But there are a lot of prospects in the world for those who know how to look and how to leverage, and many banks will look at excessive risk taking to recoup heavy losses over the last two years.

Some financial markets have made strong gains in the last two or three quarters, and pockets of banks and fund managers have emerged “from the ashes” almost too strongly. Many European and American Central Bank officials have said that the performance of these institutions is against the grain, and show some uncomfortable parallels that were seen prior to previous disasters.

The same resemblances are being seen with some economist’s views of capitalism, stressing that one of the cores of the predominantly western economic system is that it often lends itself to auto-correction.

However, the laissez-faire approach of free market economies was seen as being largely responsible, as organisations ran rampant without any restrictions or impositions from their governments. Now, should not central banks and countries treasuries be reversing modern trend and putting in, dare we say it, slightly communist principles.

After all, those same governments effectively disregarded the basic tenets of “capitalism” when pumping taxpayer’s money into the system to stabilise it, which then meant that governments around the world suddenly had stakes in large portions of the private sector.

Governments all round the world have actively looked to impose some restrictions and measures on businesses, the most dominant being the curbing of executive payments.

But risk taking is inherently part of the free market model and capitalism.

Would the governments have been able to pump trillions of dollars into the markets if they themselves had not profited from the remarkable levels of income that the leading financial institutions had sustained for the years leading into the crisis.

Lest we forget, the world’s economic growth was humming along at an astronomical rate after the dot.com crash.

But now there are so many opportunities, as the “dead shells” of so many businesses and industries represent massive prospects, and despite the fact that the financial system is still recovering, there are trillions of dollars circulating now that weren’t in place before, thanks to government stimulus packages.

The real fear is that as businesses and banks move to rebuild their balance sheets, it is hard to be allayed that they will not (are not) making the same fundamental errors that caused the system meltdown in the first place.

The world we live in now is a credit based economy, and often the measurement and assessment of such credit is based on the value of assets, bonds, shares and the like, which as history has now proven to us, are susceptible to bubbles and inaccurate price portrayals.

The crisis wasn’t so much a crisis as a giant “correction”, and for all of the opportunities and growth afforded by capitalism and a free market mentality, the reality is that it is likely that we will be prone to another such correction in the coming years.

But with governments encumbered with record debt levels, what will be the solution and fix next time round?