Even though the Economist held that the "world economy which has fallen off a cliff," it was comforting to see the photos and read the news of a beaming Chairman Dhammika Perera of the BOI holding out that just 50 factories have closed and only a net job loss of 770 had occurred- that this was "no big deal." His view that the effect on employment of the downturn was "insignificant" in the context of the world wide economic disaster was bracing; adding to this was his reassurance that his BOI was attracting more FDI which "achievements are quite satisfactory." Lest an impression was given that the Sri Lankan economy was Teflon coated, a few days later, the Governor of the Central Bank was making headlines with dire warnings of an impending "economic catastrophe." Disappointingly, while the warnings were not rocket science, no policy prescriptions to remedy the situations were reported.

Chinese Premier Wen Jiabao in a departure from Chinese practice directly fingered the greed of the Wall Street’s "unsustainable model" of "blind pursuit of profit" as being responsible for the meltdown. Indian Premier Manmohan Singh blamed the "massive failure" on the authorities of "developed societies," while Russian Premier Putin fingered the "irresponsibility of the system [in the US]." Brazilian President Lula da Silva held that the "US bears the brunt of the responsibility for the crisis." Nobel Prize laureate Joseph Stiglitz: "Now we are paying the price for failure to act…Today we are in the middle of a `made in USA’ crisis."

The meltdown is the worst collapse ever of financial institutions in the US on a scale not seen in 70 years which has spread to the Europe and rest of the world. The consequence was, as the Economist held damningly, "the world economy had fallen off a cliff." Fareed Zakaria noted all the elements of a collapse: "Choked off credit lines, massively leveraged firms, assets gone ‘bad,’ sinking mortgages, panicked consumers, and paralyzed companies….American financial system is effectively broken. Major Banks (are) moving towards insolvency." By one estimate, the stock market lost $50 trillion in value and banks and insurance giants were gasping and had to be saved: Citibank, Bank of America, AIG – many more in UK and Europe. Francis Fukuyama summed it up as the "vanishing of more than a trillion US dollars…in a day. A $700 billion tab for US taxpayers. The scale of the Wall Street crack up could scarcely be more gargantuan." Andy Serwer, Managing Editor of Fortune, "In one weekend, the federal government swallowed up two gigantic mortgage companies and dumped more than $5 trillion…of the firms debts onto the taxpayers...Lehman Bros goes [bankrupt] and Merrill Lynch is taken over by Bank of America...AIG, a $1 trillion insurance company, is rescued with $85 billion from the US taxpayer."

The vaunted laissez-faire and untrammeled free market economics were/are in ruins. The Economist noted that "people are furious with politicians, central bankers and immigrants." British Premier Gordon Brown placed the final nail in the free trade coffin when he said, "we are seeing…the collapse of a failed laissez-faire dogma…the old free market fundamentalism has been found wanting…Laissez-faire has had its day." US Treasury Secretary Thimothy Geithner confessed to the US Congress "Our system failed in fundamental ways. To address this will require comprehensive reform. Not modest repairs at the margin, but new rules of the game."

President Obama acknowledged that the United States is "certainly" to blame for the global economic downturn. "What’s difficult to imagine is that we didn’t act sooner." He did not try to deflect the vociferous blame directed at Washington and Wall Street, by French President Nicolas Sarkozy, German Chancellor Angela Merkel and leaders from developing countries, acknowledging that such criticism were justified.

How did it the mighty US economic behemoth and the countries slavishly hitched to it come to this?

Benjamin Friedman, a onetime Economics Professor of Harvard, saw the origin in American governmental and consumer profligacy of the late 1980s: "we are living well by running up our debts and selling off our assets. America has thrown itself a party and billed the tab to the future…Our prosperity is false prosperity… [it is] built on borrowing…and living beyond our means." Foreigners owed the US in 1980 and now the country was $2.6 trillion in debt to them by 1989. The warning of the irresponsible consumer extravagance, of living beyond ones means and government extravagance of unlimited expenditure based on extensive (foreign) borrowing came in a book aptly titled Day of Reckoning. The year was 1989; 20 years later that day of reckoning had arrived.

However, the Economist saw the Asian contagion of 1997 as a more recent source of the origin of the meltdown. Because of that painful lesson Asian countries were driving up savings and accumulating huge current account surpluses for insulation: never again foreign funds in investment which would flee at the slightest tremor. "Asian nations-especially China-have been determined to be a part of the global capital markets but not run current account deficits." Chinese governments stashed away $2 trillion in US Treasury bills as a part of this trend as did the cash rich UAE states, Dubai, Abu Dhabi and Qatar, who were investing in the US and Europe.

Thomas Friedman, the high priest of free markets: "We built more and more stores in America to sell more and more stuff, which was made in more and more Chinese factories powered by more and more coal that earned more and more dollars to buy more and more U.S. T-bills that got recycled back to America in the form of cheap credit to build more and more stores and more and more houses that gave rise to more and more Chinese factories." 

So while Asia saved, the US government was spending on two fruitless wars in Iraq and Afghanistan by borrowing from the Chinese to the tune of trillions of dollars. At the same time the US consumers were running up debts living the American dream as if there was no tomorrow, with compliant banks falling over each other to give credit to hundreds of thousands whom they knew could not repay: "Crazy lending practices ensued"- loans to those on welfare, loans to buy multimillion dollar houses to those who were earning $40,000 a year.

Adding fuel to the burgeoning credit was Bush’s almost decade long drive for a "home owning society" under which banks were encouraged to extend extensive credit. The mushrooming mortgages were further fueled by the commercial and investment banking separation removed by Bush’s drive for deregulation. Banks were now free to lend, lend, and lend. Huge doses of plain, mind-boggling stupidity drove the trend: "Low interest rates made mortgages affordable, including for subprime borrowers with shaky credit," with little or no paper work. "Millions of Americans [had] come to believe they could get something for nothing by taking on debts they couldn’t repay." The U.S. economy got "finance-heavy and finance-mad." A disaster was in the making.

While the bubble water level was rising, "American know-how and talent made the [impending] disaster worse." Andy Serwer summed up what happened: "hedge fund operators…and whiz kids…devised …new financial instruments, creating a financial Frankenstein the likes of which we had never seen" dreaming up "complicated mathematical models of risks. They thought they had these sophisticated tools to reduce risk…the false lure of the Gaussian copula function, the formula that gave finance whizzes the illusion that they could accurately calculate risks."

"Too many banks got involved in exotic and incomprehensible financial innovations." It is an irony of ironies that Lawrence Summers, Chief Economic Advisor to President Obama, was involved in advising an elite corps of math wizards and scientists devising investment strategies for D. E. Shaw & Company, creating the very people who contributed to the debacle he is helping to put right.

Using the intricate mathematical models so devised, banks [reasoned] their way into backing what are now the infamous CDOs - collateralized debt obligations also called "credit default swaps" or "toxic paper." These were mortgage obligations bunched together and sold off to others (such as AIG) who took on the risk for a fee, freeing the original seller of the package from obligations to back up the loans. These were in effect packaged mortgages which had no real chance of being repaid by the insurer! "The failure to assess an array of risks they were taking has emerged as a key element in the multitrillion-dollar meltdown of the global financial system." This was the undoing of Lehman Brothers (which went bankrupt) and AIG the world’s largest insurance company (saved by the US taxpayer).

A heady cocktail of greed combined with unbelievable, if brainless belief that the bubble will last, drove the system in an upward spiral. Adding to the brew was the incredible arrogance of bankers whose belief in the infallibility of their financial models buttressed with the belief of a perpetual growth blinded them to the waiting disaster; the spiral had come to the edge of the precipice: there was nowhere to go but off the cliff.

The inevitable happened: housing values began to fall as boom in construction of houses led to an over-supply of houses overwhelming the demand for them in Las Vegas and Miami. Unable to pay, with no down payment involved, hundreds of thousands of house owners walked away as the panic spread across the US.

Rising delinquencies mean that CDOs lost value. It was no surprise that the banks could not honor the insurance or the CDOs taken out: Bears Stern went down; followed by Lehmann Bros. AIG’s London branch issued insurance or massive amounts of CDOs while not having adequate reserves to cover claims if things went badly wrong, which is what happened. "When the housing market collapsed, derivatives stoked the fires that ignited inside some of the biggest banking companies."

With AIG unable to honor the sudden demands of massive insurance mortgages albeit CDOs they had issued, the rout began, taking down not only the mortgage loans ($1.2 trillion and a further $39.9 billion), but also student loans ($5.6 billion), credit cards ($9.8 billion), auto loans ($2.4 billion) and home equity ($61.8 million) along with it: a gargantuan collapse involving an astounding $1.8 trillion.

The consequence was that in the space of ten days, the government forced a merger of Bears Stern with JP Morgan while Fannie Mae and Freddie Mac, the government owned mortgage giants, were secured with government funds. Merrill Lynch, suffering billions in losses, endured a fire-sale to Bank of America. Morgan Stanley, one of the two banks still standing was "pummeled in the market." AIG had 70 million customers, a $1 trillion exposure, and continuing dealings with key world financial institutions. If it was unable to meet the insurance obligations of its "toxic paper" and was downgraded, it would have led to a domino like "death spiral" collapse of the entire US financial system.

Faced with that outcome, the US Treasury and the Federal Reserve launched a taxpayer funded entity that took over hundreds of billions of dollars of troubled mortgages from banks and the AIG. So tax payers, albeit the government had to come once more to the rescue.

In the vaunted private sector utopia that is US failed businesses should die under the dictate of the God-like ‘invisible hand’ of market forces. But these institutions had grown so big that they could not be "allowed to fail." All the profits when they are made, are theirs; the failures become wards of society and the taxpaying public!

British Premier Brown emphasized what was at fault was not the absence of rules but the fact that "the rules were flouted with impunity," arguing that the world meltdown was "changing the public’s expectations of business values, and they no longer believe a successful economy has to be based on high levels of risk: Most people want business to have the same values as they practice in their everyday life. People would rather reward hard work rather than risk-taking. They want to support enterprise and not excess. They want to support people that take responsibility and not run away from it"

"‘Greed is good’ is no prescription for the good society," he intoned "neither is it the mark of a good economy…We [should] celebrate men and women of integrity who work hard, treat people fairly, take responsibility and look out for others… rewarding hard work, co-operation, responsibility while penalizing excess and reckless risk-taking - which will ensure our market economy works efficiently and fairly…these are the principles that [should] guide and govern our economic life." Lofty word to world governments struggling to come to terms with the disaster.

Where are the US and the world economy heading, if and when the meltdown is averted and resurrection begins? Would the restored economies carry on regardless until the next meltdown comes along? Or, as Premier Brown emphasized, take stock of the system and put in place values, limits and regulations which will drastically reduce the dominance of these who do not produce wealth, but those who plunder by manipulations and fraud?

The Group of 20 –G20 decisions gives an indicator to what collective efforts will be made in this direction:

New reforms of the global banking system, including institutions like hedge funds, and other parts of the so-called "shadow banking system" coming under global regulatory control of international colleges of supervisors for national regulators; the injection of an additional $trillion into the global economy through measures including a $500 billion increase in the funding available to the IMF; an increase in the availability of money for developing countries through the IMF’s "special drawing rights" to $250 billion with a further $250 billion being set aside for trade assistance; reform of institutions like the IMF to allow countries like China to have greater influence; senior posts at the IMF and the World Bank will open to candidates from the developing world; $50 billion for the world’s poorest countries.

Much will depend on what emerges from this gargantuan task.

Whatever the outcome, there is clear evidence that a return to the past, where Asia exported and the US consumed, is not unsustainable. As TIME described it "Asia’s [economic] model resembles a vast Ponzi scheme, one that is precariously perched on the expectation that Americans will continue buying more and bigger TVs, computers and cars forever." The US is now in debt to the world to the tune of trillions of dollars while its citizens are equally "debt-ridden, house-poor and unemployed."

President Obama was clear that the US would not be the "voracious consumer market," of the world while he urged other nations to do more to revive growth in their home markets. "We cannot rely on the U.S. being the global locomotive," said Willem H. Buiter, a London School of Economics professor. "Those days are gone."

This however, is easier said than done. It involves a major restructuring of a massive and a complex Siamese-Twin like relationship : "China’s economic fortunes remain deeply entangled with those of the United States, its biggest customer, rival, debtor and still — by far — the world’s biggest economy."

As Americans, having no access to unlimited credit, react by acquiring a "frugal mindset," cut spending and even save, Asia will have to look inwards to create domestic markets. Already, in India and China with huge domestic markets are looking inwards: sales of cars and white goods are rising, because of swift and strong economic stimulus measures implemented. Asia will have to look more towards China, Brazil, Russia, India and Middle East to create a market on which its future will depend. Other Asian leaders (some of them sleeping), will now have to awaken to the new challenge of the global shift which is beginning.