In A Few Fateful Days

That reality was recognized with the Asian crisis and the collapse of Long-Term Capital Management in the late 1990s, but they were dry runs for today. The leverage and exposure then was alarming by way of comparison with what came before, but only a fraction of what is at stake in today's crisis. The total amount of outstanding derivatives is in the neighborhood of $600 trillion, and even if only a small portion of those represent "real" money and potential losses, that still could approach the entire GDP of the planet.

As is usually the case, innovations have outpaced institutions. To put it another way, the global financial system catalyzed by New Economy technology has evolved at light speed, while the world's governing systems and bureaucracies are legacies of a time not far removed from the telegraph. That explains how things could have gone so far, so deep without any regulator sounding the alarm bell—that and a prevalent ideology in Washington against the notion of regulation, period. Yet that should also have meant that governments and governors would be paralyzed in the face of the crisis.

They haven't been. In fact, the very tools that enabled the crisis empowered the response. Each national bank, finance ministry and treasury department worked independently and in tandem across great distances, sharing information about balance sheets, outstanding liquidity and potential obligations with the same clicks of a button and the same models. They were able to act with emergency powers as national governments but more in sync than they would have been sitting next to each other in the assembly hall of some international ministry. They were, in short, able to act as a global virtual institution.

The model—not surprisingly—is the Internet itself. Dispersed among multiple servers, it has no physical location, but it acts as a system by virtue of its ability to link many other locations so seamlessly. Today, state governments, or at least central banks and treasury/finance departments, are functioning in similar fashion. Just as the Internet enabled financial contagion to spread more quickly than ever before, so it has allowed national agencies to respond with unprecedented speed and efficiency.

Of course, there's the rub: no one knows if what has been done so far will work. The crisis hasn't ended, and equities across the world continue to go up and mostly down with startling volatility, causing massive erosion of wealth. But the fact that action has been taken the way it has so far should be a sign that what got us into this mess may be a way out, as surely as a vaccine carries the seeds of the disease that it seeks to eradicate. This globally coordinated bailout isn't finished, not by a long shot, but the way it has been handled so far signals that the brave new world may contain its share of positive innovations as well as creative destruction.

Karabell is president of RiverTwice Research.

© 2008