During the past two decades, many people thought that they were rich, as their properties and equities appreciate in value. This is false wealth on the back of an asset bubble.
They are the same assets but they were priced at inflated values due to low interest rate, financial engineering and leverage (i.e. high borrowings at low cost).
The global financial crisis of 2008 had brought the asset prices down to earth. Suddenly, many people realized that they were not so rich after all. The affluence brought about by financial innovation was an illusion.
We went through the collapse of the US housing bubble together with the associated asset backed securities, collateralized debt obligations, credit default swaps and other strange products. We will now face a second wave of problems with the default of Dubai World. What next?
Unfortunately, the people who suffer most will again be the ordinary people. They will face higher unemployment and still have to pay the heavy mortgage on their overpriced housing.
Those who think that the free market capitalism can create wealth should re-think again. Is it truth wealth or false wealth?
Tan Kin Lian
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