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The parents had been doing business conservatively. The son took it further and tried to expand the business in a big way, but the concessions turned sour. And the losses and liabilities were huge. The parents had to sell everything to rescue the son, who created liabilities that outweighed the family's assets. I was very sad to hear this story back then.

The plight of the Chiang Mai family more than 20 years ago is similar to what we are seeing now with global financial capitalism.

The US and most other countries jumped on the bandwagon of financial capitalism. They all allowed their banks and financial institutions to take great risks by leveraging their finances at 50 to 100 times their capital. In good times, the banks and financial institutions made filthy profits from leveraging the market upturn. There were periodic market downturns, allowing the banks and financial institutions to make adjustments. Wall Street firms were king.

But in this crisis, the financial bubbles, driven by greed and excess, are so huge that they threaten to pull the global economy down with them. The banks created all kinds of crazy instruments and commercial paper on top of their normal commercial loans. If they had practised traditional banking, they would not have suffered this great damage.

Instead the banks got the blessing from banking authorities and legislators to embark on liberalisation. In the process, they and the financial institutions created financial instruments that even the experts had, and have, a difficult time understanding. These instruments piled up on each other and were issued and traded over the counter.

Since the financial markets are now collapsing, these instruments have become worthless. They have become just pieces of paper. The banks are running short of liquidity. They need cash to meet the obligations from their clients or counter parties. But they can't raise cash from issuing debt any more. There are no buyers of the debt instruments issued by the banks. So the banks are stuck with massive liabilities and a deterioration of their assets.

Like the Chiang Mai family mentioned above, sovereign governments are now being pushed into a bankrupt situation. They can't bail out their banks because the liabilities of the banks have become larger than the balance sheets of the governments. Financial capitalism has created financial monsters that it can't control or bring back into the bottle.

Going forward, there is a risk that banks will face a run when customers or counter parties are not confident about their financial health. And since the liabilities of the banks are 10 or 100 times larger than the sovereign governments', the authorities will not be able to bail all of them out.  

In an emergency, the banking authorities will be forced to print money to fill the black hole in the balance sheets of the banks. But no matter how much money they print, they will not be able to cover the damage from the collapse of the bad debts and all the crazy financial instruments issued on thin air.

A loss of confidence in the financial system will lead to a loss of confidence in the currency. A loss of confidence in the currency will lead to inflation. This is going to happen on an unprecedented global scale because practically all the open-market economies are facing a financial crisis, preceded by a collapse in global demand.

Sovereign governments made the biggest mistake by deregulating and putting all the power to move the economy in the hands of financiers and bankers, who went on to create liabilities 100 times larger than their capital base and the balance sheets of their governments.

Now the G20 Summit is going to meet in London in early April to discuss how to save the world. They might blame greed, lack of transparency, or poor banking and financial practice as the roots of the crisis. They will be calling on nations to stimulate their economies, adopt financial transparency, beef up banking supervision, boost demand, and help the banks to recapitalise, so that at the end of the day the banks will resume their lending again.

Does this vicious cycle sound familiar?

It is frightening but true that the experts have not yet figured out how to tackle a banking system crisis in which the liabilities of the banks are larger than the balance sheets of the sovereign governments.