By Shyam Paliwal

A few days ago the Emirate of Dubai was the premier business hub in the Middle East. It touted itself as the gateway to the oil wealth of the region. It based much of its success on the property boom.

Today, figures show that the property boom has officially gone bust. The property boom in Dubai was the result of easy credit and excessive liquidity. Dubai was able to raise enormous amounts of money from international investors because of the implicit sovereign guarantee.

This case is very similar to what happened with Fannie Mae and Freddie Mac. As these were government entities or had the implicit guarantee of the government, the investors did not hesitate to lend money.

However, there was one problem. Unlike its neighboring emirate of Abu Dhabi, Dubai did not have any oil or gas. Even a sovereign state needs to have something of value to back up the debt that it runs up ― even if the scale of crisis is small and it might not have a lasting impact on the world economy.

But this crisis has confirmed that there are still important pockets of stress, overvalued assets and excessive leverage out there in the world at large and that these could eventually lead to further surprises.

Investors in the market are now going to have to differentiate much more between countries and individual issuers of debt and equity that have strong balance sheets and those that have weak balance sheets.

Until now, for the last seven months we been having a very powerful liquidity-fuelled rally in which correlations of risky assets went up sharply as a result of a fall in the dollar value, a steepening of the yield curve in the U.S. and a rally in practically everything else, substantially led by free and plentiful liquidity in the world, which basically drove everything up all at once, albeit to varying degrees.

There is going to be much more differentiation because it's clear that despite the huge amount of liquidity that is present in the market, not everybody can refinance their debt if they are excessively leveraged.

At the present moment the Federal Reserve is keeping the interest rates artificially low and if these rates are kept low for an extended period of time there are chances of hyper inflation and destruction of currency.

As the supply of money is so great, even though demand for assets has declined, prices remain firm due to excessive liquidity.

There is an urgent need for world currencies to be backed by something of intrinsic value, such as gold, silver or even proven energy reserves.

The Reserve Bank of India, which has done spectacularly well in insulating India from the current economic crisis, surprised everyone by buying 200 tons of gold from the IMF.

This was a very smart move and diversified the country's reserves into something having real value. All the stimulus packages are required to be slowly wound down and it should be left to the market to decide the rate of interest.

As spending alone does not create employment and government is the least efficient entity when it comes to spending money, they generally run up huge bills for very little output.

In America the government has virtually become the landlord. As Fannie and Freddie collapsed, the government ended up owning a large number of houses. Now they plan to give these houses out on rent.

The down payment required for the houses is still 3.5 percent of the total price. And given the $8,000 tax credit, people get the houses without paying anything from their pockets. This is the best bet any gambler can make. If the price of the house goes up, they will sell and make money.

However, if the market moves against them they will just stop paying the mortgages, strip the house of any fittings and just move out.

It is a testimony to the policy of the Korean government that they have always intervened whenever an asset bubble seems to be developing. The down payment required in Korea is in the region from 20 to 50 percent.

This helps to rein in speculators as they have skin in the game. This policy has helped to keep property prices in check and within the reach of end users. This kind of positive intervention helps to prevent the formation of stress in the system.

I personally believe that credit should be easily available for the businesses that produce goods, provide services or add value. However, consumer credit should be reined in, especially credit card loans.

I know quite a few people who buy designer goods on credit and hope to pay for them later. Savings need to be encouraged and interest rates on savings increased. We need to reward responsible behavior.

Shyam Paliwal is an international investor and an economic advisor. He now resides in Haeundae, Busan. He can be reached at shyampali@gmail.com.