As the world tries to cope with the onslaught of failing economies and bailout packages, all efforts to solve the crisis are veering away from the sublime to the ridiculous. The world over the crisis is being projected as one caused by drying up of liquidity, and so the rescue attempt is based on injecting a lot of good money into the banking systems, and induce banks to restart lending to each other. There is no analysis on the why of the problem, and pumping more and more money looks to be the end all and be all of all ideas. The G- 7 summit, for want of better ideas, also endorsed the fire fighting as the only expedient to solve the problem. And while more and more good money is injected to save bad money and rotten investments, the tumble and melt down continues unabated and markets desperately reach further south, there being nowhere else to go. What are being shattered are not just the dreams of the common man, but also faith, trust and hope in the ability of the powers that be to come out with some innovative mechanism that will swivel us towards a new economic order.
The approach and reaction of the world politicians, economists and statesmen is similar to their attitude towards Global Warming and other real issues that face the world. From population to climate change, from diversion of inputs and land use from food to biofuels, from self sufficiency to chaos, they act in unison and move in the direction that will result in the maximum harm to the world and the people. The Big 7, 8, or 22 etc will meet at some exotic location to formulate ideas and mechanism and provide leadership and direction; but the behavior will be same as that of the participants at any convention or seminar. Lots of travel, top hotels and food, bon homie galore, but no attempt and movement towards achieving anything of purpose. Davos, et al have become annual events to holiday and while away precious resources as the world trembles and eventually crumbles.
There is nothing that has suddenly gone fundamentally wrong with the world economy; all what is wrong is in our leaders and path breakers. They are united in being pitted against us, the common man, and are doing, and will continue to do whatever is good for their narrow selfish objective. We have allowed thoughtless and mindless leaders to ruin us, and unless we unite to throw them all out and give to ourselves quality and an informed leadership, they will continue to work against our interests and needs.
It is a pity that political parties are devised and organised along religious and emotive issues, and there is none that espouses the cause of the aam aadmi though everyone clamours about him. We need a resurgence, a new breed of sensitive ad concerned politicians who work for the country and not for fanning every fire that will endear them to a particular vote bank. This is easier said and done. It needs good people to come into active politics and refrm the system from within. Just beating the brerast about dishonest politicians and public figures will achieve nothing.
In reality there is not much that is wrong with the World, its systems or its economy. There is just a deliberate skew, and it is the removal of the skew that will restore plenty and happiness. This present crisis will last as long as it is convenient to the power brokers and manipulators. And this will be continue only till such time as money flows into the system. When the system cans suck no more, there will be a sudden dramatic U Turn and all values and indices will move northwards. Tributes will be paid to the foresight of those who made it all possible; maybe a Nobel Prize also to reward those who so efficiently engineered the entire drama J
Before that happens our own Index should slip to anywhere in the range of 8000- 10000. It will be advisable to start reinvesting at every fall below 10000. But this should be entirely from free funds, not from leveraged values or instruments.
What has happened is just a game. Reminds me of Omar Khayyam, who said "Its all a chequer board of night and days, where destiny with man for pleasure plays, hither and thither moves and lays and slays, and one by one back in the closet lays". The dark clouds will soon melt away, but that will only happen when it is convenient to the powers that control the world, and not when it is going to benefit the vox populi.
The global economy is losing more money from the disappearance of forests than through the current banking crisis, A EU-commissioned study puts the annual cost of forest loss at between $2 trillion and $5 trillion. The figure comes from adding the value of the various services that forests perform, such as providing clean water and absorbing carbon dioxide. The cost of natural decline dwarfs losses on the financial markets. So whereas Wall Street by various calculations has to date lost, within the financial sector, $1-$1.5 trillion, the reality is that at today’s rate we are losing natural capital at least between $2-$5 trillion every year. Key to understanding the conclusions is that as forests decline, nature stops providing services which it used to provide essentially for free. So the human economy either has to provide them instead, perhaps through building reservoirs, building facilities to sequester carbon dioxide, or farming foods that were once naturally available. Or we have to do without them; either way, there is a financial cost.
Amit, you are right. This is a discussion of Pure & Hard Money Matters. Morality, generosity, sacrifice, compassion… have no place. Look at the sacking of 1900 employess in one stroke. It was reality waiting to happen. It is the price one has to pay for adopting market economy. Vivek & Kush jump in…
We use the terms Greed, Ego, Necessity as words, which they are not. These are concepts, and will look right, left or wrong depending on our individual perspective. // I was at an interesting meeting yesterday, where the CEO of a company kept on harping on 2 to 3 different ways to do a project; he called them Alternatives. Finally i interrupted him and said that what you are calling as Alternatives, are really different Scenarios of the SAME alternative
We use words loosely and mix up the concepts and get trapped in the jargon and the verbose.// What Eka and LL are debating about is Morality in everyday Life… subject matter of an independent discussion, for, if applied to current affairs and the economy, it gives a skew which makes many lines of discussion inappropiate. We set limits to ourselves, and that is the biggest and most absurd compromise we make- but we all do it all the time. We are not what we wish to be, but what the environment has reduced and comnspired us to becom
Blame it on Rio. Blame it on Greed – It is easiest way to diagnose and get away. Buddha also said “Greed is root cause of all the worries”. Unfortunately, all are not “realized” to understand the line of separation between “Desire and Greed”. Imagine the world living with emotion of antonym of Greed. Well, I also dream of that utopian situation. It is a fact, Man (I mean human here!) is driven by desire/ greed. He tries to reach his “Goal” by whatever means. He has done this historically and will continue for many more generation. Then why blame and wash off the problem? It is a case of failure of governance. If it is considered as effect of the Free Economy model, why this reaction to rescue with 700 bn $? I think Govt. should have left the market to mend itself and allow it to clear itself. After all, most who are affected in this had direct/ indirect had a participation with Greed.
I think Government should have pumped the money in to projects and made the economy to reorient itself to new alignment. By nationalizing the loss making institutions, all that is happening is USA is becoming India of 1970’s. May be it is first step, before it goes in Old East Block Socialist mould!
I completely agree Eka, it is not right at all, but in the wronged state of today it is a practical way to decelerate the wrong, rather it is a way of stemming it. Amnesties as you know are not permanent. They are a one time window of declarations which if not availed of invites punishments. So there is no ”encouragement” to create more black money. In fact after that having wiped the slate clean the laws could be stringent. With the back of the parallel economy broken, it would be possible to set things right. Now we can all sit and cry hoarse about right and wrong and ideals and the black money will literally rule by feeding elections, underworld, police, hafta, drug and anti national activity and we can all sit feeling happy and righteous. I agree it is not ethical or right. Id love to see them all behind bars… but then I have also wished for a terror free world where all men live as brothers and no one was poor. Sigh. As I said its better than losing more white to the black.
No Lissome, I think there is something fundamentally wrong with the kind of correction you suggest. As i said, I do not have much knowledge of economics. But basically, the greatest problem of all time is the absence of ethics. All the mess that we have now or have had is because we compromise on that. We cannot wish away the black money but for the state to legitimise it, is to encourage more people to take the same route. The Government having done it earlier, does not make it right. There are all kinds of lobbies out there putting pressure on the Government and if it succumbs , it does so , making a mockery of all the laws and regulations in force. Why have those laws in the first place then, if you are later on going to facilitate transgression?
Eka, yes I am saying just that about black money. The government does from time to time decide to entice black money from its dark closets by promising amnesty and get a trickle out. So it is not a new concept. If we want an idealistic honest to goodness police search and imprisonment and clean up of the system honestly, I am afraid, with the problem so deeprooted, cutting will kill the tree in the process. So although it sounds like criminal abetting, the fact is taht black money in the magnitude that we have in India, where it runs a parallel economy cannot be wished away with law. Here is a golden opportunity to do what the government regularly does, but on a bigger scale. If we dont sit on our righteous horses, and spout moralistic values, all of which we know is empty air as we are not doing/ or going to do/ or cannot do anything that will stop this scourge, we can possibly use this opportunity to clean the system. What other way does anyone else propose? I am all ears.
Wow. I missed this big discussion. All of you are right in putting together this jigsaw puzzle. I would liken it to a big smoke screen where no one can ‘’see” anything but ”believe” it is all there and growing and growing. so lack of information on exact realities (mainly because these realities have changed hands so many times that the end holder is far away from the original product sold.) As alf says the original product may not even exist and with each resale is a further ballooning of price and more hard earned money pumped in. The tulip mania in holland where the flowers sold at 20X wages in 1637. History repeats itself, so I am not sure we will ever learn. Just tells us that greed and comfort zones are such strong influences and reason cannot caution them. Herd mentality is another factor. The banks after selling and getting cash would have put it all back in the same sector, worsening the prospect of healthy distribution which might have saved us. Amused at hindsight wisdom
Eka, you are right in understanding. Congratulations! But not “rightly so” to be successful Financial manager. I will give an example. There is one oil compnay in india which has not produced single drop of oil till date and shows profit and hold your breath, it is being traded nearly 30 times its face value! Now abot currency value. Before Nixon became President, currency of the country was valued based on the Gold reserves. Nixon discontinued and pure “Paper money” started. It has ended up like this.
Eka Ji ! You are bang on, there is no simplification. This is what i call the MBA culture, you give large packages to ppl with paper degrees, and the system takes over, its more of both the company and the MBA pampering each other and both live in a fanciful world of imagination, things are hunky dory but at some point the bubble bursts.
afl, I tried reading that link. It is too complicated for me. I was a zoology graduate. But broadly i understand that there is no real production to match the money that is floating around and consumers are buying things without really haing the money in hand, to pay for the house or car or whatever. So, shouldn”t the first step towards correcting this step be, to start consuming less and live within one’’s means and stop listening to tele -marketers from the various banks who keep tempting us with offers of all kinds of loans? Or is that an oversimplification?
As far as I can understand it, it is like lending money to the girl, who had a basket of eggs, on the premise of more hens, then the goat and then the cow etc. But the chickens never hatched?
Amit & Eka, I have received a nice presentation explaining the Sub-prime crisis. Apparently I am not sure how to place it in Iland blog. If you are interested in it, please drop in your email address. I will send it.
I suggest we have a dig at afl’’s brilliant blog at http://floatingleaf.rediffiland.com/blogs/2008/10/09/700-Bn-rescue.html
This gives a concise and precise humourous summary of what exzactly has happenned. keep it up afl !
What was happenning in the US soon spread to the continent, where too the falling REAL ESTATE price phenomena soon became a realty. It was a much bigger crisis than the EWS and farmers loan problem we faced in India. India being a low cost and low level economy the reverberations were much less and esasily controllable than the so called sub prime crisis in the West. // As afl very accurately hits the nail bang on its head, it is yet another reminder that real manufacturing and production- does not matter whether it is goods or ideas- is at the root of all economic expansion. Peddling financial services alone, which has become the in thing in the modern era, can only take you so long, but not further. The seeds of the present crisis were sown some 20- 30 years back when USA proudly declared it would concentrate only on IT and relegate manufacturing to the 3rd world. (SHALL CONTINUE LAter if necessary)
The housing boom in the US started petering out in 2007. One major reason was that the boom had led to a massive increase in the supply of housing. Thus house prices started falling. This increased the default rate among subprime borrowers, many of whom were no longer able or willing to pay through their nose to buy a house that was declining in value.
Since in home loans in the US, the collateral is typically the home being bought, this increased the supply of houses for sale while lowering the demand, thereby lowering prices even further and setting off a vicious cycle. That this coincided with a slowdown in the US economy only made matters worse. Estimates are that US housing prices have dropped by almost 50% from their peak in 2006 in some cases. The declining value of the collateral means that lenders are left with less than the value of their loans and hence have to book losses.
To quote a recent forward, “In roughly five years leading up to 2007, many banks started giving loans to sub-prime borrowers, typically through subsidiaries. They did so because they believed that the real estate boom, which had more than doubled home prices in the US since 1997, would allow even people with dodgy credit backgrounds to repay on the loans they were taking to buy or build homes. Government also encouraged lenders to lend to sub-prime borrowers, arguing that this would help even the poor and young to buy houses.
With stock markets booming and the system flush with liquidity, many big fund investors like hedge funds and mutual funds saw sub-prime loan portfolios as attractive investment opportunities. Hence, they bought such portfolios from the original lenders. This in turn meant the lenders had fresh funds to lend. The sub prime loan market thus became a fast growing segment.”
I am grateful to my friends who have devised this devious method to draw me out of my shell. Reminds me of the Vikran and Vetal serial. // Well ! The sub prime crisis was just that. To give a boost to the sagging construction and real estate industry, banks devised loans to the SUB PRIME sector, meaning, to the sector which was less than prime in asessment about their capability to repay the loan. These loans were initially given by specialised agencies funded by various cash rich channels,but these were soon usurped and sucked in by the big banking institutions. The incentive was that the loan to the fishy sub prime sector was at a higher rate than what banks and institutions normally got from the prime sector. With finance coming in big chunks and rapidly, the sector grew at high rates and all was hunky dory all around. (CONTINUED)
I know there are not many admirers left for Nehru. I recall reading the compilation of letters of Nehru to Indira. He mentions this ill effect of capitalism. He wonders on what would happen when all the capitalist country starts living only by rotating money! I keep telling our Finance Managers, company cannot profit by filling pages with numbers, it has to earned by hard production! Believe I am happy as technical Line Manager, at last for once the “Hollow” finance managers are exposed naked!
Eka, refer to http://en.wikipedia.org/wiki/Credit_default_swap. If you can understand 10% of this, consider yourself as Financial expert! My advise. “Be happy and do not waste your mind power and precious time in understanding this mess”
Lissome, do you mean to suggest that this crisis should be turned into a good opportunity, where the Governement facilitates those who have flouted the law and amassed money illegitimately to regularise their financil misdemeanors?
You are sure it will turn around once they”ve sucked in the maximum that the Govt. is pumping in? Why…how? Could you please explain why this crisis has come about in the first place? It seems to be snowballing and rolling from one country to another. What about india?
Fantastic Amit. What a piece! World class really. Superior writing and such clarity of thought. Dil khush hua. 1) I think this is a great time for India to convert its parallel economy of black to white by getting some amnesties going for creating liquidity as opposed to pumping in good money from reserves. 2) you are right about summits - a bunch of selfish men and women who are having irresponsible fun. 3) Unless the media decides to do its bit and seek and promote a number of alternate good people I dont see how we are going to find alternate candidates. Media is the only one who can influence large numbers to see the good and they are busy devoting half the paper to telling us the bp and ecg of amitabh bachchan in hospital. 4) ups and downs are ok for those who can afford to wait, for those who have put in life savings, or those who suddenly lose their incomes by the meltdown the disaster can be of tragic proportions.5) natural losses have not even registered on them.
Have never had a head for financial matters. My hard earned :-)money is locked up in a fixed deposit in a private bank. Am planning to put it in the SBI. These ups and downs of the market and shares are not for the likes of me. Am too meek hearted. Everything seems to be going crazy out there.