These days I have been reading a lot of commentary about the actual cause of the inflation. Everybody seems to form an opinion about inflation by just concentrating on a particular aspect of the problem. However, nobody was concentrating on explaining how all these opinions are addressing the same issue from different perspectives. This article is just about trying to connect all those disparate viewpoints.
Origins:
The present crises seem to have originated in 1978. That was the year China opened itself to the world for business. However, the world didn’t seem to recognize China for a long time inspite of consistent growth of 9% every year. The late 80’s was the time for various historic moments. China’s growth story was lost trying to capture the historic realignments happening in Europe.
The First gulf war forced India to open up for business in 1991. However, nothing much changed in India till 1997 till India restructured its financial industry. The world started looking towards India and China more seriously after the 1997 Asian Financial crises. India and China were the least affected economies due to the crises. Western economies trying to recover from the Asian crises started ramping up manufacturing facilities in China to reduce their risks. Indian economy at the same time was growing at a rapid pace due to Information Technology industry.
Causes:
The dot com bust and the unfortunate events of 9/11 accelerated the outsourcing of backend office tasks to India and the bulk manufacturing industries to China. These events led to lot of development in those countries and thereby improving their local economies.
The Federal Reserve of United States at the same time wanted to revive the US economy, hence started reducing the interest rates. This led to increase in liquidity thereby Banks were competing to fund all kinds of exotic financial products.
The subsequent wars in Iraq and Afghanistan absorbed all the excess liquidity of the Federal government of United States. Hence, United States of America was walking a very tight rope in managing its economy while funding for the wars at the same time.
Effects:
The outsourcing of manufacturing to China and back office tasks to India reduced the Job opportunities of US citizens without a college degree.
Most of the issues were not given enough attention since the housing market with access to cheap credit was masking all the problems. All the issues came back to hit the US economy at the same time due to the unraveling of the housing market which started in Apr 2007 but actually made news only in Aug 2007.
The housing market’s bust led to multi billion dollar losses in the financial industry forcing financial firms to raise money from investors outside of United States. This caused severe devaluation of the dollar.
The devaluation of the dollar caused many other currencies to fall in value too as those currencies were tied to the dollar. This caused many of those countries to increase prices on their exports to make up for the loss of the dollar value.
Financial firms which suffered huge losses due to housing crises started getting into the commodities markets to cover up their housing losses.
Emerging economies like India and China with years of tremendous growth suddenly found themselves with lot of liquidity among its citizens. These Indian and Chinese started to live the life of the western countries due to their new found riches. This along with the Indian and Chinese government’s policy of shielding their citizens from the global pricing of commodities through rebates is leading to every increasing price of commodities.
Conclusions:
The globalized economies must take a hard look at their business models to overcome the present crises.
The emerging markets must remove the market distorting rebates to their citizens so that the commodities demand decreases. The market distortions are keeping the prices so low that there seem to be no decrease in demand for commodities.
The developed countries must also take some hard decisions and try to increase the value of dollar to reduce the inflation in commodities.
However, the urgency to make hard choices is presently with developed countries than the developing countries. Hence,tail wags the dog instead of the other way around
Wednesday, June 18, 2008
Sunday, May 25, 2008
Ready , Start Camera and Action
The Present Financial Crises which started off in Aug 2007 could have been the most choreographed crises in history. Every other crises which had occurred in the past could have been due to certain factors beyond people's control. This particular crises was something which everybody knew and anticipated.
Every affected home owner/home speculator knew that home prices can't go up 30% every year. Every Mortgage lender/Mortgage Apprisor knew the fact that the loan amounts being sanctioned are not based on fundamentals. Every Mortgage dealer/Mortgage Securitization wizards like Fannie Mae/Freddie Mac knew that the mortgages being packaged are not worth their values. Every Mortgage Funds Experts also knew that their holdings are over valued but still couldn't resist the promised returns.
It looks like the whole chain knew what they were getting into and possible repercussions. However, every one seemed to blind sided by the juicy returns. Chuck Prince, then CEO of Citicorp put it nicely “As long as the music is playing, you’ve got to get up and dance.”
It looks like everyone played their part like in a Broadway Musical. The repercussion are now being felt far and wide.
The opening shot of this Musical seems to have begun by the repealing of "Glass-Steigal Act" , a depression era law which separated Consumer Banks(Citi,BOA) from Investment Banks (Goldman Sachs, Merill).
This was followed by the dot com bust and the unfortunate events of 9/11, which allowed the second part of the play into picture by Alan Greenspan of lowering the interest rates to 1% in 2002. This was followed by the Greenspan's speech in Feb 2004 to take creative mortgage loans on houses instead of the traditional mortgage loans
The Musical was such a big hit that it lured all of the non traditional players into it thereby making it toxic with those toxic effects not being known until Aug 2007.
Let me just explain things in a more detailed fashion. The repealing of the Glass-Stiegal act allowed consumer banks (BOA,Citi,etc...) to compete with Investment Banks (Goldman Sachs,Merill etc..). This allowed the consumer banks to now aggressively trade their mortgage loans in Wallstreet unlike in the past where they had to hold them till they got their money back with interest. Wall Street just recovering from the dot com bust was very aggressively trying to buy these mortgages for their consistent returns. Those aggressive buying from Wall Street coupled with Greenspan's call for creative mortgage products (click on link above) led to substantial decrease in Consumer Bank's mortgage loan safeguards leading to the crises.
The effects of the toxins are still being felt even after 9 months of the crises and seem to extend until atleast end of 2009 and possibly beyond.
How we wish that the Glass-Stiegal act stayed in place so that we could have avoided the whole crises .
Every affected home owner/home speculator knew that home prices can't go up 30% every year. Every Mortgage lender/Mortgage Apprisor knew the fact that the loan amounts being sanctioned are not based on fundamentals. Every Mortgage dealer/Mortgage Securitization wizards like Fannie Mae/Freddie Mac knew that the mortgages being packaged are not worth their values. Every Mortgage Funds Experts also knew that their holdings are over valued but still couldn't resist the promised returns.
It looks like the whole chain knew what they were getting into and possible repercussions. However, every one seemed to blind sided by the juicy returns. Chuck Prince, then CEO of Citicorp put it nicely “As long as the music is playing, you’ve got to get up and dance.”
It looks like everyone played their part like in a Broadway Musical. The repercussion are now being felt far and wide.
The opening shot of this Musical seems to have begun by the repealing of "Glass-Steigal Act" , a depression era law which separated Consumer Banks(Citi,BOA) from Investment Banks (Goldman Sachs, Merill).
This was followed by the dot com bust and the unfortunate events of 9/11, which allowed the second part of the play into picture by Alan Greenspan of lowering the interest rates to 1% in 2002. This was followed by the Greenspan's speech in Feb 2004 to take creative mortgage loans on houses instead of the traditional mortgage loans
The Musical was such a big hit that it lured all of the non traditional players into it thereby making it toxic with those toxic effects not being known until Aug 2007.
Let me just explain things in a more detailed fashion. The repealing of the Glass-Stiegal act allowed consumer banks (BOA,Citi,etc...) to compete with Investment Banks (Goldman Sachs,Merill etc..). This allowed the consumer banks to now aggressively trade their mortgage loans in Wallstreet unlike in the past where they had to hold them till they got their money back with interest. Wall Street just recovering from the dot com bust was very aggressively trying to buy these mortgages for their consistent returns. Those aggressive buying from Wall Street coupled with Greenspan's call for creative mortgage products (click on link above) led to substantial decrease in Consumer Bank's mortgage loan safeguards leading to the crises.
The effects of the toxins are still being felt even after 9 months of the crises and seem to extend until atleast end of 2009 and possibly beyond.
How we wish that the Glass-Stiegal act stayed in place so that we could have avoided the whole crises .
Sunday, May 18, 2008
Official Recession ; Are we there yet ?
Every Day we keep hearing expert comments on whether we are officially in Recession or Did we just escape the whole recession by a whisker ?
According to commentators, We are officially in Recession if we have negative GDP growth for two successive quarters consecutively.
However, as a consumer we find the whole debate about whether or not we are in recession depressing. If the price of everyday essential items had gone up more than 50% then we could assume that recession has officially hit us irrespective of whether it met the expert's criterion.
We are finding that the Federal Reserve is printing & pumping money into the financial world even faster than a publisher of a best selling author. The very architects of the financial crises are again asked to handle the new money reminding me of the quote made by president Bush regarding his Democratic congressional colleagues " A teenager with a Brand New Credit card".
Many of us could personally be inexperienced while judging the terms related to financial matters however we feel it when recession hits since it directly affect our wallet and decreases our ability to enjoy small things in life we cherish the most.
Hopefully, it's time that both Washington (Federal Reserve) and New York (Wall Street) get off their ivory towers and set the records straight by fixing the economy thus ending this recession debate which is depressing most of the common consumers.
According to commentators, We are officially in Recession if we have negative GDP growth for two successive quarters consecutively.
However, as a consumer we find the whole debate about whether or not we are in recession depressing. If the price of everyday essential items had gone up more than 50% then we could assume that recession has officially hit us irrespective of whether it met the expert's criterion.
We are finding that the Federal Reserve is printing & pumping money into the financial world even faster than a publisher of a best selling author. The very architects of the financial crises are again asked to handle the new money reminding me of the quote made by president Bush regarding his Democratic congressional colleagues " A teenager with a Brand New Credit card".
Many of us could personally be inexperienced while judging the terms related to financial matters however we feel it when recession hits since it directly affect our wallet and decreases our ability to enjoy small things in life we cherish the most.
Hopefully, it's time that both Washington (Federal Reserve) and New York (Wall Street) get off their ivory towers and set the records straight by fixing the economy thus ending this recession debate which is depressing most of the common consumers.
Saturday, April 19, 2008
Who is to be blamed for the Financial Crises? Words from an unlikely victim
Everyday for the past couple of months we have been hearing some new or the other related to recession and the financial crises. This has affected a lot of people in a lot of ways. I am one of those victims. This led me to explore & understand the full extent of the crises and who were best placed to stop this carnage?
History:
Let me however start the whole story from the beginning of the crises. In July 2007, two hedge funds set up by Bear Stearns imploded. Hedge Funds imploding were not new and the structure of those funds was set up that way so that the good ones make huge money and the bad ones are corrected by the market. These ones however had a twist. These funds were projected to be ultra safe investments based on mortgages which were as credit worthy as the Federal Govt. of USA. Anything which is credit worthy as the Federal Govt. of USA is rated “AAA”. When this happened, everybody in the financial world was alarmed as this was equivalent of Apocalypse for the financial world. Folks outside of the financials never felt anything during that time and everything seemed normal. However, that normalcy turned out something equivalent to the day in New Orleans just before Hurricane Katrina hit.
Financial folks frantically started to evaluate their own risks after this incident without letting much information out into the open as to who this could affect common folks. Remember, common folks are affected by these crises as much as the financial world through their 401(k) plans. However, common folks were never explained things in ways they could understand until the crises really hit them really hard.
Blame Game:
Once things started going out of control, the blame game started in the financial world. The Hedge funds managers blamed it on the Banks. The Banks started blaming it on the Mortgage brokers. The Mortgage brokers started blaming the homeowners. The homeowners in turn started blaming everybody other than themselves. New York Times has posted this article “The Trillion Dollar Bet” in July 2005 warning just against this sort of meltdown. However, until George Soros repeated the same statement in Apr 2008 did folks realize the true extent of the crises?
My Analysis:
Common folks like me who never owned a home, diligently paid all their dues to the government still got affected by the crises. This crisis is like no other since this one is affecting the financial industry which is the “CENTRAL NERVOUS SYSTEM” of all the business. Businesses are now running out of credit and not being able to export goods. That is causing disruptions in other parts of the business cycle.
I personally hold the “RATING AGENCIES” responsible for the crises. The big three rating agencies Standards&Poor (S&P), Moody’s, Fitch are responsible for figuring out the risk of each of those loans and then provide a rating. They are supposed to be like “Cerberus: The mythical three headed watch dog from Greek mythology”.
The business of providing mortgages to less than credit worthy folks had always existed. However, that business turned into crises only recently as the folks who are responsible for analyzing the risk failed to do their jobs. These rating agencies didn’t seem to realize the importance of their functions to the entire world. These folks if they had done their due diligence in a proper manner wouldn’t have allowed the financial guys to get the risky assets the same rating as “AAA”.
Now, the rating agencies have the temerity to come back and say with a straight face that they just provide recommendations and their recommendations are not to be taken at face value. That is their job and if there are not in the business of evaluating risks then why do they exist?
Impact on Me:
The actions of the rating agencies have had a direct effect on me even though I had no relation to their business. The dollar has become devalued so much that every item I need to buy had become costly even though my paycheque has remained the same. My daily commute had consumed so much of my spare income that I had cutback on my vacation. I lost my work life balance as now I can only afford to drive to work as all my discretion income is lost to the increased prices on essential items also commonly knows as “INFLATION”.
My life has become monotonous that I am not able to perform my work properly. Thanks to the rating agencies that enabled this crises that common folks like me who were promptly paying all their dues to everybody are also stuck in the crises inspite of not being a homeowner.
SHAME ON YOU GUYS
Maybe it’s time for those rating agencies to remember the phrase from Spider Man Movie: “With Great Power comes Great Responsibility”
History:
Let me however start the whole story from the beginning of the crises. In July 2007, two hedge funds set up by Bear Stearns imploded. Hedge Funds imploding were not new and the structure of those funds was set up that way so that the good ones make huge money and the bad ones are corrected by the market. These ones however had a twist. These funds were projected to be ultra safe investments based on mortgages which were as credit worthy as the Federal Govt. of USA. Anything which is credit worthy as the Federal Govt. of USA is rated “AAA”. When this happened, everybody in the financial world was alarmed as this was equivalent of Apocalypse for the financial world. Folks outside of the financials never felt anything during that time and everything seemed normal. However, that normalcy turned out something equivalent to the day in New Orleans just before Hurricane Katrina hit.
Financial folks frantically started to evaluate their own risks after this incident without letting much information out into the open as to who this could affect common folks. Remember, common folks are affected by these crises as much as the financial world through their 401(k) plans. However, common folks were never explained things in ways they could understand until the crises really hit them really hard.
Blame Game:
Once things started going out of control, the blame game started in the financial world. The Hedge funds managers blamed it on the Banks. The Banks started blaming it on the Mortgage brokers. The Mortgage brokers started blaming the homeowners. The homeowners in turn started blaming everybody other than themselves. New York Times has posted this article “The Trillion Dollar Bet” in July 2005 warning just against this sort of meltdown. However, until George Soros repeated the same statement in Apr 2008 did folks realize the true extent of the crises?
My Analysis:
Common folks like me who never owned a home, diligently paid all their dues to the government still got affected by the crises. This crisis is like no other since this one is affecting the financial industry which is the “CENTRAL NERVOUS SYSTEM” of all the business. Businesses are now running out of credit and not being able to export goods. That is causing disruptions in other parts of the business cycle.
I personally hold the “RATING AGENCIES” responsible for the crises. The big three rating agencies Standards&Poor (S&P), Moody’s, Fitch are responsible for figuring out the risk of each of those loans and then provide a rating. They are supposed to be like “Cerberus: The mythical three headed watch dog from Greek mythology”.
The business of providing mortgages to less than credit worthy folks had always existed. However, that business turned into crises only recently as the folks who are responsible for analyzing the risk failed to do their jobs. These rating agencies didn’t seem to realize the importance of their functions to the entire world. These folks if they had done their due diligence in a proper manner wouldn’t have allowed the financial guys to get the risky assets the same rating as “AAA”.
Now, the rating agencies have the temerity to come back and say with a straight face that they just provide recommendations and their recommendations are not to be taken at face value. That is their job and if there are not in the business of evaluating risks then why do they exist?
Impact on Me:
The actions of the rating agencies have had a direct effect on me even though I had no relation to their business. The dollar has become devalued so much that every item I need to buy had become costly even though my paycheque has remained the same. My daily commute had consumed so much of my spare income that I had cutback on my vacation. I lost my work life balance as now I can only afford to drive to work as all my discretion income is lost to the increased prices on essential items also commonly knows as “INFLATION”.
My life has become monotonous that I am not able to perform my work properly. Thanks to the rating agencies that enabled this crises that common folks like me who were promptly paying all their dues to everybody are also stuck in the crises inspite of not being a homeowner.
SHAME ON YOU GUYS
Maybe it’s time for those rating agencies to remember the phrase from Spider Man Movie: “With Great Power comes Great Responsibility”
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