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 .
Sunday, May 25, 2008
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.
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