The argument about the $700 Billion package and actions taken by the Central Banks all over Europe might heat up further. Capitalist countries and its citizens might not find this easy to gulp, forget to digest. The media is so powerful here that you need deeper studies into all these issues, its happenings, its effects and remedies to the problems.
Meanwhile, it is very important for me that all those who visit this blog and express themselves., must continue doing that despite their disagreement with my views . I am thankful to all those who visit this blog at the same time they write up their invaluable comments. And as my basic principle to publish their related comments unedited. (As I acknowledge the basic human right to express themselves freely.)
I have not been a very strong supporter for Bush Administration for what they have been doing after the sub prime crisis got few good banks. There may be great arguments over some part or the other parts of the package itself or the complexities involved into issues of an economy as huge as that of USA. There may be thousands of ifs and buts. There may have been many deep routed and inter connected complexities. But THE BASICS REMAINS THE SAME.
And what I think is from the basic. The basic of human nature, basic of trading, earning profit, sometimes legally and most of the time illegally, basic of all the systems that are working around us, almost work in tandem with each other. And once into the crisis mode, even the Government as stubborn as that of Mr. Bush, must turn to basics and set the things right from the basic.
One must try to understand these basics. Bush Administration was allowing the things to happen and then ran for the solutions, when it was too late. It waited till the smoke caught fire and became inferno, that is what happens whether it is USA or India or any other democracy. It was too late when the Lehman Brothers collapsed.
The sub-prime crisis was just going to happen sooner or later and it happened now. The money supply to the US economy increased when the DOTCOM bubble burst in year 2000. The money supplied to the US economy needed to be absorbed in all different manners. One of them was lending for house property. The banks were lending to those who had no capacity to pay back. They did not lend to eligible borrowers. or perhaps they were little bothered to check their financial anecdotes.
Everything was fine till the capacity to pay these loan was there with the borrower. But as soon as job creation in US economy stopped or say slowed down considerably, the paying capacity of the business to people got the maximum hit and consequently who were given loans started to default. This all was very badly got into the other big banks who had re-lent the loans to smaller banks. No body woke up till the time the Lehman Brothers filed for bankruptcy. Which has created a crisis of TRUST amongst the investors and those who have funds and their funds could be of great help to stabilize.
Well, coming back to the solutions now. Its all done and over, now the salvation and recovery part must begin. We cannot wait till all the people of this world become bankrupt. As one must understand that the destiny of single man on this earth is connected to that of USA. It could be complete chaos, if now the things were allowed to happen, which the Bush Administration did for the last two and half years. It is important to arrest the downfall. It is important that no banks further register for bankruptcy. Because more the banks register, more the money of investors in these banks would go bad. Which could be utter chaotic conditions.
To understand it further lets have a hypothetical example. We are just understanding the basic.
Suppose Mr. A has deposited $100 in the bank. And there are say million who have also saved their money into the bank. Bank after receiving these deposits, invested these funds in properties and other business which would give them better returns. Now due to some reasons bank loose on the value of few assets i.e., say due to recession the value of assets went down, bank would incur huge loss, on the news of bank going bad, depositor A, would go to withdraw his money back. Like him, millions of people who have money in the bank, would also rush for the same.
Since Banks do not keep the deposits to themselves, like that of received from Mr. A in the bank itself, in case of these depositors ask their money back at once, bank would not be in position to give them their money back. They would try to arrange for liquidity from all the sources available and even sell their investments (what these FIIs are doing in India at the moment. They are selling heavily and causing the market to collapse here.) The banks would be in terrific fix, as their investments are fetching less, they have t0 pay higher rate of interest to ward off liquidity crisis and they have no liquidity left as depositors like Mr. A are withdrawing from the bank. These depositors would even accept and settle for lesser amount than what he had deposited, thinking that whatever he got was his luck. Hence the loss is all around.
It is at this stage that the Govt requires to step in to create and support the atmosphere of trust. It would do all the things to support the banks from failing in their undertaking. Banks would be supported by providing them cheap short or long term funds, depending upon the requirements of these banks, it wold also buy few of the assets of the banks which are now low in their values etc. These steps would help banks to steer clear of the crisis in liquidity. The depositors/investors could ask their money back, but if they get their money back on time, they would come again to the would again invest with the bank and sort of trust would be created.
One must not forget that the Great Depression of 1929, which lasted for 10 long years, was not understood at that time. But the situation is greatly different now. The top experts on economy and financial services are being hired by almost all countries and they know the solutions to the problem. US citizens might question the Administration's act of $700 Billion package, and may cry foul as they are worried about why the Govt should pay tax payers' money for those who did the wrong by defaulting the loan repayment . But one not forget that the entire country or entire world for that reason can not not be punished for the wrong which they have not committed. The wrong was committed but that was due to the failure of system prevent there. This is an act of socialism, which the capitalist mindset would take longer to understand and adjust.
You must have noted that almost all the Central Banks, across the globe, irrespective of their ideology, have declared packages for their banks who might have been caught in the sub-prime and subsequent world economic crisis.
The first step in building TRUST. The downfall in the trust , once arrested , Govt has to use all the tools to control the consequent effects of such steps by any federal government. With passage of time, say 3 months, the situation would become normal and trust might have been back.
The support for the Bush Administration proposed $700 Billion package stems out of this fact. Not only the Bush Administration, even the Governments of Europe are also taking similar steps, which would restore the confidence of the people around the globe.
After this the most important part will begin, of making people to spend their money by spending on goods and material and to save and invest their excess money. Though they might have money, they would prefer to save those money for future contingencies., but not with banks and other financial institutions. If they are assured that their future is safe and they can safely either invest or spend in the market, both the ways will enhance the liquidity crunch in the market. It will boost production activity as demand for product is created and with the investment coming back to market, capital will not remain scarce.
Well, with regard to the market sliding all over the world, one must understand, that it is very sensitive to any news and sentiments could get affected. It is a panic selling in all the markets all over the world. With the trust restored and people readily spending their money or investing their money, markets could see a very strong surge within the next 6 months or so. REMEMBER the Govt all over world would not allow the depression to set in. They will take all the steps to see that recession stays away. It is the right time for the real investor to invest at this moment of time.
The Bush -Package may have its inherent discrepancies, but at the moment it is only the solution, the Bush Administration and so is the case with all those Western capitalist Economies. KARL will stay worried till the TRUST is restored.
Meanwhile, it is very important for me that all those who visit this blog and express themselves., must continue doing that despite their disagreement with my views . I am thankful to all those who visit this blog at the same time they write up their invaluable comments. And as my basic principle to publish their related comments unedited. (As I acknowledge the basic human right to express themselves freely.)
I have not been a very strong supporter for Bush Administration for what they have been doing after the sub prime crisis got few good banks. There may be great arguments over some part or the other parts of the package itself or the complexities involved into issues of an economy as huge as that of USA. There may be thousands of ifs and buts. There may have been many deep routed and inter connected complexities. But THE BASICS REMAINS THE SAME.
And what I think is from the basic. The basic of human nature, basic of trading, earning profit, sometimes legally and most of the time illegally, basic of all the systems that are working around us, almost work in tandem with each other. And once into the crisis mode, even the Government as stubborn as that of Mr. Bush, must turn to basics and set the things right from the basic.
One must try to understand these basics. Bush Administration was allowing the things to happen and then ran for the solutions, when it was too late. It waited till the smoke caught fire and became inferno, that is what happens whether it is USA or India or any other democracy. It was too late when the Lehman Brothers collapsed.
The sub-prime crisis was just going to happen sooner or later and it happened now. The money supply to the US economy increased when the DOTCOM bubble burst in year 2000. The money supplied to the US economy needed to be absorbed in all different manners. One of them was lending for house property. The banks were lending to those who had no capacity to pay back. They did not lend to eligible borrowers. or perhaps they were little bothered to check their financial anecdotes.
Everything was fine till the capacity to pay these loan was there with the borrower. But as soon as job creation in US economy stopped or say slowed down considerably, the paying capacity of the business to people got the maximum hit and consequently who were given loans started to default. This all was very badly got into the other big banks who had re-lent the loans to smaller banks. No body woke up till the time the Lehman Brothers filed for bankruptcy. Which has created a crisis of TRUST amongst the investors and those who have funds and their funds could be of great help to stabilize.
Well, coming back to the solutions now. Its all done and over, now the salvation and recovery part must begin. We cannot wait till all the people of this world become bankrupt. As one must understand that the destiny of single man on this earth is connected to that of USA. It could be complete chaos, if now the things were allowed to happen, which the Bush Administration did for the last two and half years. It is important to arrest the downfall. It is important that no banks further register for bankruptcy. Because more the banks register, more the money of investors in these banks would go bad. Which could be utter chaotic conditions.
To understand it further lets have a hypothetical example. We are just understanding the basic.
Suppose Mr. A has deposited $100 in the bank. And there are say million who have also saved their money into the bank. Bank after receiving these deposits, invested these funds in properties and other business which would give them better returns. Now due to some reasons bank loose on the value of few assets i.e., say due to recession the value of assets went down, bank would incur huge loss, on the news of bank going bad, depositor A, would go to withdraw his money back. Like him, millions of people who have money in the bank, would also rush for the same.
Since Banks do not keep the deposits to themselves, like that of received from Mr. A in the bank itself, in case of these depositors ask their money back at once, bank would not be in position to give them their money back. They would try to arrange for liquidity from all the sources available and even sell their investments (what these FIIs are doing in India at the moment. They are selling heavily and causing the market to collapse here.) The banks would be in terrific fix, as their investments are fetching less, they have t0 pay higher rate of interest to ward off liquidity crisis and they have no liquidity left as depositors like Mr. A are withdrawing from the bank. These depositors would even accept and settle for lesser amount than what he had deposited, thinking that whatever he got was his luck. Hence the loss is all around.
It is at this stage that the Govt requires to step in to create and support the atmosphere of trust. It would do all the things to support the banks from failing in their undertaking. Banks would be supported by providing them cheap short or long term funds, depending upon the requirements of these banks, it wold also buy few of the assets of the banks which are now low in their values etc. These steps would help banks to steer clear of the crisis in liquidity. The depositors/investors could ask their money back, but if they get their money back on time, they would come again to the would again invest with the bank and sort of trust would be created.
One must not forget that the Great Depression of 1929, which lasted for 10 long years, was not understood at that time. But the situation is greatly different now. The top experts on economy and financial services are being hired by almost all countries and they know the solutions to the problem. US citizens might question the Administration's act of $700 Billion package, and may cry foul as they are worried about why the Govt should pay tax payers' money for those who did the wrong by defaulting the loan repayment . But one not forget that the entire country or entire world for that reason can not not be punished for the wrong which they have not committed. The wrong was committed but that was due to the failure of system prevent there. This is an act of socialism, which the capitalist mindset would take longer to understand and adjust.
You must have noted that almost all the Central Banks, across the globe, irrespective of their ideology, have declared packages for their banks who might have been caught in the sub-prime and subsequent world economic crisis.
The first step in building TRUST. The downfall in the trust , once arrested , Govt has to use all the tools to control the consequent effects of such steps by any federal government. With passage of time, say 3 months, the situation would become normal and trust might have been back.
The support for the Bush Administration proposed $700 Billion package stems out of this fact. Not only the Bush Administration, even the Governments of Europe are also taking similar steps, which would restore the confidence of the people around the globe.
After this the most important part will begin, of making people to spend their money by spending on goods and material and to save and invest their excess money. Though they might have money, they would prefer to save those money for future contingencies., but not with banks and other financial institutions. If they are assured that their future is safe and they can safely either invest or spend in the market, both the ways will enhance the liquidity crunch in the market. It will boost production activity as demand for product is created and with the investment coming back to market, capital will not remain scarce.
Well, with regard to the market sliding all over the world, one must understand, that it is very sensitive to any news and sentiments could get affected. It is a panic selling in all the markets all over the world. With the trust restored and people readily spending their money or investing their money, markets could see a very strong surge within the next 6 months or so. REMEMBER the Govt all over world would not allow the depression to set in. They will take all the steps to see that recession stays away. It is the right time for the real investor to invest at this moment of time.
The Bush -Package may have its inherent discrepancies, but at the moment it is only the solution, the Bush Administration and so is the case with all those Western capitalist Economies. KARL will stay worried till the TRUST is restored.
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7 comments:
Did the taxpayers (specifically the U.S. taxpayers) cause the problem that now faces the world? Then why should they be the ones to pay for the consequences of the elite?
You are right the problem is TRUST. Just because the government throws money at the banks, the trust will not come back. These banks (not just U.S. banks) have incurred billions of dollars of losses. They have to acknowledge that so the whole system can move forward. If government gives them the money those losses will remain hidden until its time to pay it back.
Sure some of the depositors might beleive that the bank is fine and will not take their money out, but that is not the big problem. The problem is that the banks do not trust each other. The banks know that there are plenty of banks out there with huge losses and since government is not allowing any banks to fail they can't tell which bank is truly safe and which one just appears safe because of the government money. This inability to TRUST other banks has prevented them from lending to each other.
It's all about lending. If the banks do not lend to each other or to other corporations or to people then there will be Great Depression Part 2.
I guess you could argue that government should just give these banks money for free. I am not sure how that's a reasonable solution. You want taxpayers that had nothing to do with the banks and other corporations' reckless desire to make profit suffer as a result?
Even so taxpayers don't have an unlimited supply to give government as much money as it demands. In order to collect taxes, there has to taxpayers. To have taxpayers there has to be high employment and profits. In light of the current economic situation, the companies are laying off people in drastic numbers. At the same time they are also posting record losses. The true unemployment rate in U.S. is closer to 10% right now and things are only likely to get worse. If people are not employed they can't pay taxes and if they can't pay taxes then government cannot collect the extra trillion dollars they need to throw at the banks.
It should be kept in mind that U.S. goernment's free spending ways are only possible because foreign governments, specifically that of China and the Sovereign Wealth Funds, continue buying U.S. treasuries trusting the U.S. government's ability to pay it back when the treasuries mature. When those funds realize that U.S. government will not be able pay back the loans, then you will truly see great depression.
The repercussions will be felt by every economy that depended on U.S. for growth. This includes India's IT sector.
The above is just my humble opinion. I know we clearly disagree, but since you asked for all opinions, there you have it. Good Luck.
Happy Diwali and Saal Mubarak.
Thank You for your valued support & comments. You deserved to be praised. I have stood by my promise to publish all comments without edits, if they are intelligent and are non-abusive in its language.
What i have been saying from this platform, is being followed by the Central banks all over the world. Besides, stay assured no TGD 2 will take place for now, take my word. I am not highly optimistics but I am logically confident that this time around there will be no Great Depression 2
The fundamental difference here is in understanding the actual application of solution, being worked by the top economic experts who know how to treat an ailing economy. The problem here is that the solution is coming too late.
Remember, that the Govt. when decides to aid the ailing banks with the funds to the tune of even trillions, does not necessarily mean that all that money which is provided as aid will come only from the tax payers. It is more likely that the US treasury will use its sovereign right and print the dollars for supplying it to the US economy. The money could come to the economy in various ways.
You would say that such an act could trigger inflation and could prove to be counter productive. You are right. But this will be absorbed back with higher tax rates. Remember the Govt. will ensure only one thing that money changes hands and that could trigger a economic recovery.
My write ups in no way justify the wrong doings by few citizens, corporate or individuals, but you can not wait till those guilty are punished, while the other hapless millions watch. You need to take the steps in the most urgent manner. IF not arrested, this trend could ruin us all. So what I have been posting here is a practical solutions to the issue. Please remember the Banks All over the WORLD are working on this direction.
Besides no one will be able to catch those wrong doers. They have never been detected, if detected never arrested, if arrested never punished. So what you could about that is a big question.
Happy Diwali & Sal Mubarak to you too !
Just because everyone is doing it does not make it okay. The actions taken by the U.S. cannot be considered as solutions because they will make things worse than they are.
If U.S. prints, then that devalues the dollar. If they think devaluing the dollar is the solution, then only God can help them. Once they devalue the dollar, the central banks around the world will dump their dollar holdings as it no longer makes sense to hold a devaluing currency. This will lead to disastorous results for the U.S. economy and all those economies tied to the U.S.
As I have said before the solution is to force these banks to recognize their losses, let those that should be bankrupt, go bankrupt or allow the stronger ones to takeover the weaker ones. Letting them hide these losses or changing accounting rules as you go along will continue to make things worse.
By the way, I am not sure if you are following what's going on with the $700 billion (or is it 850) giveaway. The banks are hoarding the cash or using it to buy other banks. The almighty congress is now claiming that this was not the purpose of the giveaway. That the banks were suppose to use that to start lending again. Of course no such thing is happening, which is not surprising, because it would be foolish to lend right now.
As for the wrongdoers not being detected. Who are you looking for? The wrongdoers are the heads of the big investment banks that started this. Guess who is on top of that list? Henry Paulson. Yes the Secretary of Treasury. You see before he became the Secretary he was the head of Goldman Sachs. And in that position he encouraged the reckless actions that created this mess. He by no means is alone, but that would be a great start, along with Alan Greenspan and others. It is not difficult to identify the culprits. The problem is the culprits are the ones with the power and to bring them to justice will be no easy task.
here are certain limitations to a democratic set up. Be it USA or India. We in India know that Abdul Karim Telgi accused of instigating one of the largest ever scam of stamp papers involving Rs.30,000 to Rs.40,000 crores. He while desposing before the NARCO test had given the name of present agriculture minister & President of BCCI Mr. Shard Pawar. The media and the political class was so shy to take his name that within 15 days everybody forgot abut the narco test conducted on Telgi.
Bofors gun scandal shook the Rajiv Gandhi Govt., but to find the receipt of Rs.64 Crores (Rs.640 Million), more than 2 billion rupees were spent, but we never could prove that the money were paid to Italian agent, Quatrochi, who was very close to Rajiv Gandhi & Sonia Gandhi family.
The same thing has happened in US. The people who are close to the power have had and will indulge in such scams and we all know that. Punishing them will be very difficult as proving a full proof case against them in the court of law.
We may differ on this issue of package by Govt. and its implications, but the fact remains is that we have no other way out of it. I totally agree with what you have said about the Banks be allowed to go bankrupt, let them go into oblivion, but remember that they will take away hard earned money of small investors & depositors along with them, this could be a great loss as people will be left with no money and they could loose their money for no fault of their own. One needs to think that to save those gullible depositors and investors, we need to have a formula which works for these bank as well. Besides you never know what is inside financial status of any bank, nobody knew about the Lehman Brothers, until it registered for bankruptcy.
You can term this entire episode as a ABSURD GIVE AWAY DRAMA. In which everybody gets their share of money, even it may be you and me also. It always has began with the reckless lending of money, then it came to saving of banks which could not get their money back.
In democracy you have to be a big manipulator to make money. And every billionaire on this earth has done something wrong here and there. So must think from our own perspective, as everybody is doing. Nobody wants and likes to incur loss in the value of their assets, be it shares or deposits or real estate.
Wrong will always remain wrong. But when everybody is hell bent on doing wrong things, oneself cannot stay aloof. Even if he stays aloof, he will get hurt in the hurricane of misdeeds.
you have made quite a detailed analysis.
the main issue now is whether our own govt. is capable of handling the present crisis well.
it seems to be quite confused as its stance changes from one day to another and many of its actions appear to be designed to help certian vested interests, in the garb of maintaining growth.
Just one last question/point and we can put this discussion to rest:
When the banks were making billions of dollars, the only people benefiting were the bankers themselves and their investors.
Now when the bankers are facing losses, who should bear those losses? Bankers and investors that benefited during the profitable era or the taxpayers who did not share in any of the gains, but are now required to share in the losses?
Investing in stock markets is inherently risky. There is no guarantee that you will always make money.
As for the depositors who have saved (not invested) money in the banks, they had nothing to worry about before the government spending spree began. Those deposits were guaranteed by the Federal government up to $100,000 for individuals. If the government was concerned about the depositors they could have also just raised the amount they insured.
Instead we are left with privatized profits, but socialized losses.
The present requirement is to shift focus from MICRO to MACRO. Secondly, arresting the down slide is more important than punishing the guilty. It is perhaps the time to look for survival and everything can be done later on, including the reforming the financial structure of the US economy.
Remember $700 Billion Dollar package or any eventual further addition to such an amount, is just an attempt to arrest the down slide in the economy and trust the people could have had.
No permanent solution to the present crisis can be defined from the luxury of the living room. What I have been trying to write and explain is that, presumably the right action is taken by the present administration. Not even the treasury of USA knows how far it will help. But they have gone to basics of the problem and have taken actions if their own.
Perhaps even Mr Barak Obama would also take the same action before he actually starts much awaited financial restructuring of the US economy.
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