The world seems to be more in depression than recession!! Every morning, one gets depressed reading the newspapers and hearing the latest on the news channels. Leave alone companies, countries are going bankrupt here. What’s with the world? This is like an economic tsunami. The elite G7 still believe they have the power to make decisions while the market share is continuously being dominated by the emerging economies like the BRIICS (Brazil, Russia, India, Indonesia, China and South Africa). Markets are dominated by the highest shareholders; thus hitherto changing the king maker and the pawn game.
The world economies were growing all through 2000 till 2006 at a healthy pace. A lose monetary policy in the United States, high consumption and investments in China, and the Middle East were pushing markets and keeping investors happy. Asset and equity markets all over the world were booming. Then what happened suddenly that completely shattered this bliss? It seems that the asset markets were overheating since some time in the US and the Middle East. Banks were flush with funds and ready to lend to anyone; many times without running a back ground check on the borrower’s credit history. Most of these loans were home loans. The banks hedged this risk of default by exchanging it with other banks. As this risk exchanged hands it was leveraged multiple times through different derivative products. Now, every derivative has an underlying and here the underlying were the (increasing) house prices. With booming asset prices, it was generally believed that the best was yet to come.
In the meanwhile, world politics took a sudden change for the worse, with the US fighting two wars (in Iraq and Afghanistan). US slowly started unwinding its loose monetary policy stance; interest rates started rising. Sure enough, home loan borrowers felt the pinch and the number of defaulters increased. What is heartening though is that greed had taken over common sense, and bankers and fund managers had taken huge positions with almost irrecoverable losses. Soon the whole banking system was on the verge of a collapse, with some banks and fund houses filing for bankruptcy.
My question is how come no one saw this coming? Was everyone so engrossed in making a million bucks every day to downplay such huge risks involved?! It’s very depressing to know that the tax payers are now paying for the sins committed by Wall Street. More than not, depression economics is turning tides to behavioral economics! So my message to everyone: Let’s BEHAVE ourselves!
"Man is flying too fast for a world that is round. Soon he will catch up with himself in a great rear-end collision and Man will never know that what hit him from behind was Man."
ReplyDelete--James Thurber