Monday, October 13, 2008

FIRE Vaporises Global Wealth

I was never good with numbers in my school or college. Due to this drawback, I have never opted for any course in accounts or economics. So I just couldn’t understand in the beginning the recent global financial crisis and because of not having any knowledge on this matter, I stayed away from blogging. However, as reams and reams are being written daily, it slowly dawned on me that there is a close connection between these banks and myself. The connection is Fraud and Forgery. You see my father was an old fashioned parent who believed that making money freely available to children would spoil them. So he would give certain fixed pocket money monthly and insisted on proper accounts to be submitted during every semester holidays. That posed a huge problem to me as the 20 movies I used to watch on average a month and the 2 packs of cigarettes a day could not be accounted for as they were and also the pocket money was never sufficient. So I used to replace movies with masala dosa and cigarettes with chilli bhaja while accounting and show huge unexpected expenses for books and other study material, the money for which I used to claim was borrowed from friends. To receive a feel good fat cash bonus before returning to the college after holidays, I used to tamper the mark sheet from college. This is nothing but Fraud and Forgery for personal gains. I realized that these giant financial corporations have done the same. Fraud and Forgery for personal gains. So we have a common thread and I can now freely blog.
My Fraud and Forgery continued taking it to the next level as I moved up a year in the college the expenses too have increased. My father got suspicious and looked so close into the accounts as to find out in person the cost of masala dosa and chilli bhajja. He also approached the college office to compare the actual marks with the declared marks. The result. Severe financial restrictions were imposed and I had to qualify with concrete evidence to whatever I said from then on. I quickly fell in line.
It is sad to see that governments didn’t have same common sense as my father, a school drop out had. They have given away trillions of dollars of tax payers’ money as a bail out gift to these mega corporations instead of punishing them for their crimes. In the name of saving the economy, governments world over have pumped in trillions of dollars, in lieu of worthless paper. Even on the brink of bankruptcy, the power of these mega corporations to influence the decision making of governments is mind boggling.

All these years, these corporations pressurized government after government to deregulate and have little or no government intervention at any stage. This process, the banking gurus said, was essential and essence of capitalism and free markets. The result. The combined greed and fraud of Financial Institutes, Insurance sector and Real Estate ( FIRE) has vaporized wealth across the globe.

So what really happened. The Real Estate sector banked heavily on continuous price appreciations and built excess capacity. The people too banked heavily on continuous price rises and bought houses they could not afford because the banks were giving loans 100% of the cost. These banks then bundled up these mortgages as bonds and sold them to other banks all over the World. The Insurance companies guaranteed these mortgages as well as loan repayments for a commission. When people wanted to sell the houses for a profit after some time, they realized there were no takers in the market because every Tom, Dick and Harry had a house. Prices crashed, millions of people defaulted in EMI payments and the mortgages have suddenly become worthless papers. Not knowing which bank had how much of this toxic debt, banks refused to extend any credit to each other. Starved of liquidity, bank after bank went bankrupt. The infusion of trillions of dollars by governments will only act like a drip to a dehydrated patient and not as a fuel for a rebound. The Stock markets , as usual operate only on two factors. Fear and Greed. This time fear has set in and the market wealth of all the companies has just vaporized by more than half, thanks to FIRE.

The lesson we have to learn is that while the concept of free markets is good and that of government controls bad, the operation of free markets almost without any kind of oversight or control (which is what happened on Wall Street where government restrictions were over the years subverted by lobby-driven legislation) is doomed to lead to catastrophe. This is not the first time this has happened, and it will not be the last unless the governments take some tough measures. The governments at least now should ensure that the Financial Institutes come out clean and arrive at the truthful value of assets they hold. New mechanisms should be in place to ensure transparency in book keeping and severe punishments for those CEOs and Boards who inflate the profits for personal gains.
Meanwhile, let us all brace for a severe credit crunch and an economic slowdown, if not recession.


Anonymous said...

Trust you are doing great.
Really interesting blog entry sir. You have approached the hot topic of the day, in a very refreshing way I must say!!
Thank You!
Good Day.

Namita Kutty

Anonymous said...

Dear Ramana,

Thanks for sharing your life experience and your opinion.
I would add one more place where the money has been consumed – it is the business of destruction. In Iraq, Afghanistan and elsewhere.
Opposition (a lack of concern for other people, nature) … is at the root of these problems. Wanting to have it my way (only), hence joint family to nuclear family to single parent family to … to wanting things that really are not required … without concern for nature leading to so much destruction of nature; and to violence with other humans, overt conflict, wars …
Rajul Asthana said...

Global crisis is not only about companies of financial services. It is about common people as well. The ones with loans, credits, mortgages. The ones with jobs to preserve, houses to retain, families to maintain, relatives to support, children to send to colleges. The ones with budgets, where every cent has its destination. How many of the people lose jobs, cars, homes? How many have to cut out the spendings, which they considered a normal part of their lives? -

Anonymous said...

If you could e-mail me including a handful of suggestions about the approach you ended your page seem this admirable, I would be thankful.

Before I go, let me thank you for your tolerance with my English as (I am convinced you have figured this by now,), English is not my mother language therefore I am using Google Translate to figure out how to write what I sincerely intend to tell.

Ramana said...

I have just suggested at the end what I thought was right about having some sort of controls by independent bodies or the government in stead of letting the banks and financial institutes run amok with public money.