The global economy is in a synchronized downturn. The economies of America, Europe and Japan are going to shrink by 2 to 5 percent in 2009. Emerging economies like China and India are going to suffer a sharp slowdown. Growth in China is going to fall from 11 percent to 7 percent while that in India is going to fall from 9 percent to under 6 percent. The current downturn is the biggest downturn in the last 70 years since the Great Depression of 1930.
What is being done by Central Bankers and Governments across the world to prevent a repeat of 1930? What are the lessons learnt? Read a nice article on this here
Friday, April 17, 2009
Don’t Count Your Recoveries Before They’re Hatched
Ben Bernanke, the Federal Reserve chairman, sees “green shoots.” President Obama sees “glimmers of hope.” And the stock market has been on a tear. Are we out of the woods? Is the recession about to end? The recent news is certainly better but there are many reasons to be cautious about the economic outlook.
The International Monetary Fund (IMF) has just issued its gloomiest forecast ever. It says world GDP, which has never shrunk since the Great Depression, will shrink 1.3% in 2009, and then inch up to 1.9% in 2010. Growth of less than 2% indicates a global recession. So, serious recovery will not come before 2011.
The IMF sees world growth being strangled by what it calls negative feedback loops. The financial crisis first reduces cash flow to producing sectors. This causes a recession, with producing sectors slashing production and employment. But the recession then makes the financial crisis worse — more corporations and individuals default on bank loans. The banks respond by cutting credit further, and this hits production and employment further. This is the negative feedback loop.
The current global recession is likely to be unusually long and severe and the recovery sluggish because it sprang from a financial crisis. New IMF analysis shows recessions tied to a financial crisis, like the current one that has its roots in reckless lending for the U.S. housing market, are more difficult to shake because they are often held back by weak demand. Worse still is that today's recession combines a financial crisis at the heart of the United States, the world's
largest economy, with a broader global downturn making it unique.
The 2001 recession officially lasted only eight months, ending in November of that year. But unemployment kept rising for another year and a half. The same thing happened after the 1990-91 recession. And there’s every reason to believe that it will happen this time too. Don’t be surprised if unemployment keeps rising right through 2010.
Why? “V-shaped” recoveries, in which employment comes roaring back, take place only when there’s a lot of pent-up demand. That’s not what’s going on this time: today, the economy is depressed, loosely speaking, because we ran up too much debt and built too many shopping malls, and nobody is in the mood for a new burst of spending.
The International Monetary Fund (IMF) has just issued its gloomiest forecast ever. It says world GDP, which has never shrunk since the Great Depression, will shrink 1.3% in 2009, and then inch up to 1.9% in 2010. Growth of less than 2% indicates a global recession. So, serious recovery will not come before 2011.
The IMF sees world growth being strangled by what it calls negative feedback loops. The financial crisis first reduces cash flow to producing sectors. This causes a recession, with producing sectors slashing production and employment. But the recession then makes the financial crisis worse — more corporations and individuals default on bank loans. The banks respond by cutting credit further, and this hits production and employment further. This is the negative feedback loop.
The current global recession is likely to be unusually long and severe and the recovery sluggish because it sprang from a financial crisis. New IMF analysis shows recessions tied to a financial crisis, like the current one that has its roots in reckless lending for the U.S. housing market, are more difficult to shake because they are often held back by weak demand. Worse still is that today's recession combines a financial crisis at the heart of the United States, the world's
largest economy, with a broader global downturn making it unique.
The 2001 recession officially lasted only eight months, ending in November of that year. But unemployment kept rising for another year and a half. The same thing happened after the 1990-91 recession. And there’s every reason to believe that it will happen this time too. Don’t be surprised if unemployment keeps rising right through 2010.
Why? “V-shaped” recoveries, in which employment comes roaring back, take place only when there’s a lot of pent-up demand. That’s not what’s going on this time: today, the economy is depressed, loosely speaking, because we ran up too much debt and built too many shopping malls, and nobody is in the mood for a new burst of spending.
Wednesday, March 25, 2009
How Credit Default Swaps Became a Timebomb
A Credit Default Swap is a credit derivative or agreement between two counterparties, in which one makes periodic payments to the other and gets promise of a payoff if a third party defaults. The first party gets credit protection, a kind of insurance, and is called the "buyer." The second party gives credit protection and is called the "seller". The third party, the one that might go bankrupt or default, is known as the "reference entity."
Credit default swaps resemble an insurance policy, as they can be used by debt owners to hedge, or insure against a default on a debt. However, because there is no requirement to actually hold any asset or suffer a loss, credit default swaps can also be used for speculative purposes.
Such exotic financial products are extremely profitable in times of easy credit, but when markets reverse, as has been the case since August 2007, they amplify risk considerably.
Read about the role Of Credit Default Swaps (CDS's) in the Financial Crisis in a great 3 part article
Link to Part 1
Read about the role Of Credit Default Swaps (CDS's) in the Financial Crisis in a great 3 part article
Link to Part 1
Wednesday, March 4, 2009
A.I.G: A Financial Blackhole
On Monday the American International Group(A.I.G) reported a loss of $61.7 billion, the largest quarterly loss in history. Most of it is due to write-downs on the value of the company’s assets. The American Government on Sunday agreed to provide an additional $30 billion in taxpayer money to A.I.G. This is the fourth time the American taxpayer has had to step in to stave off a collapse. So far the government has thrown $150 billion at the company, in loans, investments and equity injections, to keep it afloat. A.I.G is becoming a financial black-hole swallowing billions upon billions of dollars.
Background Information
A.I.G. had to be propped up because its business and trading activities were intricately woven through the world’s banking system. After the calamity that followed the fall of Lehman Brothers, which was far less enmeshed in the global financial system than A.I.G., who would dare allow the world’s biggest insurer to fail? Who would want to take that risk?
The previous rescues were intended to stabilize A.I.G. and buy it time to restructure its business. The idea was that A.I.G Would gradually sell its various assets and repay the Government. Basically a controlled breakup of the company without leading to upheaveals in the financial markets.
Previous Bailouts For A.I.G.
In September 2008 after Lehman Brothers went bust, the Federal Reserve lent A.I.G. $85 billion when the company suddenly found itself unable to meet a round of margin calls. In return A.I.G. issued warrants for slightly less than 80 percent of the company’s shares.
But in just weeks it became clear that A.I.G.’s problems were so grave the $85 billion would not be enough. It was using up that money alarmingly fast. In October another $38 billion was lent to the company.
But that was not enough either. In mid-November A.I.G was back for more. The conditions of the previous loans were relaxed and $40 billion was injected into A.I.G. in exchange for preferred shares.
In all, A.I.G has received $160bn of government help: $85bn in exchange for an effective 79.9% equity stake, loans worth $38bn and around $40bn to capitalize two vehicles holding AIG’s dodgy assets. Add the latest $30 Billion and the bill reaches almost $200bn.
The Bottom Line
The American taxpayer is going to lose billions of dollars sorting out A.I.G's mess. At best $100-120bn will be realized by selling A.I.G's various pieces. Expected loss to the American taxpayer: $50 bn(minimum)
Ben Bernanke, the chairman of the Federal Reserve, is pretty peeved at the company as well. “This was a hedge fund, basically, that was attached to a large and stable insurance company,” Mr. Bernanke told lawmakers on Tuesday, later adding, “There was no regulatory oversight because there was a gap in the system.”
Read Mr. Bernanke’s Testimony here
Background Information
A.I.G. had to be propped up because its business and trading activities were intricately woven through the world’s banking system. After the calamity that followed the fall of Lehman Brothers, which was far less enmeshed in the global financial system than A.I.G., who would dare allow the world’s biggest insurer to fail? Who would want to take that risk?
The previous rescues were intended to stabilize A.I.G. and buy it time to restructure its business. The idea was that A.I.G Would gradually sell its various assets and repay the Government. Basically a controlled breakup of the company without leading to upheaveals in the financial markets.
Previous Bailouts For A.I.G.
In September 2008 after Lehman Brothers went bust, the Federal Reserve lent A.I.G. $85 billion when the company suddenly found itself unable to meet a round of margin calls. In return A.I.G. issued warrants for slightly less than 80 percent of the company’s shares.
But in just weeks it became clear that A.I.G.’s problems were so grave the $85 billion would not be enough. It was using up that money alarmingly fast. In October another $38 billion was lent to the company.
But that was not enough either. In mid-November A.I.G was back for more. The conditions of the previous loans were relaxed and $40 billion was injected into A.I.G. in exchange for preferred shares.
In all, A.I.G has received $160bn of government help: $85bn in exchange for an effective 79.9% equity stake, loans worth $38bn and around $40bn to capitalize two vehicles holding AIG’s dodgy assets. Add the latest $30 Billion and the bill reaches almost $200bn.
The Bottom Line
The American taxpayer is going to lose billions of dollars sorting out A.I.G's mess. At best $100-120bn will be realized by selling A.I.G's various pieces. Expected loss to the American taxpayer: $50 bn(minimum)
Ben Bernanke, the chairman of the Federal Reserve, is pretty peeved at the company as well. “This was a hedge fund, basically, that was attached to a large and stable insurance company,” Mr. Bernanke told lawmakers on Tuesday, later adding, “There was no regulatory oversight because there was a gap in the system.”
Read Mr. Bernanke’s Testimony here
Saturday, February 21, 2009
The U.S. Automobile Industry's Biggest Mistakes
The U.S. Automobile Industry's difficulties stem from complacency, arrogance, endless executive upheavals, numerous reorganizations and unwise investments.
The Forbes website has a slide-show which succinctly explains the reasons for the downfall of Detroit.
Read more: The U.S. Automobile Industry's Biggest Mistakes
The Forbes website has a slide-show which succinctly explains the reasons for the downfall of Detroit.
Read more: The U.S. Automobile Industry's Biggest Mistakes
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