It’s been a long time since I blogged. My heartiest apologies to my loyal readers! The reason is quite apparent from the title I believe. According to most of the analysts & self proclaimed experts the recession is already here & it is here to stay for a considerable long time before it gives way to some growth. There had been many financial follies that our Harvard Princeton & IIM grads committed while creating a all gorging monster called derivatives that almost wiped out $3 trillion out of the world economy. This financial blunder is compared to the great depression of the 1930s. Could this be the apparition of the old & painful time that has come back from the underworld to haunt us for coming years?
Well let us first have a look at the reasons why we are facing this situation. The very base of this problem is faulty valuations of the assets held. It all started with the housing bubble in
Now comes the time for the financial innovators. These loans offered by banks are converted into Mortgage backed CDOs (Collateralised Debt Obligations). They were securitised by the companies like Fannie Mae & Freddie Mac into resalable assets. These assets were bought by investment bankers like Lehman Bros & Merrill Lynch. Add to that another innovation called ‘Derivatives’, which itself has no value of its own but trades on some other asset like the paper money mentioned above. All of the institutions mentioned above are now liquidated. The correction of the prices started when general people realised that the houses they were buying or holding were not worth the prices they were quoting. So the base of all these financial innovation & great boost to global turnover was removed. The huge castles of cards built over such base had to come crashing down.
Other culprits to the disaster are the rating agencies world over, as all these assets were rated as ‘very safe’ before selling them to next buyer. So all the buyers were also under the misconception that their investments were also ‘very safe’. The valuation models followed by the rating agencies & the investment bankers need to be revisited to avoid any reoccurrence of such disaster in future.
In my opinion the even though the current crisis is very serious & the extent of losses booked are very huge; the biggest difference between the great depression & now is the role knowledge & information technology & media will play in resolving the problem. The biggest problem in recession has always been the public perception & sentiments. So far the media has been disgusting in helping the people out. When the prices were rising to a ridiculous level, they were not bothered to inform people about it. Now as the recession is round the corner, the only thing that can help prevent that is the public sentiment & spending that will boost the consumption in economy. If you read the articles in any of the financial periodicals, you’ll lose your appetite; forget about spending your hard earned money in the market.
In the end if anyone asks for my opinion about the whole situation, I’d say that there is problem in the global market & the recession is not here yet but it will be here. But if all knowledge works in the right direction then it won’t be here to stay for a longer time. I believe we have gathered enough knowledge & are equipped enough to come out of it. Particularly the BRIC nations will be the first ones to rise out of it. Now only the time will tell, how good an analyst I am!
