Perspectives on the global economic meltdown

AshokS · Post by **AshokS** » 21 Jan 2009 10:48

For investors, the thought is if you have powder in this environment, keep it dry. For funds already capitalized, invest in distressed assets. For banks, no one is lending. Have to wonder why investors are finding zero yield bonds attractive? Says something about their confidence in the economy and probably banks. Banks did not trust each other back in Sept Oct (look at overnight rates). Recently the TED spread has shrunk, might be good news for interbank lending:

http://www.bloomberg.com/apps/cbuilder? ... EDSP%3AIND

John Snow · Post by **John Snow** » 21 Jan 2009 11:25

Anybody Remember Curving (In US Schools aka universities) ?

That is what is going to happen next, because of money printing machines being over worked, and keeping the unemployment at politically correct levels, there will be stagflation and then hyperinflation in the world most consuming economies. There will be corresponding deliberate downward pressure (dumping) on the developing world economies as they compete to export to keep their own economies operating at reasonable production and employment levels.

The least efficient will fall out because the developing economies cant print currencies like the US and EU/ Not so great Britain.

Also manufacturing will become viable in US once the deflation and correction in consuming comes about (because of productivity gains)
IMOO

John Snow · Post by **John Snow** » 21 Jan 2009 11:28

yes LIBOR rates have come down but the home loans non conforming have not come down, becaue the home value could be inflated to begin with and a correction in price means bank is financing an over valued asset , most probably the owner already cashed out his equity during the happy go lucky days prior to COME SPETEMBER 2008!

AshokS · Post by **AshokS** » 21 Jan 2009 12:03

That's why the LTV ratio in the US for resis is around 50%, similar to commercial in some cases. In the 2005-2007 era you could get 90% financing, even 95% in some cases. So the bank has already priced in a correction (often use a lower appraisal amount anyway) and is protected from downward corrections - they can still walk out with at least their equity in a foreclosure. One still needs really good FICO scores to get one in the first place.

That will not help the economy until this drops to 85% financing where it was before, making it more affordable for consumers.

vsudhir · Post by **vsudhir** » 21 Jan 2009 19:33

Ramana garu,

is sub-prime the only affliction hitting the West? I think there are other factors adding to the liquidity crisis. Today Montek was on TV saying he isnt done with package for 2009. All that earlier was for 2008. So maybe they are worried

To borrow an excellent analogy first used by Vina (I think), the subprime mess is merely the first stage trigger (NPAs soar -> banks in trouble-> credit squeeze). The second stage (credit scarcity squeezes the gen economy -> layoffs and shutdowns -> more loans sour -> bank insolvency rife -> Fed launches quantitative easing to recapitalize banks and ease credit crunch) is only now taking off. The third stage (lack of demand -> deflation -> quant easing -> excess money supply -> inflationary pressures --> possible hyperinflation) will have a milestone to it - the downgrading of sovereign debt not by rating agencies but by the market - when sovereign debt doesn't find enough buyers in the market --> country level interest rates soar. Spain has already made a beginning and Iceland nicely shows where things are headed. UKstan, Italy and now Ireland are all headed towards financial purgatory, seems like.

Ireland's banks sink with decline of the 'Celtic Tiger'

Australia to take whatever it takes to stabilize markets (after Rudd warned of the toughest year in decades and consumer sentiment has nosedived without finding the bottom yet.

Meanwhile,
Japan’s recession may become the longest in the postwar era, Yoshikawa says

and

US stocks slide as Dow averages the worst inaguration day drop ever

The headlines say it all.

But coming back to how far India could be affected. Well, demand remains healthy in India, something that can;t be said of many of the worst affected countries and India is a net saver (of the order of 30%+ of GDP, again, something that hasn't been true of the G7 in decades) both of which go a long way to dampen the secondary at a time when the primary itself failed to ignite due to YV Reddy saar.

Hey, just my reading of tea leaves, no grand gyan claimed and all that.

P.S.
More economic stormy news flooding in:

French Banks to Get EU10.5 Billion Aid, Scrap Executive Bonuses

(World's largest mining company) BHPwrites off $1.6 billion on Australian Nickel subsidiary (due to declining prices and profits. The commodity bust is a phenomenon that should be studied more deeply).

Lotsa bad news from the ICE sector and the following link is just 1 of the many news items from there.
Warner Bros to pare jobs

Singha · Post by **Singha** » 21 Jan 2009 20:21

Spain, Italy, Ireland and UKstan were touted as the most dynamic, free market and growth markets
in EU, compared to more conservative 'old europe' laggards like france, germany and austria.

I suppose spain and italy still have lower cost manufacturing and farming to fall back on. people
still need to eat.

UK is unsuitable for large scale farming (land, climate) and is too costly for chipanda style
manufacturing.

I suppose they could stage a recovery by herding together all the pakis and giving them
the option of low wages and living in dormitory camps with zero social benefits or be
deported back to Mirpur.

tough times need tough measures.

vsudhir · Post by **vsudhir** » 21 Jan 2009 22:15

Not to belabor the point, bt the daily drip drip drip of news abt the UKstan economy itself tells another tale.... that of the transformation of Britistan to sh1tistan....

Is the Sterling about to tank?

Of course, folks are coming out of the woodwork to claim credit for prescience for having foreseen this catasrophe back in November.

With the pound sterling dropping like a stone against most other currencies and credit default swap rates on long-
term UK sovereign debt beginning to edge up, this is a good time to revisit a suggestion I made earlier on a number of occasions (e.g. here, here and here), that there is a non-trivial risk of the UK becoming the next Iceland.

The risk of a triple crisis - a banking crisis, a currency crisis and a sovereign debt default crisis - is always there for countries that are afflicted with the inconsistent quartet identified by Anne Sibert and myself in our work on Iceland: (1) a small country with (2) a large internationally exposed banking sector, (3) a currency that is not a global reserve currency and (4) limited fiscal capacity.

Seriously Alarmed

The slide in sterling has turned "disorderly"....

For the first time since this crisis began eighteen months ago, I am seriously worried that British government is losing control.

The currency has fallen five cents today to $1.39 against the dollar. It is now perched precariously on a two-decade support line -- the levels tested in 2001 and 1992. If it breaks that line, traders may send it crashing down towards dollar parity.

The danger is blindingly obvious. The $4.4 trillion of foreign liabilities accumulated by UK banks are twice the size of the British economy. UK foreign reserves are virtually nothing at $60.6bn. (on this, more later in a piece I'm writing today)

If the Government is forced to nationalise RBS and perhaps Barclays with their vast exposure in dollars, euros, and yen, it risks being submerged. It is one thing for a sovereign state to let its national debt jump in a crisis -- or a war -- perhaps even to 100pc of GDP. It is another to take on foreign debts on such a scale with no reserves. Yes, the banks have foreign assets as well to match the debts. But how much are these assets really worth?

This is the moment when the "rubber hits the road" -- to borrow from American argot -- the moment when the reckless debt experiment of our economic and political leaders comes back to haunt.

We cannot even do what Iceland did to save its skin. Reykjavik refused to honour the foreign debts of its buccaneering banks. It let them default, parking the losses in Resolution Committees. Small islands can do that. Iceland has fish instead, and lots of metals.

Britain cannot follow suit. The debts are too big. If London takes such disastrous action it will set off global panic and lead to an asset death spiral, drawing the entire world into deep depression. {No skin off UKstan's back, I suppose. If UK can't pay its debts, what else can it do but default??}

What have our leaders wrought? The reckless conduct of City, the fiscal incontinence of Gordon Brown (3pc deficit at the top of the cycle), and the pitiful regulation of the UK housing boom have all combined to bring the country to the brink of disaster.

England has not defaulted since the Middle Ages. There is a real risk it may do so now.

And no -- just so there is no misuderstanding -- it would not have been any better if Britain had joined the euro ten years ago. The bubble would have been just as bad, or worse, as Ireland and Spain can attest. We have our disaster. They have their disaster. When the dust has settled in five years we can make a proper judgement on the sterling-EMU issue. Not now.

The Baby Boomers have had their moment in power. The most spoilt generation in history has handled affairs with its characteristic hedonism. The results are coming in.
The blithering idiots.

Yup, the saner ones are waking up to the headache hangovers bring. Shall cross-post this in the Indo-UK thread as well.

Like I said previously, bad karma due and coming to collect....

ldev · Post by **ldev** » 22 Jan 2009 03:30

The danger is blindingly obvious. The $4.4 trillion of foreign liabilities accumulated by UK banks are twice the size of the British economy. UK foreign reserves are virtually nothing at $60.6bn

Its not quite as black and white as this British version of the DDM seems to be saying e.g. UBS alone had assets under management which were four times the size of Switzerland's economy forget about the rest of the Swiss banking system. And yet they are much farther along restoring health to UBS. As far as reserves are concerned, any country that has no exchange controls and is comfortable about its currency being used for settlements between third parties cannot be counted on the same footing as those countries which have either total or limited exchange controls in place. One more reason for the downward pressure on sterling is the unwinding of carry trades with borrowings done predominantly in yen and invested in hitherto high yielding assets such as sterling.

Having said that, confidence is a very perilous commodity. Anything can happen, but it may not necessarily happen for the reasons ascribed by the writer of that piece.

Ameet · Post by **Ameet** » 22 Jan 2009 04:48

Singha wrote:if the UK is forced to cut social spending and doles - the hardest hit are going to be the Ukpakis and bangaldeshis living in town council flats with huge families(more mouths to feed) ?

they will come to India and ask for asylum (or is it asalamalakum) from the evil british (or is it brutish) government. imagine the joys of all these first time voters!!

paramu · Post by **paramu** » 22 Jan 2009 06:06

Question to economic gurus:

Many people talk about possibility of spiralling inflation because US (and other) govt pump in money to rescue to the economic system. When so much of paper & book wealth that existed in the economy being destroyed at unprecedented rate, how can small money printed by govt. create inflation?

Taking amrikhan case, when banks and markets lost say $40(?) trillion, and goverment pumps in 1 trillion, or say 10 trillion in next 4 years. New money pumped in is far less than the money lost in the market. Should this create inflation? (I think Zimbabwe is not right example because they did not experience loss of paper wealth)

ajay_ijn · Post by **ajay_ijn** » 22 Jan 2009 13:30

I think there is fear of deflation in west right now. Some are predicting that even India might see deflation or very low inflation figures this year.

some more bad news for asian economies.
South Korean economy shrinks by 5.6% in Q4

Japan exports fall record 35 pct yr/yr in December

Singha · Post by **Singha** » 22 Jan 2009 13:45

iceland is seeing its biggest demonstrations since 1949

http://www.guardian.co.uk/commentisfree ... lrecession

abhischekcc · Post by **abhischekcc** » 22 Jan 2009 14:43

The actual roots of this crisis are very simple to understand - the west is addicted to "luxury without work". Or more precisely, the goods they produce are worth less than the goods they consume.

They made up the difference by issuing debt. The scam, as SS-Roy said, has been going on since the 70s. However, the (non-caucasian) world lapped up western debt because of the so called 'quality' of western institutions. Better governance equals lower risk equals lower cost of capital equals higher standard of living - or so we were told.

Now, with all the scams breaking out, especially those of rating services, we know how false the 'quality' of western institutions really is. It was all a big ponzi scheme - it had to end badly. Recall that Madoff, accused of running the 'biggest ponzi scheme' in the world is a former Nasdaq Chairman. What he was doing was essentially what the western financial system does. The west itself is the biggest ponzi scheme in the world - and it is payback time.

------------

Sometime ago, I noted that the collapse of the financial system will challenge not only the ruling financial philosophy (free market), but also democracy itself, because they are both based on the same principle - invisible hand, or the notion that private profit can produce public good. With hind sight we can now say ha bloody ha to all this, but there was a time when I really believed in this.

Imagine, the west did not last half a generation in the post soviet state.

--------------

The real big idea to watch for, going forward, will be - how much of this system will they be able to preserve. I mean, this has been a really profitable con for the west, right? If they try to create a new con (neo-con?

), and that too when the non-west is more powerful than it has been since the industrial revolution, it might not work.

So, the main thrust of their attempts will be to preserve as much of the system as they can. A series of western sovereign defaults is the most damaging possibility to the system. It even creates the possibility of old style protectionism, some thing I discounted just a few days ago.

------------

Another interesting possibility to watch for is the rise of religion in the west. It won't be 'Asian' religions like Hinduism or Buddhism. It will be fundamentalist Christianity and will fight neo-pagans like wicca/gaia/whatever. A severe cultural paralysis in the west now looms in the background.

These are the most interesting times in this !@#$%^&*( world.

Singha · Post by **Singha** » 22 Jan 2009 15:05

when the Day of the Dog dawns my friend, it will be found the western citizenry is the most heavily armed in history - us, canada, italy, spain, greece, switzerland, nordics, rural france and rural england probably have heavy gun ownership.

the militias would look to hang and burn the "culprits" whether it be Big Govt, yahudis, moslems and what not.

the Far right parties, backed by support of EJs could win big going fwd.

pradeepe · Post by **pradeepe** » 22 Jan 2009 17:29

I actually think that wrt religion it will be two pronged. Overall I expect it to regress, but pockets will go radical leading to increased polarization.

abhischekcc · Post by **abhischekcc** » 22 Jan 2009 18:01

Singha, you should not be watching mad max type thrillers

What I am trying to say is - it took nearly 3 centuries of post-renaissance for enlightenment to become the dominant religion of west. You can recognize enlightenment as liberalism. Look at all the genocidal wars in Europe during that time (accd to my definition - Hitler was a liberal

)

It took all that fighting for enlightement to displace Christianity. Now enlightenment is threatened again.

At any rate, the next theater of engagement for the U.S. Army is going to be ............. drumbeats ............. Mexico. The drug war in Mexico threatens to make Mexico a failed state. And this is one war that the US cannot get out of - because the contiguous Mexican population in the two countries will ensure that the reverberations from that country will shake US society as well.

I honestly don't expect the armed US civilian militias to do anything except provide target practice opportunities for the crazies.

Singha · Post by **Singha** » 22 Jan 2009 22:00

dont forget the militias/freemen will have a lot of ex-military/law enforcement types. they can be a handful if they fight back against the FBI.

---WSJ---even the legendery greenbrier in virginia is hurting---

Hotels Trim Amenities Amid Recession

By SARAH NASSAUER

The Courtyard and other Marriott chains recently stopped putting hand lotion in their rooms, leaving guests to ask for it at the front desk. Wyndham Hotels and Resorts are putting fewer towels in rooms. And Ritz-Carlton hotels are shaving opening hours at restaurants, spas and retail shops.

As vacationers and business travelers reduce the time they spend on the road, hotels are quietly trimming amenities and services to save money. That can mean fewer toiletries in rooms, longer check-in lines and fewer freebies like cookies or 24 hour-a-day coffee in lobbies for guests. The cutbacks come as the weak economy pushes down occupancy levels and forces hotels to drop their overnight rates to attract lodgers.

Some frequent travelers gripe that the small cuts can add up to a big annoyance. Bruce Schobel, an actuary from Princeton, N.J., who traveled about 200 nights last year, says he has noticed longer lines at front desks and less food variety at breakfasts in recent months. "None of them in and of themselves is a huge deal, but all put together ... finally you say, this isn't fun anymore."

After a series of management meetings on cost cutting in December, Wyndham decided to take sewing kits, mouth wash and shower caps out of rooms. Instead, these products are kept behind the front desk, where guests can request them, says David Martin, senior vice president of operations for Wyndham Hotels and Resorts, a unit of Wyndham Worldwide Corp. He says Wyndham also will reduce the number of bath towels, hand towels and wash cloths by one in every room to save on laundry and purchasing costs.
Cutting Back on Fruit

Marriott International Inc., the country's largest hotel company, recently began telling some chains they can cut back on breakfast offerings. The company's Courtyard, SpringHill Suites and Residence Inn brands are all reducing the variety of fruits they are offering in breakfast buffets.

The Holiday Inn Cocoa Beach Resort in Florida also has changed meal offerings. Instead of an open breakfast buffet for $10.95 a person, the hotel now asks guests to order a la carte from a menu. This means less food goes to waste, as happened often in the buffet, says general manager Shay Baranowski. The hotel's parent, Intercontinental Hotels Group, says it has stopped delivering newspapers to loyalty- program members' rooms, and instead leaves papers in a central spot on each floor.

Kim Daniel, general manager of The Courtyard by Marriott in Huntsville, Ala., says the parent company asked the hotel to remove hand lotion from the rooms. When a top manager at the Alabama hotel left last year, Marriott asked that the spot stay vacant to cut costs, she says. And Ms. Daniel says she recently decided to stop serving free coffee in the lobby because so much was wasted. "We would make it, throw it away, make it, throw it away. You got one free cup, but it cost me $22 from all the waste we had." She says the hotel will now make a free cup for any guest who requests it. But "if you are used to a free cookie you might not get it," she says.

Rob Wiley of San Francisco says he travels about one to two weeks a month for his work at an apparel company. Last month, he noticed there was no hand lotion in his room at the Residence Inn in downtown Tampa, Fla., a Marriott property, where he stays often. "I went down and asked at the front desk, 'Do you have any lotion?'" The person at the front desk "opened this little drawer next to the cash drawer and gave me this one bottle for a week's stay," says the 42-year-old, adding that it's "a minor inconvenience."

Hotels are hoping that the cutbacks will go largely unnoticed by guests. They also are dropping rates to keep customers coming back. According to Smith Travel Research, a lodging-industry research firm, the average daily room rate in the U.S. fell 2.5% in November from a year earlier. At the luxury end the fall was steeper -- down 6.6%. The declines came as hotel occupancy rates industrywide fell 10.6% in November from a year earlier.

Finding ways to trim costs is more challenging for high-end properties that cater to demanding guests who might be paying in the neighborhood of $700 a night.

The Ritz-Carlton, an upscale chain owned by Marriott, has begun doing away with displays of fresh-cut flowers in hotels around the U.S. Instead, the chain is setting up apples or potted plants, which are cheaper and need replenishing less often. "It isn't something that the guest is going to notice, but yet it can cause considerable savings," says Vivian Deuschl, vice president of public relations for Ritz-Carlton.
No Monday Massage

Ritz-Carlton, like many other hotel properties, also is reducing operating hours for restaurants, spas and retail shops, says Ms. Deuschl. The cutbacks allow the hotels to reduce staff as well as bills for heating and cooling. Ritz's layoffs have been "in hotels where occupancy has not been able to justify staff-to-guest ratio," says Ms. Deuschl.
[Wyndham Chicago] Wyndham Hotels and Resorts

Wyndham Chicago

The Ritz-Carlton, Tysons Corner in Virginia has cut opening hours for its spa, which used to be open seven days a week. Now the facility is closed on Mondays. If a guest asks for spa services on a Monday they are encouraged to schedule something later in the week, says Ms. Deuschl.

The Greenbrier, a historic luxury resort in West Virginia owned by CSX Corp., this month laid off 650 workers, about half its work force and far more than the usual 400 layoffs it makes during the slow winter season. The Greenbrier says the cuts mean some services have reduced hours. Carriage rides, for instance, are now available five days a week instead of seven.

Atlantis Paradise Island, Bahamas laid off about 800 people late last year, or about 10% of the big resort's work force. George Markantonis, chief executive of Atlantis Bahamas, says the majority of the layoffs were in food-service departments, as the hotel cut hours at its 35 restaurants. Instead of all restaurants staying open seven days a week, they are all now on a five-day rotation. The change has had little impact on guest experience because of reduced occupancy, he says.

Staff reductions often mean many hotel employees double up on jobs in an attempt to keep sales and service humming and maintain their weekly work hours. Rohit Ranchhod, chief executive of Hospitality Management Inc., a hotel-management company in Elk Grove, Calif., says that during off hours his properties have reduced front-desk staff.

The company owns two Holiday Inn Express hotels and a Fairfield Inn and Suites. He says he is training housekeeping staff to be more efficient, including asking them to clean common areas while laundry is washing. And some staff is being trained in marketing in addition to their current jobs to maintain their hours and boost bookings. "We are trying to make sure everyone is more productive -- that there is no idle time," he says.

Although hotels are pulling back on amenities and services for leisure guests and single business travelers, they are working hard to sell more rooms and hold on to bookings in the lucrative corporate-meeting sector. "It's now a buyer's market," says Herve Sedky, vice president and general manager of global advisory services for American Express Business Travel. In corporate-contract negotiations, beyond dropping rates, hotels are beginning to throw in free Internet connections, airport-car services, breakfast and gym access, says Mr. Sedky.

ramana · Post by **ramana** » 22 Jan 2009 22:29

my comments:

In the immediate years after the collapse of Soviet Union there were many anxious articles and papers about the future of the West. Historically the victor of an existential struggle between two powers eg Rome and Carthage, Cholas and the Srivijaya, and so on itself collapsed or got transformed within 100 ~ 150 years. So the savants were wondering what would the future be like. Many of those studies were classified.

I think the end of SU allowed the rise of Clinton and then Obama as a symbol of the changes in US society.
-------------------------
The financial collapse is most intriguing that the toxicity in the systme was introduced as a way to defeat the SU during the 1907s but those who introduced the virus forgot about it after the SU collpase as they wanted to contiune and erase the National debt.
--------
The UK with a population of ~60M has bigger bailout packages(850B Sterling) then the US which shows how shallow its eminence after WWII was.
IK Gujral was before his time when the called UK a third rate power.
---------
BTW has anyone coaught on to the transformation of the imagination of the West? The popularity of Harry Potter and LOTR genre etc. I think they are reaching deep into the pagan past as their mythology is non-existent in the post christian/post englightnement/Post modern society. A society without myhology will cease to continue.

Neela · Post by **Neela** » 22 Jan 2009 22:40

ramana wrote:my comments:

BTW has anyone coaught on to the transformation of the imagination of the West? The popularity of Harry Potter and LOTR genre etc. I think they are reaching deep into the pagan past as their mythology is non-existent in the post christian/post englightnement/Post modern society. A society without myhology will cease to continue.

Interesting point. It has always baffled me as to why the West clung on to Christianity.

In fact, that is a pan-human question. Note that even in India, all kingdoms and kings always claim that they are the lineage of some Solar or other dynasty.

Willing to take this to a separate thread if needed!

ramana · Post by **ramana** » 22 Jan 2009 22:46

Take it to Non Western World view thread. Thanks, ramana

SwamyG · Post by **SwamyG** » 22 Jan 2009 22:57

The actual roots of this crisis are very simple to understand - the west is addicted to "luxury without work". Or more precisely, the goods they produce are worth less than the goods they consume.

It was created by system that originated from having to sell goods all the time. It required people to keep buying all the time. It resulted in 'vast prosperity' as business bloomed and there were plenty of jobs to be handed out. The 'vast prosperity' created a standard of living where people leased cars or bought cars every few years. Back in desh, there was no vast prosperity; people realized you buy car once in your life time. Then you hand it over to your kids.

Here I am sitting looking at the stapler at my desk. The plastic used seems to be of high quality, the metal is all chrome-finished. There are ridges at the bottom of the lower plate - possibly to give some traction on the table). It is sturdy and a joy to use. Then the top handle has tiny bubbles on them - possibly to give traction to the fingers. It is big and very sturdy. Elegantly designed and shaped, not to big to make it sore to the eyes. So why did the makers give so much thought into making this simple device? Why build so many 'features' into any product? I am sure when it started decades ago, it was all flimsy and did not have all these 'features'. It must have been very functional.

I don't know there is somewhere a lesson in that, I wish I can figure it out what it is

SwamyG · Post by **SwamyG** » 22 Jan 2009 23:01

BTW has anyone coaught on to the transformation of the imagination of the West? The popularity of Harry Potter and LOTR genre etc. I think they are reaching deep into the pagan past as their mythology is non-existent in the post christian/post englightnement/Post modern society. A society without myhology will cease to continue.

I think the sci-fi genre of books and movies for a long time now dipped into pagan past. They were not mainstream enough. Good movie making and book writing skills are taking them mainstream. But like you point out, the society seems to be at the juncture to accept them.

vsudhir · Post by **vsudhir** » 23 Jan 2009 01:16

The affliction strikes Germany in today's headlines:

Berlin Sees No Limits to Economic Intervention.

As part of her efforts to combat the economic crisis, German Chancellor Angela Merkel is increasing the state's influence in the market, buying holdings in banks and bailing out individual industries and companies. Is Germany turning into a planned economy?

The government in Berlin is undergoing an astonishing change of heart. Only a few weeks ago, Chancellor Angela Merkel spoke out against "arbitrary, unfocussed economic stimulus programs" and large-scale government intervention in the real economy. She made it clear that under no circumstance should "the government acquire permanent new responsibilities in the economy."

But now, suddenly, it seems like the public sector's economic intervention cannot be forceful enough for the administration. Last week, Merkel introduced the biggest economic stimulus program in German postwar history, as well as giving her blessing to a series of government interventions into companies and industries, the likes of which the country has not seen since German reunification.

Wonder what happened. I remember applauding Merkel's steady and sober approach in the crisis whilst UKstan, France and Italy were openly berating Deutschland for not joining in on the econnomic stimulus dance. Something must've gone severely and seriously wrong.

Has me worried that WWIII is well on the horizon as econ troubles spin outta control in des after des.

ramana · Post by **ramana** » 23 Jan 2009 03:45

Suraj, Vina et al, How do we use statistics after a black swan? Statistics assume tomorrow will be like yestrday. Howeve in between a catstrophe occurs and all things fall down. Yet WS experts/ANALysts keep comparing earnigs to year ago when they should re-baseline and look at today! How do these experts make their predictions?

Suraj · Post by **Suraj** » 23 Jan 2009 04:06

Experts ? You mean egg-spurts ?

In many ways they future will be a clean break from the past. This isn't just a recession or even a depression. It is a cataclysmic shock that undoes many long held theories on what drives progress. There'll be a lot of questions asked about a whole gamut of things from the Austrian School to Thatcherism to dry economic models. This isn't a credit crunch, but a crisis of confidence. Throwing money at it, aka 'quantitative easing'

isn't going to help, because the notion of 'bringing things back to where it was before' is likely to be much harder than expected. As the loose money builds up, it will just get to a point where we see sudden hyperinflationary conditions.

SwamyG · Post by **SwamyG** » 23 Jan 2009 04:15

So Suraj, what are we likely to see in 2009? How is the year going to pan out. There are posts in different threads that talk about a series of predictable events. Lots of information and activities. Simply put what are the things that can happen next? I understand we do not have any crystal ball, but still like to hear the BRF economic gurus' thoughts. TIA.

ramana · Post by **ramana** » 23 Jan 2009 04:17

There was prof of Duke Uty on radio in the morning who was saying the folks dont understand the magnitude of the problem. The bailout package will hardly scratch the surface as it will not address root cause.
His name was Campbell Harvey.
-
Swamyg, Suraj is one who can make sense of this mess. Give him time.

vsudhir for you:

Nicolas Taleb Home page

Suraj · Post by **Suraj** » 23 Jan 2009 04:33

We are in for a world of hurt this year and the next few. That's all I can predict right now

Black swan events are not really a model. They are a massive divergence from modeled scenarios, and so far the debate was on that the models don't adequately address the possibility of a black swan. I don't think anyone's gotten far enough along with 'apres la black swan' deluge scenarios. Even Roubini's been throwing numbers about regarding how much the cost to US will be, from $1-1.5 trillion to now $3 trillion+ . I would hesitate to elevate Taleb et al mindlessly. Yes, they wrote about black swans happening, but I don't think they're any the wiser what happens now.

Just from an economic perspective, India will suffer, but not unduly so, because of a vast internal market and growing industrial base. The key is to spend on building infrastructure and enabling consumer demand. I think that side of things will 'take care of itself' rather well. What really worries me is external shocks and conflict. Part of me wonders if this is what the world felt like to some people in early 1910s; we are not situated in a nice part of the world...

SwamyG · Post by **SwamyG** » 23 Jan 2009 04:39

What really worries me is external shocks and conflict.

When you have the time, can you elaborate more on this?

You talk about vast internal market in India. Both China and America have that too, right? USA is one of the populous country after China and India. So both countries can bank on their population. So why would India suffer any less than say these two countries?

Again thanks for all the gyan....and reply when you get the time. No hurries, onlee.

ramana · Post by **ramana** » 23 Jan 2009 04:40

You mind posting this in the geopolitical thread?

Thanks, ramana

Arya Sumantra · Post by **Arya Sumantra** » 23 Jan 2009 04:50

The economic stimulus packages are another form of corruption that helps the richest at the expense of taxpayers. The stimulus helps create a buffer time before bad things to happen to a nation's economy. This gives the big capitalists (caught unaware by the sudden precipitation of crises in sept-Nov 2008) enough time to pull out their money in a gradual manner at the expense of taxpayer's money. The ruling politicians have an added incentive for showing that they did something and not sit back during the crisis. The only good thing about stimulus package is that it allows softlanding for economy and unemployment. Gradual unemployment rise is better than a sudden spike of unemployment for stability reasons. But any claims of stimulus leading to "revival" of economy is hogwash.

AshokS · Post by **AshokS** » 23 Jan 2009 04:53

Suraj wrote: This isn't a credit crunch, but a crisis of confidence.

Had a discussion recently with the head of a large PE firm, while pitching a fund. The take away was that, everyone who has cash now is sitting on it, there is a fear of a global collapse.
We will need several months for these crisis to overcome, maybe... just maybe we will see investment back in 3rd or 4th quarter.

The incentive systems will change, that is for sure - not the economic theories... what do you think was in error? I don't think fundamentals of the economic theories are in question here. There were multiple reasons for what happened to happen, largely due to disintermediation of risks and rewards due to securitization. This was a failure of corporate governance and regulation. Yes, there was fraud as well, but that is small compared to the trillions in derivatives which collapsed like a house of cards.

Take your pick, in no specific order:
Moral Hazards in housing by both lenders and buyers. Lenders securitize (reduce risk) and buyers default (and walk away)
Increased liquidity due to competition by lenders
Highly leveraged firms, drive up asset multiples
FAS157 What happens with no market?
Asset prices goes up / Risk Aversions go down / Risk Premiums go down
Financial Engineering diversify risks (securitization, CMBS, CDO, CDS)

I think anyone thinking this is a downfall of the west and the rise of India is mistaken.

There are too many issues in India for it to take advantage of this global dislocations to come out ahead, a lot of this is characterized the total factors of productivity. Had India had its house in order, things would be different, right now the only saving grace for India is a large young population (with increasingly irrelevant marketable global skills, with the exception of a few traditional groups). They need to consume, and so they will benefit the economy. The multipliers for growth however (legal, education, governance, and so on) are decreasing in India, so I predict unless things change India will emerge out of this economic situation as a laggard amongst its desired peer group.

The US will learn from its mistakes and come out stronger, while pulling along its lackeys (UK, EU, Aussie, Japan).

Abhijeet · Post by **Abhijeet** » 23 Jan 2009 04:54

I think modeling a post-black-swan world is a contradiction in terms.

Taleb himself doesn't claim to have any special models of the world - simply the acknowledgment that unthinkable events happen regularly. I had posted an article a few days back that had a detailed look at his investment firm and its investing style. Basically, they make many small bets against things that are likely to happen. If they lose the bet, they lose a small amount of money, but if they win the bet they win a large amount of money. They've won in the last few months but I doubt that Taleb could have predicted the events of 2008, or their timeline, a year ago.

Suraj · Post by **Suraj** » 23 Jan 2009 04:56

China can turn to their internal market as well as we can, if not even better. The US, probably less so, at least in the short term, based on the lack of domestic savings relatively, compared to China or India, in terms of % of GDP. Further, if isolationism is the direction things are headed in, the US will find domestic manufacture more costly, and will concurrently face downward wage pressures in order to maintain production volume on the same level as previously imported figures. China and the US will also face an decreasing worker-dependent ratio due to an ageing population, so they'll face upward wage pressure due to fewer workers to do the job, to maintain output levels. Further, China in particular is heavily trade leveraged, and the US is much more so than we are. Black swans are times when being the SDRE isn't such a bad thing, relatively speaking, but the problem is we might end up congratulating ourselves for dodging the bullet and not focus hard on measuring up on the necessary socioeconomic parameters so as to make the best out of the situation...

Abhijeet · Post by **Abhijeet** » 23 Jan 2009 05:12

The trend towards deregulation and hands-off government is obviously reversing itself globally, so at the very least the economic idea that the market is always better off without government regulation has been shown to be false. That's one economic orthodoxy overturned.

I think that one reason that India might escape (relatively) lightly from the crisis is the absence of a domestic derivative market for mortgages, which reduces the incentive for banks to make bad loans. In general, the overall loan-averseness of the Indian population just means that there is less deleveraging to do.

Unfortunately, due to being a capital-deficient country, this also means that there is foreign capital to spend on infrastructure and other projects that need doing.

I just hope that in India, the wrong lessons are not learnt from the crisis and there's no return to the bad old days of socialism.

vsudhir · Post by **vsudhir** » 23 Jan 2009 05:23

Ramana saar,

Moi ordered and read up Black Swan a few months ago following discussion and praise for that work on BRF.

Black swans are times when being the SDRE isn't such a bad thing, relatively speaking, but the problem is we might end up congratulating ourselves for dodging the bullet and not focus hard on measuring up on the necessary socioeconomic parameters so as to make the best out of the situation...

Hear, hear!

Its plain that unless GoI takes urgent, clear and consistent action - in both policy and practice, India'll not be able to tap into the 'opportunity' part of the current slowmeltdown.

For those highbrows anxious to ensure we SDREs don't get too uppity or celebratory and determined to drill down the assertion that unkil and assorted poodles shall again prevail as they always have, fear not. Nobody here is that delusional, IMVVHO. Just that when looters and moochers like UKstan get a drubbing, there is surprise at how much effusive love and empathy there is going around onlee.

/Have a nice day.

ramana · Post by **ramana** » 23 Jan 2009 05:52

i think apre black swan aka financial meltdown they have to re-baseline from October 2008 onwards. The past has no meaning for the future. It has to be from Oct 2008.

Also the banks/finanical insititutions bailout will be a quagmire for the money or value never exisited. It was all vaporware. $1M in real loan was spun into/leveraged to $30M of credit. However the pain will become real if there is insistence on honoring the vaporware of $29M. The path forward is to provide economic stimulus and forget about future bailouts.

If any of you MBA types can put this in more elegant language will be greatful.

vsudhir · Post by **vsudhir** » 23 Jan 2009 07:52

A masala filled corruption ishtory....our netas do far worse but it rarely makes the light of day...

Merill CEO sacked and under investigation for fraud

Bank of America CEO Ken Lewis gave former Merrill chief John Thain an unceremonious heave-ho earlier today, a mere month after the Merrill deal closed, after one too many nasty surprises: the deterioration of Merrill in the fourth quarter, the revelation that Merrill effectively stiffed BofA by paying bonuses early, thus depriving the bank of the opportunity to review the payments and ascertain whether they were appropriate.

Thats decidedly white-collar and too sophisticated for aam aadmi to get? Well, here's a coarser list then:

And CNBC (with a slideshow) had a bit of fun chronicling some of Thain's spending as Merrill CEO:

When John Thain became Merrill Lynch’s CEO in early 2008, he hired Michael S. Smith Design to revamp his office suite, spending approximately $1.22 million according to documents....

The following is a list of the items in his suite:

Area Rug $87,784
Mahogany Pedestal Table $25,713
19th Century Credenza $68,179
Pendant Light Furniture $19,751
4 Pairs of Curtains $28,091
Pair of Guest Chairs $87,784
George IV Chair $18,468
6 Wall Sconces $2,741
Parchment Waste Can $1,405
Roman Shade Fabric $10,967
Roman Shades $7,315
Coffee Table $5,852
Commode on Legs $35,115....

Thain also paid his driver $230,000 for one years work, which included the driver's $85,000 salary and bonus of $18,000, and another $128,000 in over-time pay, documents show. Drivers of top executives are often paid about half that amount.

Adding a bit of gas to this fire, New York State Attorney General is reported to be investigating the early payment of Merrill bonuses.

So much for CEO level 'integrity' onlee. Our R Raju is no less, am sure...

Singha · Post by **Singha** » 23 Jan 2009 08:33

yeah one of the moral pillars and leading CEOs of wall street. these people spend
shareholders money like no tomorrow. no difference between pakistani elites and
wall street elites. both speak good english and wear sharp suits.

SriKumar · Post by **SriKumar** » 23 Jan 2009 08:45

paramu wrote: Many people talk about possibility of spiralling inflation because US (and other) govt pump in money to rescue to the economic system. When so much of paper & book wealth that existed in the economy being destroyed at unprecedented rate, how can small money printed by govt. create inflation?

Taking amrikhan case, when banks and markets lost say $40(?) trillion, and goverment pumps in 1 trillion, or say 10 trillion in next 4 years. New money pumped in is far less than the money lost in the market. Should this create inflation? (I think Zimbabwe is not right example because they did not experience loss of paper wealth)

Am making no claims to guruhood of any sort.....just chiming in on an interesting question. Inflation is supposed to happen when there is an excess of circulating legal tender (=cash) in the market chasing fewer goods+ services. A measure of inflation is the Consumer Price Index i.e. price of consumer goods. IMHO, the word 'consumer' is key. The excess money should be in a form that can chase consumer goods. To me, this suggests that it needs to be in the form of a freely-circulating legal tender = cash, and not in the form of a stock certificate (which needs to be converted to $ before it can be used to make a consumer purchase). The loss of billions in the stock market was essentially (on-paper) money that never was in circulation. So, its loss does not suck out any money that was 'chasing goods'. The bank loan losses seem to be a different thing though, and it is not supremely clear as to how the loss of a house value influences inflation (or deflation). Of course, a bad loan, in and of itself, only means that money goes from one entity (bank making the loan) to another e.g. in the case of a person buying a car- to the car dealer to the car manufacturer and everyone in that chain; and therefore is still in the economy.