Jan 10, 2011

Of late I have been struggling with my so called 'humour articles' and have begun to think twice before embarking on writing about my fictional Eddie uncle and his good intentions. Of the three comments I got, two were from my friends poking fun of me and the plump girl. Well I am free again and now that I have realized what my undoing is, let me change my baseless topics to some concrete facts and write something about what I have studied for the past year and half amidst numerous sleepless nights, loads of tea, teeth shattering cold and loss of a huge chunk of hair from my head, trying to get through my masters.

Please don’t stop reading just because the first paragraph was full of crap. According to me, every person should know what went wrong in the financial system of the world and how our is country doing at these troubled times. To be very frank, many of us don’t know what exactly happened, what is actually happening and what is in store for the future. This may be a boring article, but I will try my best to make it funny, even though it is not.
 

What actually happened

In simple terms global financial crisis, was a man-made bubble which burst, like all bubbles. Isn’t it a known fact from physics (Not sure whether it's physics or chemistry) that all bubbles burst at some point or the other? In the USA, where all the trouble began, government backed banks started lending loans to people at very low interest rates, to buy houses and riding on this wave, house prices began soaring up.

Even people with lower income were given loans as the banks were given an assurance by the US federal government that their returns are safe. This assurance made banks greedy and more and more banks began giving out loans. There may be politically driven vote bank motive behind this move as the fed government wanted people to realize their “AMERICAN DREAM” of owning a house in Mainland America.

If I remember quite well, every private bank in India repeatedly calls people (I don t know where they get our numbers from) asking to take loans and in contrast nationalized banks hardly think of loans as their mainstream business, they are bothered only about big fat deposits coming into their banks. This may be a good reason why our public banking system has withered the storm, but what about development? Our nationalized banks have a thousand rules to pass a loan, even for a BICYCLE.

Anyway, back to USA, these mortgages were bundled into securities by the banks and sold to China, Ireland, Germany and many other countries. So far so good. But gradually interest rates were increased by the federal bank in 2006; people could not pay back their loans as the rates were high. An obvious effect of all these was house rates going falling steeply which in turn led to foreign investors thinking twice before buying such mortgages, and financial institutions such as Lehmann Bros and AIG who had heavily invested in these crazy home loan securities were bankrupt as there were no buyers. Panic drove through all sectors and the whole system tumbled down like a pack of cards. If one thinks that the worst is over, we are wrong.

What is happening

Governments pumped money into the system which ran to the tunes of trillion dollars. Stimulus packages were given to every bank, every automaker to keep them afloat and yet executive bonuses were pretty hefty. If we look closely at the stimulus packages money, it is the taxpayer’s money which is going down the drain. People are encouraged to take another loan to repay their older loan, people are encouraged to spend money which is not theirs, which they should realize is not affordable.

To nullify the mortgage based bubble, the government has blown another bigger bubble. Every country is doing the same. Even I had thought that spending money now would be the best solution, but it seems to be a mid term solution, the final outcome is going to be a disaster. Political motives and corruption are also not helping to channelize the money to the right sectors. Countries have to go bankrupt in near future due to excessive debts; Experts have named the countries which are going to be bankrupt as PIGS (Portugal, Ireland ,Greece and Spain) just as Goldman Sachs had named emerging economies as BRIC (Brazil, Russia, India and China)

Where does India stand amongst all this trouble?

Well quite frankly, we are doing great compared to other countries. As our economy is mainly domestically driven rather than export driven like Chinese economy, we are better insulated to the storm. The Indian mentality of saving rather than investing has also come in handy. It s like we have had a precautionary shot to overcome this meltdown.

In the early 1990’s when our economy was freed and was made attractive to foreign investment, care was taken to make it moderately export driven by leaving enough space for domestic markets and domestic players.

Agriculture and small scale industries are India’s main breadwinner for a rural family, and IT for an urban family. Around 65% of Indian population depends on agriculture for a living and its accounts for 22% of GDP, and Indian IT and BPO exports constitute 6 % of GDP. There are several other exports like fish, fish oil, ayurvedic medicines and many other secondary materials out of agriculture which drive our export market. Reports say that within the next 5 years India is going to take over from China as the manufacturing hub of the world. Nevertheless, we are hit by the global phenomenon and have to take measures to withstand it.

What should we do?

As responsible citizens of a huge democracy, first thing we can do is to pay taxes and not deprive of the government of their income. This is the right time to drive in some major rural development schemes and fill up the void inside. Distribution of wealth in India is very uneven and the rich are getting richer and the poor more poor (I mean the tax paid is not going in right directions for development work, half the money ends in our corrupt leader’s pockets).

The government has to bring out strict measures to oversee the implementation of some good schemes such as National Minimum Wages and the Rozgar Yojana. Helping farmers spend and cultivate more would be a solution, but again the extent of inflating the bubble has to be checked by the banks before lending out money to farmers. Agriculture sector can create a lot of jobs in India and the only thing which is hindering us is the lack of dignity in making agriculture a career. No father wants his son to be a farmer and vice versa and I do not know why this culture has dawned upon Indians off late.

The world is going to soon see one more financial crisis, as most of the trend analysts predict. We can withstand or even avoid it, if we act upon it soon. We as citizens of the world have to make our contribution by becoming aware of complex investments, government programmes, political situation and its effect on the economy. Even saving electricity and water might help in a small way. Now that we know there is going to be a downturn, it is up to us and the governments of the world to get some measures in place and sail us through the rough times smoothly.