8/3/2019 Greed of Some, Woes of Billions

1/3

Greed of Some, Woes of Billions

- By Saumik Barua

In our seeking for economic and political progress, we all go up - or else we all go down. -

Franklin D. Roosevelt

Not long ago, many of the worlds economies, including India, were in a state ofeuphoria ( with hindsight, however, that turned out to be more of a state of utopia) Theeconomies were growing, prices were stable, the job markets were vibrant, consumerexpenditure and consumer confidence level were peaking and the stock markets werebooming. There was a feel good factor which pervaded the world economies. The big

boss of the world economy, the USA, was where all the action was. Although such aeuphoric state inevitably led to some voices of caution and concern, nobody really paidany heed to such views, brushing aside those voices simply as advocates of pessimism.

The economic slump that began in 2007 persists and the Global Economy is yet

again entering a dangerous phase of uncertainty. Not only is the level of unemployment

in the so called Developed Economies unacceptably high, but the entire world is also at

the verge of entering a downward spiral of financial instability, uncertainty and a total

collapse of global demand.

The Cause - It dates back to the late 1990s when south-east Asian countries likeMalaysia, Thailand etc. suffered a major economic setback due to huge investment in real

estate. With no proper banking practice and Crony Capitalism emerging, there arose a

need for Forex Reserves to facilitate easy flow of money between nations. And thus

began the purchase of U.S securities in bulk that flooded the American economy with

dollars that needed some outlet.

And this outlet came into being in the form of borrowings and spending spree.

Low interest rates and easy availability of loans were the prime reason people started

investing, mainly in the Real Estate sector. With surplus funds, banks started relaxing

terms of credit leaving no demarcation between the prime and sub prime loans and

giving least importance to background of borrowers, returning capacity etc. Real estate

prices started soaring with the surge proving a good time for all.

8/3/2019 Greed of Some, Woes of Billions

2/3

The complication started with overbuilding of houses, causing a decline in prices

and a decline in the returning capacity of the borrowers. With interest rates soaring, loan

amounts exceeding total cost of houses, the situation paved the way for the recession.

Sub-prime loans were bought not only by U.S investors but also outsiders and therefore

the recession was not confined to the States alone. Losses were incurred by the investorsand that trickled down to other banks that were in chain with the American banks who

formed the backbone of many banks. With no money, industries and business houses

failed to gain access to loans and thus facing a closure.

Simply put, the various economic factors notwithstanding, the problem got

magnified and went out of control because of one very basic human failing greed, and

it was just not greed but greed overtaking fear. Interestingly enough, this human failing,

i.e., greed overtaking fear occurred on both sides borrowers and lenders. Not

unsurprisingly, unlimited and unrealistic greed was a direct result of unlimited andunrealistic expectations.

As Friedrich Engels rightly said From the first day to this, sheer greed was the

driving spirit of civilization.

Since mid 2008 efforts have been made worldwide by financial

organizations like the IMF, World Bank as also the governments of the major economies

of the world, to pave a way for swift recovery from this recession. But even before we can

sit back and relax expecting a stable worldwide economy, a second recession isknocking on our door with Europe on the forefront this time. To mention a few, Greece,

the Euro zones worst performer is facing a sever debt crisis, U.K is facing 17 year high

Unemployment, Italy is on the brink of a debt-crisis and the list goes on and on.

Will Europe be able to drag itself out of this dwindling situation? The question

still remains unanswered. Some believe that Europes recovery will not be decided by the

Greek debt crisis but by the export potential of larger nations like Germany. Both U.S &

European trade has benefitted from fast rising demand for consumer goods in the

emerging economies (majorly China, India & South-East Asian economies). But this hashad a larger trickle down impact on countries like Germany where exports represent

about 50% of total GDP. Banks & financial institutions have done their bit in adjusting

interest rates, recapitalization, inflation control measures etc. but theres still no way out.

So is Europe heading for a Double-Dip recession? It remains to be seen and the

crucial factor over the next few months or quarters will be exports from the Euro zone to

8/3/2019 Greed of Some, Woes of Billions

3/3

the rest of the world. In other words, countries like China, India, and Brazil among other

Emerging nations will have a crucial role to play in this long hard battle.

So will the Asian Giants be able to deliver? The question is what then lays ahead,

more specifically, what lies ahead of countries like India & China? According to the

experts, the crisis has not really hit India or China in 2008 and the statements made by

the fiscal and monetary authorities in India would lead one to believe that India will be

one of the least affected countries and the Indian growth story would remain intact,

notwithstanding the current hiccup. But disturbing trends have already started to raise

their ugly heads in several fronts growth outlook, external financial position,

consumption demand, investment and capital expenditure, credit availability, value of the

rupee, etc. sure signs that things are definitely on the downturn and need to be urgently

attended to.

The RBI is still expressing confidence that Indias growth rate will be around 7 -

7.5% but several private forecasters have lowered Indias growth projection to 6% or

even lower than that to 5% and that surely would be deeply disturbing. The average

annual growth in investments in the last six years was 17% and investment growth this

year is projected at single digits for the first time since 2002-03. External borrowings

supported growth in recent years but scope for foreign borrowing to fund projects have

already become limited.

The Chinese story seems slightly brighter with GDP growth forecasts still at 9 -9.5%. But with every optimism comes a bit of pessimism, and there are fears that in the

coming few months or so the Communist nation will reduce the figure to 7-7.5% that is

surely going to cause a major panic in the world economy.

The future remains to be seen with the hope that the worlds best economists,

policy makers and the global leaders drag us out of this grave;

Else well have only option left Time it heals everything !!!

Saumik Barua

Market Analyst, Global Analytics,

Hewlett Packard India