Present global financial crisis and its possible solutions
Since 1864, American banking has been split into commercial banks and investment banks. But now that's changing. Some of the biggest names on Wall Street such as, Bear Stearns, Lehman Brothers, Merrill Lynch -- overnight, have disappeared from the money market. Goldman Sachs and Morgan Stanley are the only giants left standing. And serious challenges are confronting US financial markets.
Not only that, major Banks and other financial institutions around the world have reported losses of approximately US$435 billion as of
The liquidity concerns drove central banks around the world to take action to provide funds to member banks to encourage lending to worthy borrowers and to restore faith in the commercial paper markets.
This financial crisis in world financial markets began with the bursting of the
For a number of years prior to that, declining lending standards, an increase in loan incentives such as easy initial terms, and a long-term trend of rising housing prices had encouraged borrowers to assume difficult mortgages in the belief they would be able to quickly refinance at more favorable terms. However, once interest rates began to rise and housing prices started to drop moderately in 2006–2007 in many parts of the
The risks to the broader economy created by the financial market crisis and housing market downturn were primary factors in several decisions by the U.S. Federal Reserve to cut interest rates and the economic stimulus package passed by Congress and signed by President George W. Bush on
Bank of America acquires Countrywide Financial, the biggest
On the verge of collapse and under pressure by the Fed, Bear Stearns is forced to accept a buyout by
Even in Germany, Deutsche Bank reports a loss of 141 million euros for the first quarter of 2008, its first quarterly loss in five years. Fed spearheads coordinated push by world central banks to bolster global economic confidence by announcing moves to pump $200-billion liquidity into markets.
To stimulate the financial market US frees up another $200 billion to back troubled Fannie Mae and Freddie Mac.
G7 ministers agree to new wave of financial regulation to combat protracted financial crisis in the month April, 2008.
But the crisis already accelerated with an electrical speed in the Global money market and the resultant effects are in the month July, 2008
There some other major sliding events in the global money market In the month of September, 2008 are as follows;
(i)
(ii) Lehman Brothers investment bank declares $600-billion bankruptcy. Merrill Lynch acquired by Bank of America.
(iii)
(iv) White House requests $700-billion bail-out plan from Congress for all financial firms with bad mortgage securities to free up tightening credit flow.
(v) Last two standing investment banks, Morgan Stanley and Goldman Sachs, convert to bank holding companies.
(vi) Feds seize Washington Mutual in largest-ever US bank failure.
(vii)
To stimulate economic growth and inspire confidence in the financial markets some major actions were taken through a series of ad-hoc market interventions to bail out particular firms, a $700 billion proposal was presented to the U.S. Congress in September, 2008 assuming significant additional financial commitments.
Further on
Further steps were also taken such as;
(a) European Union leaders guarantee inter-bank lending.
(b) International Monetary Fund approves a new programme to provide emergency loans to countries facing serious cash shortages.
(c)
(d) Euro zone finance ministers meet, rule out stimulus package.
(e) Leaders of G20 nations to gather in
DPA news agency (kjb)
(f)
(g) The largest government intervention in capital markets in
(h)
(i) Wells Fargo bank and the fourth-largest
(j) G7 finance ministers gather for talks in
(k)
(l)
(m) The European Central Bank and Bank of England announce coordinated rate cut. IMF predicts global recession for 2009.
Earlier efforts to assist homeowners, and the sale of several major financial institutions did little to stem the flood, and the international crisis rapidly expanded after the fall of financial giant Lehman Brothers in September.
Banks worldwide may be forced to write down a total of $1.4 trillion in assets by the end of the year, according to the International Monetary Fund.
Even 
Rourkela Steel Plant (RSP), a giant unit and the first steel plant in the country, has been forced to reduce its normal production. Its sale position of saleable steel has started declining from October 2008, thus piling up its stock position. The web of financial crisis in the Global money market has shuttered the usual production norms of Steel Authority of India Ltd.
RSP had sold about nine lakh tonnes of saleable steel (average 1.40 lakh tonnes per month) during first-half of the current financial year, against its annual target of about seventeen lakh tonnes and gained net profit of Rs 800 crores till September 2008.
But due to declining demand of steel in the global market, RSP could manage to sell only about 90,000 tonnes of saleable steel during October 2008, sources in the steel plant said.
For November 2008, the order received by the plant was only 40,000 tonnes against its average of 1.40 lakh tonnes, the officials said.
If the present crisis of SAIL is examined in details then only the international crisis can be shield to some extent if not in totality.
The basic question is, why the Steel Authority of India Ltd announced that, SAIL likely to cut down production from its steel unit? The answer is very simple, that the demand for the metal in the global market has considerably reduced.
But why the demand for metal in the global market has considerably reduced?
To search the proper reason behind firstly we are to consider the following points;
(a) Firstly the usages of steel and steel products are related with mainly infrastructure, commercial and consumer durables. And this is not a fact, every where the consumption of steel has been reduced considerably for the reasons the utility for the usages have been declined, but the demand has been curtailed due to lesser purchasing power of the importing countries. This situation has arisen due to the failure of banking system, such as on 15th Sept, 2008 Lehman Brothers investment bank declares $600-billion bankruptcy, or Feds seize Washington Mutual in largest-ever US bank failure or In Germany, Deutsche Bank reports a loss of 141 million euros for the first quarter of 2008, and like nature banking failures.
The resultant effects, present global money market has become very much tighten, automatically business loans to the corporate sectors, commercial sectors even in the case of individuals are not readily available in accordance to the demand. And for the want of banking loans, different business sectors have to curtail their respective productions, and automatically the reciprocal effects have slashed down the demand for prime and intermediate goods in the international markets. And the adverse effects of the international markets automatically have shadowed the home/domestic markets.
This can also be said that the funding crisis of the basic and core sectors in the global market has the similar impact over the entire monies in circulation globally. This is also fact all the leading countries as a whole, are trying to fight against the unwarranted situation by stimulating economic growth and inspire confidence in the respective financial markets through significant additional financial commitments. Such as;
(i) Fed spearheads coordinated push by world central banks to bolster global economic confidence by announcing moves to pump $200-billion liquidity into markets.
(ii) US frees up another $200 billion to back troubled Fannie Mae and Freddie Mac.
(iii)
Whatever steps to stimulate the money market has been taken so far, all those are in a piecemeal manner by the individual country.
But the fact remains, only in US Adding in Social Security, Medicare and all the other unfunded obligations of the US government, the current debt actually comes in at over $60 trillion (A trillion is 1000 x 1000 x 1000 x 1000, or a million millions). To service the debt, the
It’s a lot of money. And it’s not just any kind of money. Amazingly, this unbaked currency of a bankrupt government is still the reserve currency of virtually every nation in the world today. But
The crisis in world financial markets has its roots in declining home values in the
It gets worse. In 2005, 40% of all new mortgages were adjustable-rate, and they will start resetting in 2008 and 2009. And Fannie Mae reports that almost two thirds of all sub-prime loans will be reset in 2006 and 2007. Many, perhaps most, of the borrowers will get squeezed, and more properties will hit the market after lenders repossess them.
It is already starting. The US Foreclosure Market Report shows that in the first quarter of 2006 alone, over 320,000 properties went into foreclosure, a 72% jump over the same period the year before. It is reported that in the 1st quarter of this year, nearly 4,200 properties went into foreclosure in May, accelerating to 10,500 properties by mid of this year.
On the other hand, new home sales fell, on the average, by more than 25%. In some markets the bubble is deflating even faster. In the Los Angeles/Long Beach area, and in
The loans, many to borrowers with poor credit, were bundled into assets that began to way heavily on banks' balance sheets around the world.
Recognizing that the US has little capacity to rein in its profligate spending and neither the intent nor the ability to actually pay off all that debt in dollars that are worth anything, even Median household debt grew by almost 34 percent between 2001 and 2004, while net worth went up just 1.5 percent, according to the latest Survey of Consumer Finances (a report issued only every 3 years). We suspect that since 2004, the numbers have gotten much worse.
The banking systems triggered by the failure of mortgage companies, investment firms and government sponsored enterprises which had invested in sub prime mortgages. The crisis, which has roots in the closing years of the 20th century but has become more apparent throughout 2007 and 2008,and the average American household now is carrying over $90,000 in debt, much of it as adjustable-rate mortgages.
All these happened due to defaults and foreclosure activity increased dramatically as easy initial terms expired, home prices failed to go up as anticipated, and ARM interest rates reset higher. Foreclosures accelerated in the
Major Banks and other financial institutions around the world have reported losses of approximately US$435 billion as of
The risks to the broader economy created by the financial market crisis and housing market downturn were primary factors in several decisions by the U.S. Federal Reserve to cut interest rates and the economic stimulus package passed by Congress and signed by President George W. Bush on
It’s hard to overstate how important the housing market has been in supporting the
And rising housing prices were an artesian well for consumer borrowing. According to the Fed, Americans borrowed $600 billion against their homes in 2004, on top of $439 billion in 2003, and spent half of it on goods and services. The services are ephemeral, and most of the goods will wind up in a landfill. Worse, the well is now dry, but the debt will keep compounding interest.
The Fed still has the power to push interest rates up or down temporarily. But even with that power, it now has no good place to go. From here on, if it cuts rates, it risks triggering a flight from the dollar. But if it pushes rates higher to keep foreigners from abandoning the dollar, it hammers harder on the housing market.
So the option left between two dire scenarios. Continue raising rates to keep the dollar from collapsing and crush the domestic economy in the process. Or stop raising rates and let the dollar, lynchpin of the global economy, collapse.
The Fed still has the power to push interest rates up or down temporarily. But even with that power, it now has no good place to go. From here on, if it cuts rates, it risks triggering a flight from the dollar. But if it pushes rates higher to keep foreigners from abandoning the dollar, it hammers harder on the housing market.
So we’re left with an inescapable choice between two dire scenarios. Continue raising rates to keep the dollar from collapsing and crush the domestic economy in the process. Or stop raising rates and let the dollar, lynchpin of the global economy, collapse.
The monetary crisis has already begun, evidence of which is provided by interest rates rising pretty much across the board, a sign that inflation is embedded in the DNA of the global economy.
So, mere individual countries efforts to stimulate their respective money Markey will not be able to resume normalcy in the present global crisis.
Let us come back to the cited crisis of Steel Authority of India Ltd (SAIL), say Government of India just to stimulate its own money market announces any type of considerable financial package, .............,
From the above facts and circumstances it’s very clear that;
(a) There is a financial crisis all over the world money market.
(b) Each and every State is trying to stimulate his own financial market as much as possible but these good efforts are not enough to resume normalcy.
© One after another Banking unit is either going for liquidation or
The question remains, why?
If we take the instance of 22nd November, 2008 in respect of world money market, the regretful news is as follows;
(1) With the sharp stock-market decline for Citigroup rapidly becoming a full-blown crisis of confidence, the company’s executives on Friday entered into talks with federal officials about how to stabilize the struggling financial giant.
Several options discussed included a public endorsement from the government or a new financial lifeline, people involved in the talks said.
The course of action, however, remained uncertain on Friday night, these people said, and other options may yet emerge. But after a year of gaping losses and an accelerating decline in share price, Citigroup, which has $2 trillion in assets and operations in scores of countries, is running out of time, analysts said.
After a board meeting early Friday morning, Citigroup’s management and some board members held several calls with Henry M. Paulson Jr., the Treasury secretary, and with the president of the Federal Reserve Bank of
The Fed was trying to ascertain whether the tumult in the stock market could escalate into something worse.
(2) Dipping exports, rising minimum support price make life tough for them. Over 4, 000 ginners across the country, who have been seeking a bailout package from the Government of India, will observe a two-day shutdown from November 25. The decision was taken at an all-India ginners' meet at Kadi in Mehsana district of Gujarat on Friday. With plummeting export orders coupled with a hike in Minimum Support Price (MSP), the industry has started feeling the pinch.
Against an export figure of 1.3 crore bales in the last financial year, the figures in the current year have not even crossed the 1.5-lakh mark. Besides, with the Cotton Corporation of India getting into aggressive purchasing with an MSP of Rs 575 (per 20 kg), which is 40 per cent higher than last year's price of Rs 407, the ginners say they are left with no option but to down the shutters.
"On November 25, the industry will put forward two demands: one, five per cent import duty on cotton and two, five per cent refund to the exporters under Duty Entitled Passbook Scheme," said Gujarat Ginners Association Secretary Bharat Vala.
According to Suresh Kotak, Director, Cotton Association of India, with the global meltdown, export orders have drastically gone down. The price of cotton in the international market has tanked at Rs 22,000 per bale. Primary importers like
However, the production cost for the ginners, when the domestic MSP is fixed at Rs 475 per 20 kg, is around Rs 24,000 per bales. Through 5 per cent draw back under DEPS, the ginners intend to cover this disparity partially.
"We have resolved to shutdown the units twice a week and work in just one shift in the remaining five days," said Anand Popat, secretary of Saurashtra Ginners Association.
Meanwhile, over 600 ginners from Gujarat,
So far, all the meetings of ginners with Union Textile Minister Shankersinh Vaghela and Agriculture Minister Sharad Pawar have not yielded much. On November 25, a delegation will meet Vaghela, Pawar and the Union Commerce Minister, Kamal Nath, to press their demand.
(3) Global meltdown may trigger five lakh job loss in the textile sector alone within five months, if the corrective measures are not taken, commerce secretary GK Pillai told TOI. He was quoting an estimate given by the textile ministry. He further warned that if the condition does not improve, the country's overall export growth target would be revised downward from around 25% to only 10%, missing the $200 billion target in the current financial year. The Indian textile industry, the country's second-largest foreign exchange earner, is estimated to employ around 38 million workers and accounts for about 8% of GDP. The sector is badly affected due to the global slowdown. According to CII secretary general DK Nair, 7 lakh people have already lost jobs and 5 lakh more would lose jobs by March, 2009 if remedial action is not taken immediately. He said the industry is suffering from liquidity crunch. It should be given working capital loan for purchase of cotton at 7% interest.
To avoid job cuts and bring the sector back on track, the government is preparing a package. Pillai said the sector is facing a severe crunch because of problems in the world economy, but stressed that the new package, will help the "distressed sector". The package, which may include a cut in interest rates and increased credit for exporters, will go to a committee chaired by PM Manmohan Singh next week, he said. The textile sector accounts for 20% of
As a result in the Textile Industry about 7,00,000 jobs have been cut in the last six months. The industry lobby group has also forecast a further loss of half a million jobs in the next five months.
(4) In addition, mortgage giants Fannie Mae and Freddie Mac announced they had notified loan servicing organizations to freeze foreclosures from the Thanksgiving holiday until January 9, 2009. "Freddie Mac servicers and foreclosure attorneys were told to contact as quickly as possible an estimated 6,000 borrowers with foreclosure sales scheduled between November 26, 2008 and January 9, 2009," it said in a statement. "If the property is occupied, the servicers and foreclosure attorneys will halt the sale." Fannie Mae said its measure could help at least 10,000 borrowers to stay in their homes while lenders try to work out new terms for people unable to pay their mortgages. Other banking giants have previously announced similar measures. Citigroup said earlier this month it was placing a moratorium on foreclosures for most
home loan borrowers and "preemptively reach out" to 500,000 of its mortgage customers who require help to keep their payments up-to-date.
JPMorgan Chase has said it would accelerate the restructuring of 110 billion dollars in real estate loans to help 650,000 families keep their homes. In early October Bank of
(5) Deak, in the New England Economic Partnership report, forecast a loss of 18,200 jobs in professional and business services in
(6) THE Fiji Motors Traders Association has warned of major job losses as a result of higher fiscal duties targeting the new vehicle market. "Despite our pleas to the Government for a major review of tariffs for different classes of vehicles, we get an increase ahead of any other consideration," said FMTA president Ajay Lal said. The industry has been affected as a result of the regime restructuring the highest tariff band - increasing fiscal duty from 27 per cent to 32 per cent. As a result of the new fiscal duty rate and the appreciation of the Japanese yen and US dollar against the
(7) With the recession in the
(8) Global slowdown has taken its toll on the cargo traffic (export and imports) at the ports. According to Indian Ports Association (IPA), almost all ports have shown a decline in cargo growth. IPA figures show, this year's growth rate in cargo traffic was only 5% in April-October as against last year's 14%.
(9) Inflationary pressure on the economy, expected slowdown in GDP growth to 3.5 percent coupled with likely reduction in PSDP expenditure may cause a decline in cement dispatches by 6 percent to 28 million tonnes. Cement industry has a positive correlation with the GDP growth rate. The major domestic demand drivers for the sector are Public Sector Development Programs (infrastructure), real estate and industrial construction.
On the contrary, exports are expected to grow at 25 percent during the year on demand from regional countries. The local cement dispatches could witness a
(10) In
(11) The big concern, of course, was the availability of adequate and affordable credit, which was urgently required to overcome a massive credit crunch. A situation that is adverse for big companies, and disastrous for agriculture, small and medium enterprises and consumers. Concerns were expressed on the foreign exchange management. It was felt that for the present foreign exchange inflows must be encouraged to bolster the rupee as the Rs 50 to a dollar barrier had been breached. Agriculture, which is the backbone of the economy, is already presenting a crisis situation.
Manufacturing, the other focus area, too is going through a situation of excessive capacity as demand has fallen. As of date there had been a 50% decline in manufacturing. Adding to this situation is the large-scale dumping by
Large scale job losses in sectors like construction, textile, automotive ancillaries, and other export industries, was a worry point.
Aside from the increasing fiscal deficit, slowdown in growth and decline in reserves, there is a human angle that concerns the country’s economy, that is the loss in jobs.
(12) The Black Sea region should continue to beat the
Exporters had indicated that
Egyptian wheat buyers have "warned those at
Now if we think that by taking the following steps the entire situation will turn around 18 * like as follows;
(a) by extending credits to the financial Institutions.
(b) By the arrangements of large-scale investment in infrastructure which would create jobs and lead to an increase in demand.
(c) By generating extra financial assistance to different sectors.
(d) By guarantee inter-bank lending.
(e) By providing emergency loans to countries facing serious cash shortages.
(f) By financial assistance for all households to jump-start consumption.
(g) By merger.
(h) By slashing interest rates.
All these efforts will do little to stem the flood, and the international crisis in the money market.
Before going to the details for any such remedial measures under this strain situation, I need to explain some basic and prime economy definitions.
Money in Circulation
In the first instance the seller represents the commodity, the buyer the money. Money passes into the hands of the seller in the same transaction which transfers the commodity into the hands of the buyer. Commodity and money thus move in opposite directions, and this change of places, in the course of which the commodity crosses over to one side and money to the other. On the other hand, sooner or later the money will pass again from the hands of the seller who has become a buyer into those of a new seller, and its repeated changes of place express the interlocking of the metamorphoses of commodities. The same coins therefore proceed -- always in the opposite direction to the commodities moved -- from one point of the circuit to another; some coins move more frequently, others less frequently, thus describing a longer or shorter curve. The different movements of one and the same coin can follow one another only temporally, just as conversely the multiplicity and fragmentation of the purchases and sales are reflected in the simultaneous and spatially concurrent changes of place of commodity and money. The simple form of commodity circulation, C -- M -- C, takes place when money passes from the hands of the buyer into those of the seller and from the seller who has become a buyer into the hands of a new seller. This concludes the metamorphosis of the commodity and hence the movement of money in so far as it is the expression of this metamorphosis. But since there are new use-values produced continuously in the form of commodities, which must therefore be thrown continuously afresh into the sphere of circulation, the circuit C -- M -- C is renewed and repeated by the same commodity-owners. The money they have spent as buyers returns to them when they once more become sellers of commodities. The perpetual renewal of commodity circulation is reflected in the fact that over the entire surface of bourgeois society money not only circulates from one person to another but that at the same time it describes a number of distinct small circuits, starting from an infinite variety of points and returning to the same points, in order to repeat the movement afresh.
As the change of form of the commodity appears as a mere change in place of money, and the continuity of the movement of circulation belongs entirely to the monetary side -- because the commodity always makes only one step in the direction opposite to that of money.
Money always confronts commodities as a means of purchase and as such causes commodities to move merely by realising their prices, the entire movement of circulation appears to consist of money changing places with commodities by realising their prices either in separate transactions which occur simultaneously, side by side, or successively when the same coin realises the prices of different commodities one after another. If, for example, one examines C -- M -- C' -- M -- C" -- M -- C"', etc., and disregards the qualitative aspects, which become unrecognisable in actual circulation, there emerges only the same monotonous operation. After realising the price of C, M successively realises the prices of C', C", etc., and the commodities C', C", C''', etc., invariably take the place vacated by money. It thus appears that money causes the circulation of commodities by realising their prices.
As a means of circulation money therefore appears always as a means of purchase, and this obscures the fact that it fulfils different functions in the antithetical phases of the metamorphosis of commodities. The movement of the circulation process of commodities is therefore represented by the movement of money as the medium of circulation, i.e., by the circulation of money.
No economic fact is more widely known than that somebody may spend money without receiving it back. Money starts its circuit from an endless multitude of points and returns to an endless multitude of points, but the coincidence of the point of departure and the point of return is fortuitous, because the movement C -- M -- C does not necessarily imply that the buyer becomes a seller again. It would be even less correct to depict the circulation of money as a movement which radiates from one centre to all points of the periphery and returns from all the peripheral points to the same centre.
First of all, it is evident that, if we consider the process of circulation in a country during a definite period, for instance a day, then the amount of currency (money) required for the realisation of prices and accordingly for the circulation of commodities is determined by two factors: on the one hand, the sum total of prices and, on the other hand, the average number of circuits which the individual currency (money) make. The number of circuits or the velocity of money circulation is in its turn determined by, or simply reflects, the average velocity of the commodities passing through the various phases of their metamorphosis, the speed with which the metamorphoses constituting a chain follow one another, and the speed with which new commodities are thrown into circulation to replace those that have completed their metamorphosis. Whereas during the determination of prices the exchange-value of all commodities is nominally turned into a quantity of gold of the same value and in the two separate transactions, M -- C and C -- M, the same value exists twice, on the one hand in the shape of commodities and on the other in the form of gold; yet gold as a medium of circulation is determined not by its isolated relation to individual static commodities, but by its dynamic existence in the fluid world of commodities. The function of gold is to represent the transformation of commodities by its changes of place, in other words to indicate the speed of their transformation by the speed with which it moves from one point to another. Its function in the process as a whole thus determines the actual amount of gold in circulation, or the actual quantity which circulates.(to be continued)
No comments:
Post a Comment