An excellent article to understand the cause for current economic crisis

This is an excellent article which was forwarded by my friend Sudi on the current economic crisis... It highlights how the crisis started and where its heading in a different way..... It goes like this...........

Heidi is the proprietor of a bar in Berlin.

In order to increase sales, she decides to allow her loyal customers - most of whom are unemployed alcoholics - to drink now but pay later.

She keeps track of the drinks consumed on a ledger (thereby granting the customers loans).


Word gets around and as a result increasing numbers of customers flood into Heidi's bar.
Taking advantage of her customers' freedom from immediate payment constraints, Heidi increases her prices for wine and beer, the most-consumed beverages.

Her sales volume increases massively.

A young and dynamic customer service consultant at the local bank recognizes these customer debts as valuable future assets and increases Heidi's borrowing limit.

He sees no reason for undue concern since he has the debts of the alcoholics as collateral.

At the bank's corporate headquarters, expert bankers transform these customer assets into DRINKBONDS, ALKBONDS and PUKEBONDS.

These securities are then traded on markets worldwide. No one really understands what these abbreviations mean and how the securities are guaranteed. Nevertheless, as their prices continuously climb, the securities become top-selling items.

One day, although the prices are still climbing, a risk manager (subsequently of course fired due his negativity) of the bank decides that slowly the time has come to demand payment of the debts incurred by the drinkers at Heidi's bar.

However they cannot pay back the debts.

Heidi cannot fulfill her loan obligations and claims bankruptcy.

DRINKBOND and ALKBOND drop in price by 95%.

PUKEBOND performs better, stabilizing in price after dropping by 80%.

The suppliers of Heidi's bar, having granted her generous payment due dates and having invested in the securities are faced with a new situation.

Her wine supplier claims bankruptcy, her beer supplier is taken over by a competitor.

The bank is saved by the Government following dramatic round-the-clock consultations by leaders from the governing political parties.

The funds required for this purpose are obtained by a tax levied on the non-drinkers.

Finally an explanation we can all understand ……..

Growth to Recession --> Globalization to Protectionism –>Tax breaks to Stimulus packages and Bailouts

“Polite Indian voices answered when we rang our banks. Spanish firms owned our airports, the Germans bought our water, Dubai controlled our ports. Our homes were flooded with cheap imported clothes, toys and electronic appliances from China. And, anyway, we were like an orchestra being conducted by an invisible hand” wrote Times columnist Janice Turner.

But now that music has stopped , the orchestra is coming apart. Suddenly Protectionism is the buzz word replacing Globalization.

Italy has threatened to retaliate against British workers if the Italian company in Britain is forced to sack its Italian and Portuguese staff.

Barrack Obama’s Buy American plan makes it mandatory for US companies taking bail out plans to purchase all goods and services from domestic supply has triggered a shock with the supporters of Globalization... Banking firms which have been bailed out have been asked not to issue H1B visas – a majority of H1B visa holders are Indians working in IT industry.

The debate has started… The debate is no longer about the merits of free markets and globalization but how to stop them from causing further havoc. The mood is now about protecting national interests and rights of local workers, farmers etc. A diplomatic row is simmering between US and Europe over the Buy American plan.

Paul Krugman, noted economist in his column on New York times Who will stop the pain? quotes from the minutes of a meeting of US Fed officials - “All participants anticipated that unemployment would remain substantially above its longer-run sustainable rate at the end of 2011, even absent further economic shocks; a few indicated that more than five to six years would be needed for the economy to converge to a longer-run path characterized by sustainable rates of output growth and unemployment and by an appropriate rate of inflation.”

Every day you hear governments bailing out one industry after another and recession in Europe is spreading. Anti government street demonstrations, sparked by mounting job losses and fear of an uncertain future has erupted across Europe in the face of a deepening economic crisis. The anger has been fuelled by by the perception that governments are too busy bailing out banks and big businesses and not bother about the common man. Its a tough call for governments as well.

This morning got a call from a friend working as a techie and he painted a gloomy picture about the impact of recession on IT industry in India. He predicts darker days ahead for the Indian IT companies and this might go on till the end of 2010.

What lies ahead for Indian IT industry… IT bubble bust in 2001 was largely attributed to dot com bubble and it was specific with IT sector. But todays depression has not spared any sectors. Its pervasive..

Well i advice passing graduates not to waste time and do a PG or Masters abroad so that when the industry picks up they are qualified to take up the opportunity. But there will be cut throat competition and the survival of the fittest will hold good in future...

If Indian IT industry starts laying off in a large scale i do predict a sub prime crisis (people defaulting on housing loans because of layoffs) in India and banks would be the first victim. One of my colleague predict that Banks will face pressure if students who do not get jobs and who have taken educational loans start defaulting. Though its too early to conclude this, things certainly look gloomy.

Looks like the mother of all depression is round the corner..

Is India a poor country? Swiss Bank has the answer :-) :-)

India is always projected as a poor country by the western world and even we think so looking at the fiscal situation and the number of people living below poverty line... But wait.... Here is a revelation from Swiss Bank....

Is India poor, who says? Ask the Swiss banks. With personal account deposit bank of $1,500 billion in foreign reserve which have been misappropriated, an amount 13 times larger than the country's foreign debt, one needs to rethink if India is a poor country?

Recently, due to international pressure, the Swiss government agreed to disclose the names of the account holders only if the respective governments formally asked for it. Indian government is not asking for the details..... ..no marks for guessing why?
We need to start a movement to pressurise the government to do so! This is perhaps the only way, and a golden opportunity, to expose the high and mighty and weed out corruption!

DISHONEST INDUSTRIALISTS, scandalous politicians and corrupt IAS, IRS, IPS officers have deposited in foreign banks in their illegal personal accounts a sum of about $1500 billion, which have been misappropriated by them. This amount is about 13 times larger than the country's foreign debt. With this amount 45 crore poor people can get Rs 1,00,000 each. This huge amount has been appropriated from the people of India by exploiting and betraying them. Once this huge amount of black money and property comes back to India , the entire foreign debt can be repaid in 24 hours. After paying the entire foreign debt, we will have surplus amount, almost 12 times larger than the foreign debt. If this surplus amount is invested in earning interest, the amount of interest will be more than the annual budget of the Central government. So even if all the taxes are abolished, then also the Central government will be able to maintain the country very comfortably.

Some 80,000 people travel to Switzerland every year, of whom 25,000 travel very frequently. 'Obviously, these people won't be tourists. They must be travelling there for some other reason,' believes an official involved in tracking illegal money. And, clearly, he isn't referring to the commerce ministry bureaucrats who've been flitting in and out of Geneva ever since the World Trade Organisation (WTO) negotiations went into a tailspin!

Just read the following details and note how these dishonest industrialists, scandalous politicians, corrupt officers, cricketers, film actors, illegal sex trade and protected wildlife operators, to name just a few, sucked this country's wealth and prosperity. This may be the picture of deposits in Swiss banks only. What about other international banks?

Black money in Swiss banks -- Swiss Banking Association report, 2006 details bank deposits in the territory of Switzerland by nationals of following countries:
TOP FIVE

INDIA $1,456 BILLION
RUSSIA $470 BILLION
U.K. $390 BILLION
UKRAINE $100 BILLION
CHINA $96 BILLION


Now do the math's - India with $1,456 billion or $1.4 trillion has more money in Swiss banks than rest of the world combined. Public loot since 1947:


It is further estimated by experts that one per cent of the world's population holds more than 57 per cent of total global wealth, routing it invariably through these tax havens. How much of this is from India is anybody's guess.

What is to be noted here is that most of the wealth of Indians parked in these tax havens is illegitimate money acquired through corrupt means. Naturally, the secrecy associated with the bank accounts in such places is central to the issue, not their low tax rates as the term 'tax havens' suggests. Remember Bofors and how India could not trace the ultimate beneficiary of those transactions because of the secrecy associated with these bank accounts?

Its anybody's guess that the money deposited in such safe heavens will continue to grow astronomically and we will never be able to get those back... Any way out... A BIG NO IS THE ANSWER....

Click on the following links related to this....

http://www.deccanherald.com/Content/Oct242008/editpage2008102396843.asp
http://www.telegraphindia.com/1090116/jsp/opinion/story_10397236.jsp