The rule of law

As a student in Delhi, I have always found a spate of anti-establishment sentiment in the student community. But I have myself been very skeptical about this view. It wouldn't take much to convince me through a simple greater good argument about most of the activities of the State, be it in Kashmir, Chhatisgarh or elsewhere. Of course, this isn't to say that the framework in which we're functioning is perfect, far from it. But my belief lies firmly in the need for the existence of a framework and functioning within it.

In the Indian system that belief borders on the dangerous. The labyrinth of bureaucracy, the possible nexus of the politician and the police; these are all part of a dirty underbelly, rather than a transparent entity. I don't have a counter answer for the statement- 'for an established system in society, any movement for improving that system becomes an unacceptable form of rebellion by law'. neither am i unequivocal about the desire and possibility of changing the system. BUT i am a disbeliever when it comes to anarchy, i am comfortable in the presence of the rule of law.

I read a ridiculous article about how we need a new constitution. I was surprised that the Indian Express chose to publish it. The Constitution is the very basis from which any and every right that we have is drawn. Sure there are lacunae in it, in our Penal Code (very apparent from Binayak Sen's conviction for sedition by the trial court), but the task for us is to improve it to keep it apace of the times and not to discard it. Our basis is strong and we must stand by it, it is our manner of progress that needs scrutiny.

The Right to Life is dying and we won't stop it

The 9 o'clock news today had a story about 4 policemen kidnapped by the Naxals, who're demanding the release of 8 of their comrades and a stop to Operation Greenhunt. Much in the same way that I'm starting with this to catch your attention, the "catch" used for the story was the family of one of the policemen. His wife and his daughter were shown crying in pain and agony begging for the life of their loved one. The deadline for the government to meet the Naxal demands is 9am, tomorrow.

Should the government bow down to these demands, or any such demands that 'terrorists' make? Precedent tells us that they will. India is a soft state when it comes to negotiation. In 1989, Rubaiya Sayeed, daughter of the Home Minister was kidnapped; in 1999-2000 IC-814 was hijacked and taken to Kandahar; in October 2009, 22 naxal comrades were released in exchange for one kidnapped policeman. The agony of the family, the life and liberty of individuals has always won over the greater good of the operation.

In sharp contrast to this, countries the world over follow no-negotiation policies. It's simply good politics to tell terrorists- ''Your kidnapping and trying to get public attention isn't going to work buddy." The US refused to negotiate the release of Daniel Pearl, China would probably hang the people whose release was demanded. The individual and his life simply doesn't stand up against the aims of ending the war on terror and protecting society. Very simply, for some things you can't avoid collateral damage. This argument is stretched to its limit in the movie Watchmen,(based on its graphic novel). *spoiler* The smartest man on earth engineers the killing of nearly half of all mankind which pushes the remaining ones to world peace. Killing millions to save billions. Once it's done, it leads to something good. It's the doing which the world is having problems with. With anti-state movements becoming more sophisticated, we're running out of excuses to not wipe the 'scum' off the face of the earth. If some people get in the way, so be it.

The premium placed on human life seems to be waning. Along with greater good, commodification is coming to haunt us. Presently, humans can't manufacture human life. Sure we can reproduce, but it's still very much the Miracle of Life. Cloning, genetic engineering, maybe even mass production of test tube babies a la' Brave New World isn't as far a reality as we might think. There's this drive towards a great rationality, a great logic, to define the purpose of human life and to make man perfectly suited to fulfill it. The problem is IF that greater purpose is ever discovered, we'll slowly but surely be engineered to perform it. And that will be the death of the individual and all that will matter is the greater good of the community. The Individual's Right to Life will be rendered meaningless.

Is Osama Bin Laden real?

It's been 9 years since the US started its war on terror. Nine long years since the first bomb rained down on Kabul to overthrow the Taliban and hunt down Osama Bin Laden, the world's most wanted man. Capturing Osama won't end the war. You can kill a man but you can't kill his ideas. Capturing or killing him isn't going to vanish away the problems of the region. But then again, we would prefer him dead given the fear and awe his name inspires. Is that possible? Not really if he's not real.

Osama Bin Laden would be the dream of a terrorist who's a brand manager. Masks and beards and voices wouldn't be much of a problem given the kind of technology we have. He would be the One Godly figure spreading anti-West propaganda, video after video, uniting the cause, inviting new members to it. Plus, it becomes kinda hard to catch someone who doesn't exist, it's perfect.

Either there's this deadly terrorist dude somewhere or these Al Qaeda blokes are really smart..

PS- I haven't actually seen George Bush either, but i still think he exists, ditto for Osama. Except Bush is quite a nightmare.

exams

Every year, Delhi University organizes a monstrous number of practicals, written exams, assessment procedures and the works. I'm not a fan of the system and I'll tell you why-

The EXAM is still a ONE DAY test of how much of the entire year's syllabus I can commit to my memory. So if i don't understand jack and I memorize a copy full of notes, it's going to get me through my exams, none the wiser to what economics really means. Sagarika Ghose, IBN journalist and anchor wrote after watching 3 idiots that the entire message- "the-system-sucks-and teachers-are-pathetic-and-who-cares-about-grades-and-the-rat-race-is- foolish." is flawed, and dangerous. While I see her point about making the best you can with what you've got, and just that having access to that system is a HUGE thing for a lot of people, I don't ascribe to the placatory tone of 'aal iz well' that's implicit in that view.

Another point is that 3 idiots, is cinema. Yes, cinema has influence on people, but it's supposed to be entertainment. Let's not castigate it for a message we think is dangerous, especially when that danger is ambiguous. The system is flawed, and we better make a huge hue and cry about it, encourage cinema to take up the social message, as well as journalists, so that we can change things.

For the love of the game

26 May 1999; on this day, Manchester United scored two goals in the last three minutes of the match to clinch the treble: the Union of European Football Associations (UEFA) Champions League, the Premiership and the Football Association (FA) Cup, all in the same season! A football fan was born. Eight years later, times have changed, people have changed. The love for football is constant.

Exactly what is so exciting about a bunch of people kicking a ball around and trying to put it in a goal, even willing to lash out at each other physically and verbally? Well, defining football in terms of pure animal instincts is blasphemous in itself. Like any other sport, football is an art. There is beauty in watching brilliant passing moves or skills and an inexplicable thrill in executing them yourself. There is a passion to have a favourite team or player; the same passion which makes you keep your studs (football shoes) and a pair of shorts, always ready to be picked up at the shortest notice.

Football has massive global appeal, evident from the interest shown in the Fédération Internationale de Football Association (FIFA) World Cup 2006, held in Germany and the keenness with which the European Leagues are followed. However, the English Premier League continues to be the blue-eyed boy. With foreign ownership and a new sponsorship deal coming in, the League is expected to be second biggest sporting league in the world, only after the National Football League (NFL) in USA.
The Barclays Premier League (known so for sponsorship reasons) is akin to heroin for an addict, the Bible for a Christian, a must-watch for any football fan. From being a mere breakaway league to being the face of English football, it has made football more than just a game, a rabid eruption of passion, emotions and money with a fan base not limited to one country, in terms of numbers or enthusiasm. There is wondrous journey that the league took to be where it stands now. Today, people stay up late to watch games, get together to discuss their team's fortune, save their pocket money for apparel, go into bouts of depression because their team lost to arch rivals and celebrate like maniacs on victory. One wonders, what made the League such a humungous success? What drives it? Why is it so popular?

The Football Association was established in 1863 making football one of the oldest sports in England. Yet, England has won the World Cup only once, as hosts in 1966. Further, till the late 1980s, the playing conditions, facilities, promotion et al of the game were surprisingly pathetic. This was turned around with investment in stadia and other infrastructure. The England team reaching the semi-finals of the FIFA World Cup in 1990 brought the game into focus, leading to establishment of the FA Premier League in 1992 with 22 contesting teams. This was reduced to 20 in 1995. The league was a huge success and fulfilled its purpose of tapping the enormous potential of football, in terms of popularity as well as investment. Consider this, in 1991-1992, one year before the formation of the Premier League, the total revenue of Division One clubs was Great Britain Pounds (GBP) 170 million; in 2005-2006, the total revenue of Manchester United, a single team, was GBP 168 million.

The Premier League operates as a corporation. It is owned by the 20 member clubs, all of which are considered a shareholder with one vote each. The clubs elect a Chairman, Chief Executive and Board of Directors to oversee the daily operations. The Football Association, the governing body of English football, has a veto power with regard to some issues. The 20 clubs play all the other teams twice in a season, once at their home stadium and once at the opponents'; amounting to 38 games per team in a season, which lasts from August to May. There are three points for a win and one point for a draw. The teams are ranked by total points, and then the goal difference followed by the goals scored, which is usually sufficient to decide the winners, the teams with UEFA Champions League spots (the first four teams) and the three teams to be relegated to the Football League Championship.

40 teams have been part of the League since its inception in 1992. Only seven have been in all 15 till 2006. The teams themselves are mega-corporations with massive turnovers and profits, their own infrastructure, shareholders, training centers and youth programs. Of course, their primary activity is maintaining and developing a football team. Along with that comes a host of commercial activity like apparel trade, mascots and campaigns, to name a few, all of which translates into revenue and popularity.

Of all teams, the richest and most successful four teams, popularly known as the 'Big Four' are Arsenal, Manchester United, Chelsea and Liverpool. Manchester United is the most successful, winning the League nine times, out of a total of 15. Arsenal and Chelsea have won the league three and two times respectively, with Liverpool being the only one without a League title. These teams have the largest number of supporters, attract the world's biggest players, have a healthy and sometimes unhealthy rivalry.

A major reason for the success of these teams is being part of the UEFA Champions League. The top four teams from the League get to participate in the competition, which results in a near doubling of revenue earned in a season. This leads to more money available for investment, which translates into better results.

The competition in the League is not just a matter of money. It is after all, a sport and so it involves ego- of club owners, big players, team fans, club managers, and of each person associated with the game. It is an insult to lose a game to an archrival, whereas a victory implies bragging rights. Further, for some teams it is about winning the League, for others it is about staying in the league, for yet others it is about grabbing European competition spots and lastly it is the prerogative of some to break free from an established pecking order to live their wildest dreams of achievement. All of this results in fierce, cutthroat competition and that leads to a persistent drive towards development in a professional and efficient way. This is reflected in the state of the art facilities, which other sports would do well to ape. Each club has its own stadium with capacities running into tens of thousands. The largest stadium is Old Trafford, owned by Manchester United with a seating capacity of 76,100! The maximum attendance ever has been 76,098 fans, to watch a single match; the average attendance for a Premier League game being 34,363 fans. Apart from the stadiums, the teams invest in support staff, medical staff, technical staff, marketing, public relations, and every other aspect you can think of, to keep up with the times. Use of technology for analysis, strategy and training is not a whim, but a necessity. To quote an example (not the typical and I daresay, outdated one of video analysis), some teams use a facility called the ice room for muscle toning, which exposes players to ice cold fumes to limber up muscles.
Naturally, the most important part of all teams is the players. Premier League clubs have almost complete freedom to sign whatever number and category of players they wish. There is no team or individual salary cap, no squad size limit, no age restrictions other than those applied by general employment law, no restrictions on the overall number of foreign players, and few restrictions on individual foreign players. At the inception of the League in 1992-1993, only a handful of players hailed from outside England. Such is the impact of the League, that by 2004-2005, nearly half the players in the League were foreigners. The other half of course, hail from England, most having come up through the excellent youth programs, which are an integral part of each corporation (club). It is a matter of great prestige to be playing football in the Premiership, probably a dream for millions of youngsters. The good part for the English youth is that there is no lack of incentives to get involved in the sport. First, the iconic status and adoration, something similar to what happens to cricketers in India. Second, the money raked in. The average annual salary in 2003-2004 was GBP 676,000, a whopping five and a half crore. Being the top league in the world, the best players are wooed by the clubs. To cite an example, Rio Ferdinand, Manchester United's star defender earns GBP 120,000 a week, approximately INR 1 crore in one week. And that is excluding endorsement.
It is a truism to state that football is a popular sport, but it is business acumen to study what makes it so. Of course, it is a brilliant game, requiring skill and strategy, enthralling the public's demand. But it is greatly aided by an aspect called Marketing. This includes promotion of the League, promotion of teams and players. Along with that comes the whole media circus with views, reviews, speculation, controversy, expert opinions and endorsements all fed to the eager masses. For each game played, there is week-in analysis plus a pre-match and post-match program, all beefed up with some small competition or the other. Hence to increase TV ratings, a ludicrous fee is paid to the Premiership (currently GBP 1.7 billion as TV rights). In return, the channels provide in-house analysis, earn equally ludicrous advertisement rates and give away a few T-shirts and mobile phones as prizes. This goes to explain why there are umpteen number of football shows in all countries and one of the punch lines is 'The Greatest Show on Earth'. Of course, the attention is not solely on the football being played. It is about controversy and gossip, be it personal or professional. Football players are celebrities, constantly under the scanner, being paid fantastic salaries for playing and being intruded upon. This is not to say whether they enjoy it or not.
So, football at the base, complemented with investment, marketing, popularity and passion, and substituted by none has become a humungous industry, an industry with its managers, its members, its supporters and money. Revenues, marketing, salaries, investments, profits, transfers; the whole league is a churning pot of money, a very large amount of money. This money goes to the corporations, the government, as tourism, taxes or fines. Then, it goes to the people, is spent by them and keeps circulating in the economy. The money becomes someone's income, the work becomes someone's employment, and the game becomes someone's passion. This passion supports an industry, is supported by another industry, and becomes an industry in itself. The winner is not just football, it is just about everyone.

For the love of the game

26 May 1999; on this day, Manchester United scored two goals in the last three minutes of the match to clinch the treble: the Union of European Football Associations (UEFA) Champions League, the Premiership and the Football Association (FA) Cup, all in the same season! A football fan was born. Eight years later, times have changed, people have changed. The love for football is constant.

Exactly what is so exciting about a bunch of people kicking a ball around and trying to put it in a goal, even willing to lash out at each other physically and verbally? Well, defining football in terms of pure animal instincts is blasphemous in itself. Like any other sport, football is an art. There is beauty in watching brilliant passing moves or skills and an inexplicable thrill in executing them yourself. There is a passion to have a favourite team or player; the same passion which makes you keep your studs (football shoes) and a pair of shorts, always ready to be picked up at the shortest notice.

Football has massive global appeal, evident from the interest shown in the Fédération Internationale de Football Association (FIFA) World Cup 2006, held in Germany and the keenness with which the European Leagues are followed. However, the English Premier League continues to be the blue-eyed boy. With foreign ownership and a new sponsorship deal coming in, the League is expected to be second biggest sporting league in the world, only after the National Football League (NFL) in USA.
The Barclays Premier League (known so for sponsorship reasons) is akin to heroin for an addict, the Bible for a Christian, a must-watch for any football fan. From being a mere breakaway league to being the face of English football, it has made football more than just a game, a rabid eruption of passion, emotions and money with a fan base not limited to one country, in terms of numbers or enthusiasm. There is wondrous journey that the league took to be where it stands now. Today, people stay up late to watch games, get together to discuss their team's fortune, save their pocket money for apparel, go into bouts of depression because their team lost to arch rivals and celebrate like maniacs on victory. One wonders, what made the League such a humungous success? What drives it? Why is it so popular?

The Football Association was established in 1863 making football one of the oldest sports in England. Yet, England has won the World Cup only once, as hosts in 1966. Further, till the late 1980s, the playing conditions, facilities, promotion et al of the game were surprisingly pathetic. This was turned around with investment in stadia and other infrastructure. The England team reaching the semi-finals of the FIFA World Cup in 1990 brought the game into focus, leading to establishment of the FA Premier League in 1992 with 22 contesting teams. This was reduced to 20 in 1995. The league was a huge success and fulfilled its purpose of tapping the enormous potential of football, in terms of popularity as well as investment. Consider this, in 1991-1992, one year before the formation of the Premier League, the total revenue of Division One clubs was Great Britain Pounds (GBP) 170 million; in 2005-2006, the total revenue of Manchester United, a single team, was GBP 168 million.

The Premier League operates as a corporation. It is owned by the 20 member clubs, all of which are considered a shareholder with one vote each. The clubs elect a Chairman, Chief Executive and Board of Directors to oversee the daily operations. The Football Association, the governing body of English football, has a veto power with regard to some issues. The 20 clubs play all the other teams twice in a season, once at their home stadium and once at the opponents'; amounting to 38 games per team in a season, which lasts from August to May. There are three points for a win and one point for a draw. The teams are ranked by total points, and then the goal difference followed by the goals scored, which is usually sufficient to decide the winners, the teams with UEFA Champions League spots (the first four teams) and the three teams to be relegated to the Football League Championship.

40 teams have been part of the League since its inception in 1992. Only seven have been in all 15 till 2006. The teams themselves are mega-corporations with massive turnovers and profits, their own infrastructure, shareholders, training centers and youth programs. Of course, their primary activity is maintaining and developing a football team. Along with that comes a host of commercial activity like apparel trade, mascots and campaigns, to name a few, all of which translates into revenue and popularity.

Of all teams, the richest and most successful four teams, popularly known as the 'Big Four' are Arsenal, Manchester United, Chelsea and Liverpool. Manchester United is the most successful, winning the League nine times, out of a total of 15. Arsenal and Chelsea have won the league three and two times respectively, with Liverpool being the only one without a League title. These teams have the largest number of supporters, attract the world's biggest players, have a healthy and sometimes unhealthy rivalry.

A major reason for the success of these teams is being part of the UEFA Champions League. The top four teams from the League get to participate in the competition, which results in a near doubling of revenue earned in a season. This leads to more money available for investment, which translates into better results.

The competition in the League is not just a matter of money. It is after all, a sport and so it involves ego- of club owners, big players, team fans, club managers, and of each person associated with the game. It is an insult to lose a game to an archrival, whereas a victory implies bragging rights. Further, for some teams it is about winning the League, for others it is about staying in the league, for yet others it is about grabbing European competition spots and lastly it is the prerogative of some to break free from an established pecking order to live their wildest dreams of achievement. All of this results in fierce, cutthroat competition and that leads to a persistent drive towards development in a professional and efficient way. This is reflected in the state of the art facilities, which other sports would do well to ape. Each club has its own stadium with capacities running into tens of thousands. The largest stadium is Old Trafford, owned by Manchester United with a seating capacity of 76,100! The maximum attendance ever has been 76,098 fans, to watch a single match; the average attendance for a Premier League game being 34,363 fans. Apart from the stadiums, the teams invest in support staff, medical staff, technical staff, marketing, public relations, and every other aspect you can think of, to keep up with the times. Use of technology for analysis, strategy and training is not a whim, but a necessity. To quote an example (not the typical and I daresay, outdated one of video analysis), some teams use a facility called the ice room for muscle toning, which exposes players to ice cold fumes to limber up muscles.
Naturally, the most important part of all teams is the players. Premier League clubs have almost complete freedom to sign whatever number and category of players they wish. There is no team or individual salary cap, no squad size limit, no age restrictions other than those applied by general employment law, no restrictions on the overall number of foreign players, and few restrictions on individual foreign players. At the inception of the League in 1992-1993, only a handful of players hailed from outside England. Such is the impact of the League, that by 2004-2005, nearly half the players in the League were foreigners. The other half of course, hail from England, most having come up through the excellent youth programs, which are an integral part of each corporation (club). It is a matter of great prestige to be playing football in the Premiership, probably a dream for millions of youngsters. The good part for the English youth is that there is no lack of incentives to get involved in the sport. First, the iconic status and adoration, something similar to what happens to cricketers in India. Second, the money raked in. The average annual salary in 2003-2004 was GBP 676,000, a whopping five and a half crore. Being the top league in the world, the best players are wooed by the clubs. To cite an example, Rio Ferdinand, Manchester United's star defender earns GBP 120,000 a week, approximately INR 1 crore in one week. And that is excluding endorsement.
It is a truism to state that football is a popular sport, but it is business acumen to study what makes it so. Of course, it is a brilliant game, requiring skill and strategy, enthralling the public's demand. But it is greatly aided by an aspect called Marketing. This includes promotion of the League, promotion of teams and players. Along with that comes the whole media circus with views, reviews, speculation, controversy, expert opinions and endorsements all fed to the eager masses. For each game played, there is week-in analysis plus a pre-match and post-match program, all beefed up with some small competition or the other. Hence to increase TV ratings, a ludicrous fee is paid to the Premiership (currently GBP 1.7 billion as TV rights). In return, the channels provide in-house analysis, earn equally ludicrous advertisement rates and give away a few T-shirts and mobile phones as prizes. This goes to explain why there are umpteen number of football shows in all countries and one of the punch lines is 'The Greatest Show on Earth'. Of course, the attention is not solely on the football being played. It is about controversy and gossip, be it personal or professional. Football players are celebrities, constantly under the scanner, being paid fantastic salaries for playing and being intruded upon. This is not to say whether they enjoy it or not.
So, football at the base, complemented with investment, marketing, popularity and passion, and substituted by none has become a humungous industry, an industry with its managers, its members, its supporters and money. Revenues, marketing, salaries, investments, profits, transfers; the whole league is a churning pot of money, a very large amount of money. This money goes to the corporations, the government, as tourism, taxes or fines. Then, it goes to the people, is spent by them and keeps circulating in the economy. The money becomes someone's income, the work becomes someone's employment, and the game becomes someone's passion. This passion supports an industry, is supported by another industry, and becomes an industry in itself. The winner is not just football, it is just about everyone.

The current financial crisis

The Changing Face of the Financial World, Fear is the Key, Wall Street Banks are History and so on and so forth.
These are just a few of the headlines running rampage over the daily newspapers, magazines, editorial columns, and of course the financial systems of the entire world. Everyone knows of the collapse of some big names like Lehman Brothers and Merrill Lynch, we all have read about the 2 trillion USD worldwide financial bailout; some of us read the Economic Times and nod wisely at all the financial jargon, but very few of us, including yours truly, have their heads wrapped around the ABC of the crisis. Yet, one must try to lay threadbare the situation and try to understand the goings on as plain logic.
To comprehend the trouble, one needs to understand the causes, the hanky-panky, the reactions and the effects of the crisis. To start off, the root cause of the crisis is the astounding progress that the US has made as a nation. Over the past 10 years, the US has been fuelling its economy through debt, be it easy debt to firms, consumers, in the foreign exchange market; everywhere. Add to that the social context, where children are not dependent on parents after the age of 18, and parents don’t save for marriages et al as in India, what you get is a mad rush towards bigger and better consumerism and a lower rate of saving. People dump their 2 month old washing machine for the latest model; take loans to buy that luxury car, and most of it as debt because it is available! As a responsible government taking care of its citizens, the US promulgated the concept of ‘financial inclusivity’. Under this, the government endeavours to enable lending to everyone, even those who do not have the means to be good borrowers. This is what is called sub-prime lending, where borrowers with no means of guarantee of repayment are given loans, what is popularly called a NINJA (No Income, No Job, No Assets) loan.
Moving specifically to the real estate market; after the bursting of the dot-com bubble in the early 2000s, people withdrew their money from these avenues in droves and chose real estate as the new crown prince of investment. As is true of any economic bubble, the possibility of a decrease in prices was completely blocked out, and the entire system functioned on this assumption. Prices of houses going up led to positive speculation about the market, and an expectancy of the prices going up further. A bad loan was all right because the property’s price had increased so non-payment or default leading to seizure of property would be profitable; an adjustable rate loan, where for the first few years a person pays a very low interest rate called a teaser rate and later a much higher interest rate, was taken because people weren’t told about the high rates in some cases and could refinance their loan in some cases against increasing property prices. For example, to buy a house worth 100,000 USD, one could take a loan of 80,000 USD. Now, if the price of the property goes up to 120,000 USD, the repayment of the loan is eased out, either by loan period or interest rate adjustment.
A spin-off of the assumption of ‘always increasing real estate prices’, that has, coupled with financial innovation on Wall Street wreaked havoc on the worlds financial systems is securitization of mortgages. A financial institution could either be a lender, or could buy these loans from property loans institutions. Such a loan would be an illiquid asset of the bank. But given the increasing real estate prices, and hence a guarantee of the loan being paid, there was an opportunity for banks to earn money from this. What they did is that they pooled together these mortgages/loans and created a security out of it. Hence a security is a financial asset, where people are given a certain rate of return. This way the mortgages and loans were sold again, raising more money for the bank, and diversifying the risk to other consumers as well. This became one of the major sources of funds for institutions, with the overall value running into trillions of dollars and was further exacerbated by rating agencies slacking on their due diligence reports. Ratings were given to the securities based on the reputations of the firms issuing them rather than the underlying asset backing them; once more, the assumption of the real estate market being stable leading to apathy of regulation. Yet another slip-up because of the ‘innovation’ was that the regulations, statutory capital requirements as backing for the securities were left ambiguous. These special purpose vehicles were allowed to be left off the balance sheets of firms, operated through a subsidiary. Hence, the mortgages being put together were often of bad quality, and this was kept hidden from the public at large, realization of a grave moral hazard.
Having established a background of the situation, the next step to be looked at is the trigger of the crisis. If there was a bubble, where did the pricking of the pin come from? The answer cannot be given in one line or one word, but is rather a combination of factors and a certain inevitability of the situation. Once the markets are being fuelled by speculative price rise, it is only a matter of time before one person selling property leads to 100 others doing the same. For them, it would simply be a realization of the returns they expected. In the market, seen from a simple demand-supply approach, it would mean a sudden jump of supply of housing leading to a fall in prices. Also, given the economic situation of the world, the rapid increase in the prices of oil, commodities and food, daily household spending received a pinch. To control this inflation, the Federal Reserve increased its interest rates leading to loans and other form of borrowing becoming more expensive. Add to that the fact that Americans did not save up their money (the saving rate for the economy was 1.7% compared to India’s 20-30%) for tough times and that a lot of the loans taken were adjustable rate loans whereby payments required to be made jumped up after a certain period of time; these factors together led to a severe payment shock for the borrowers and led to a large number of defaults or non-payments of the loans.
The danger to the economy here started from the micro level, with people at risk of being shunted out of their homes, not being able to pay for them anymore. Then the toxic effects started spreading. Because of the sudden rush to sell homes, the supply outstripped demand and led to the price crash everyone was afraid of. The number of bad loans given out were humungous, so the lending institutions got the rap from there. The banking system and this needs attention to detail given the recent crashes, suffered due to the securitization process. As outlined, the cash flows to the securities dried up closing one major avenue of revenue for the banks. Also, institutions themselves were investors in these securities as much as individuals were, making that another loss which they had to bear. This led to the daily spending of banks being threatened because they rely on short term loans. These short term loans from other institutions disappeared since the institutions themselves required the money, and did not know which bank can be trusted with the money, since the records of the securities were off the balance sheets of the institutions. A breakdown of trust of position of the banks brought with it a credit crunch, where banks needing to make payments didn’t have reliable sources of money, and consequently, consumers wanted to withdraw their money from the bank- a run on the bank. It is this lack of transparency within the system that has led to the crashing of the financial giants on Wall Street. Banks have been desperately trying to raise capital by selling off assets, merging with performing firms, reducing the scope of their businesses. Yet, even these are not enough to overcome the twin blows of mortgage-backed losses and a fall in trust levels.
It is precisely for these reasons that governments all over the world are creating financial stimulus, bailout packages and the likes. The reason for them coming up is the simple ideological differences of the micro and macro level. The world economy is judged by governments and people at a macro level, in terms of aggregate outputs, unemployment and other such indicators that include social welfare as one of the primary goals. However, at a micro level, individuals as well as firms operate on a principle of personal benefit, more popularly called profit. If avenues shut down, and output shrinks, it would be better for firms to stop production and minimize their personal losses, even though the macro economy would suffer because of it. This is the reason that a government intervention is taking place. It is being criticized as responsible tax-payers bailing out irresponsible spenders however a full-blown market correction would lead to a much larger loss to the entire economy, including the tax-payers, than if the government intervenes and saves some institutions from completely shutting down.
The effect is being felt globally because of the much touted globalization. Investors from foreign markets who had heavily invested in the mortgage backed securities suffered substantial losses. Further, with parent companies running into trouble, their arms in different parts of the world too suffered. Also, capital inflows to emerging economies like India, export-import dynamics, all have taken a hit because of reduced spending, the world over.
The question remains- Is the crisis over? Is the worst yet to come? I’m neither an expert economist (yet), nor a plagiarist of the numerous business journals that come out periodically, and can only put down a logical guess so to say. My verdict would be that the suffering is far from over. The cleaning up of toxic assets has only started yet. Even with government bailouts, the assets don’t evaporate. Regulatory mechanisms will undergo revamping, and the global economy will take some time to react to that. Availability of capital for businesses is and will continue to take a hit for a while. The world economy is like a gigantic beast tripped up. It will take a lot of effort and time to get it running again.