I still keep in touch with my colleagues. They are all in great shape ( I meant in their career :-). Everyone is smart in some way and especially the teacher who used to teach us is really been the pillar behind everyone. A selfless act, he stooped down from his teacher position to a friend during our classes. Many life has been changed by him.
So this morning my friend Vinod gives this wonder summation of global recession. I think he covered good. We can argue about communism and other facts, but overall a fantastic opinion put forth by him. So, what does Vinod do... well apart from playing flute, you guessed it. He is in the loans department of a major bank.
What started the global recession? The sub-prime mortgage exposure and losses, the subsequent collapse of a HUGE bank in the US and the resulting lack of rust in the banks all over the world in each other (in some cases, not without reason), leading to liquidity crunch in the financial systems all across the world . What caused the sub-prime exposure and losses? The whole thing started with an innocuous-sounding letter sent by Clinton to the major banks and financial institutions in the US (it was an interesting letter. 'Am not able to lay my hands on that. Shall forward it as soon as I get my hands on it). 'It was a suggestion made by the Govt. to the US banks/ Fis to embark on more "inclusive" banking practices'.
This was followed-up by numerous 'discussions' and 'negotiations' between the US Govt. and its banks on how and how much to implement the suggestion. The suggestion was this:
"US Banks currently offer mortgage loans to only those applicants who either have a proven track record of repayments or are able to show documents/ evidence of ability to repay the loan installments in future. There is a growing number of US population that have 'not been endowed with ability to service EMIs from mortgage loans'. Therefore, as a social measure, it would be a good idea for banks to offer mortgage loans to these segments also, so that they would also be able to have a roof over the head.
"What the entire suggestion reeks of is ABJECT COMMUNISM in a capitalist country. It doesn't matter if the guy has the ability (or even intention) to pay. What matters is ONLY his need - in this case, the need of a roof over the head. If a guy has that need (as all of us have), he needs to work hard, make his contribution to the economy, earn his pay-packet, grow and then with the resultant rewards, satisfy his need. This is the essence of capitalism. More of this later. Lets go back to the current recession.
Whats the result of this allt? Banks were constrained to care two hoots about ability to pay. They started offering mortgage loans- left, right and centre. Initially, this resulted in a boom. The demand for houses shot up, with more people now turning to investing in real estate (anyway, they would get the loans). It was at this stage that human's tendency towards unrealistic greed came to fore. People started chasing houses, mostly with investment motive (speculation) and banks started chasing these people, with a hope to make huge profits. Since retail loans generally vintage a bit, before showing their true colors in terms of losses, they initially did not estimate their future losses properly.
When this bubble was forced to become bigger (Govt. supervision, with a social angle, majorly helping this), the inevitable happened- the people who were anyway unable to pay, did the most logical thing - they defaulted on the EMIs). As their numbers started growing, the panicky banks started enforcing the mortgage (took possession of houses and auctioned them). They also suspended sub-prime lending (lending to those having no ability to pay EMIs, on a 'social' basis). This had a cascading effect over time, and real-estate prices started crashing since you suddenly had lot more houses on market than what was demanded. This increased defaults since the sub-prime customers did not want to pay higher EMIs on depreciating asset and preferred to surrender the houses, instead. More supply, less demand - RECESSION in the US real-estate & mortgage loans market.
A majority of these sub-prime loans, in the meanwhile or rather when things were looking hunky-dory, were converted into papers (or bonds) and sold as investments to every financial institution/ bank or its wannabe, across the globe, directly or indirectly. With the collapse of the loans, the papers turned junk, dealing a deathly blow to many banks/Fis across the globe the biggest of which, we know - Lehman brothers).
How could we have avoided the situation? Two things, throw SOCIALISM and COMMUNISM in the dustbin. If only the US govt. left the banks to themselves to decide whom to give loans and whom not to, we wouldn't have reached this situation. Even before the Govt.'s diktat, banks were still supporting and bringing up so many wannabes - but with profit motive. They did it after establishing his intention, and his income not just at the time of taking the loan but also an estimated growth in his inflows, given his ability and promise. Just because Clinton wanted
to be known as a people-savvy socially-conscious leader, he took what looks now like a small step, but a giant fall for mankind. BE and THINK CAPITALIST, for the sake of a better world.
The second part is GREED. Capitalism is always mistaken for greed. Greed is blindly running after money, without caring about doing your part to improving the economy. Capitalism believes that you need to get from the financial system as much as you have contributed to it - not a penny more, not a penny less. There was greed in the US banks' eyes in chasing sub-prime customers, when they found that there was a lot of profit in it, initially. There was greed when they repossessed and sold houses, in haste, bringing down the entire real-estate system there. Be after money, but ensure that you've created in the financial system at least as much money as you have taken.
So many suicides, so many losses, so many broken dreams have already resulted because of the highly populist measure of giving because the other person needs and not because he deserves. A disciplined capitalist like Warren Buffet always shows us that what is the other side of the coin.
So this morning my friend Vinod gives this wonder summation of global recession. I think he covered good. We can argue about communism and other facts, but overall a fantastic opinion put forth by him. So, what does Vinod do... well apart from playing flute, you guessed it. He is in the loans department of a major bank.
What started the global recession? The sub-prime mortgage exposure and losses, the subsequent collapse of a HUGE bank in the US and the resulting lack of rust in the banks all over the world in each other (in some cases, not without reason), leading to liquidity crunch in the financial systems all across the world . What caused the sub-prime exposure and losses? The whole thing started with an innocuous-sounding letter sent by Clinton to the major banks and financial institutions in the US (it was an interesting letter. 'Am not able to lay my hands on that. Shall forward it as soon as I get my hands on it). 'It was a suggestion made by the Govt. to the US banks/ Fis to embark on more "inclusive" banking practices'.
This was followed-up by numerous 'discussions' and 'negotiations' between the US Govt. and its banks on how and how much to implement the suggestion. The suggestion was this:
"US Banks currently offer mortgage loans to only those applicants who either have a proven track record of repayments or are able to show documents/ evidence of ability to repay the loan installments in future. There is a growing number of US population that have 'not been endowed with ability to service EMIs from mortgage loans'. Therefore, as a social measure, it would be a good idea for banks to offer mortgage loans to these segments also, so that they would also be able to have a roof over the head.
"What the entire suggestion reeks of is ABJECT COMMUNISM in a capitalist country. It doesn't matter if the guy has the ability (or even intention) to pay. What matters is ONLY his need - in this case, the need of a roof over the head. If a guy has that need (as all of us have), he needs to work hard, make his contribution to the economy, earn his pay-packet, grow and then with the resultant rewards, satisfy his need. This is the essence of capitalism. More of this later. Lets go back to the current recession.
Whats the result of this allt? Banks were constrained to care two hoots about ability to pay. They started offering mortgage loans- left, right and centre. Initially, this resulted in a boom. The demand for houses shot up, with more people now turning to investing in real estate (anyway, they would get the loans). It was at this stage that human's tendency towards unrealistic greed came to fore. People started chasing houses, mostly with investment motive (speculation) and banks started chasing these people, with a hope to make huge profits. Since retail loans generally vintage a bit, before showing their true colors in terms of losses, they initially did not estimate their future losses properly.
When this bubble was forced to become bigger (Govt. supervision, with a social angle, majorly helping this), the inevitable happened- the people who were anyway unable to pay, did the most logical thing - they defaulted on the EMIs). As their numbers started growing, the panicky banks started enforcing the mortgage (took possession of houses and auctioned them). They also suspended sub-prime lending (lending to those having no ability to pay EMIs, on a 'social' basis). This had a cascading effect over time, and real-estate prices started crashing since you suddenly had lot more houses on market than what was demanded. This increased defaults since the sub-prime customers did not want to pay higher EMIs on depreciating asset and preferred to surrender the houses, instead. More supply, less demand - RECESSION in the US real-estate & mortgage loans market.
A majority of these sub-prime loans, in the meanwhile or rather when things were looking hunky-dory, were converted into papers (or bonds) and sold as investments to every financial institution/ bank or its wannabe, across the globe, directly or indirectly. With the collapse of the loans, the papers turned junk, dealing a deathly blow to many banks/Fis across the globe the biggest of which, we know - Lehman brothers).
How could we have avoided the situation? Two things, throw SOCIALISM and COMMUNISM in the dustbin. If only the US govt. left the banks to themselves to decide whom to give loans and whom not to, we wouldn't have reached this situation. Even before the Govt.'s diktat, banks were still supporting and bringing up so many wannabes - but with profit motive. They did it after establishing his intention, and his income not just at the time of taking the loan but also an estimated growth in his inflows, given his ability and promise. Just because Clinton wanted
to be known as a people-savvy socially-conscious leader, he took what looks now like a small step, but a giant fall for mankind. BE and THINK CAPITALIST, for the sake of a better world.
The second part is GREED. Capitalism is always mistaken for greed. Greed is blindly running after money, without caring about doing your part to improving the economy. Capitalism believes that you need to get from the financial system as much as you have contributed to it - not a penny more, not a penny less. There was greed in the US banks' eyes in chasing sub-prime customers, when they found that there was a lot of profit in it, initially. There was greed when they repossessed and sold houses, in haste, bringing down the entire real-estate system there. Be after money, but ensure that you've created in the financial system at least as much money as you have taken.
So many suicides, so many losses, so many broken dreams have already resulted because of the highly populist measure of giving because the other person needs and not because he deserves. A disciplined capitalist like Warren Buffet always shows us that what is the other side of the coin.
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