Sunday, September 21, 2008

The Economic Gibberish...!!

I was absolutely clueless about what's happening to the world markets, and the economical jargon confused me beyond any hope. But i knew that what was happening could or will in some way affect us, whether we understand it or not. And guess what, i had nothing better to do other than stare at the news on TV. Well... from what i understood, it all began with America's very generous credit policies. Which meant that credit or loans were given to almost anyone, without even ascertaining the fact whether that fellow could pay it back or not. Mostly these loans were provided to purchase houses. As more and more loans started to be given out to buy houses, the land value too skyrocketed. Accordingly, the loan amounts given started to become even bigger. Now coming back to the fellow to whom the loan was given, might not even be eligible for the loan for whatever reason it might be.  

The banks didn't scrutinize much the details about him, and just gave him the loan. Even if he had a previous defaulting history, it didn't mind. Obviously over a period of years, the number of defaulters began to rise. People were not able to repay the loans, and would just hand over the house keys back to the bank. When more and more people begin to hand back the house, the land value would eventually plummet. This means the bank wont get back the money that it had loaned out, let alone any profit out of it.

Upon evaluation, it was suspected that the banks were just full of hot air. They held assets whose value would fall sharply. As the fear of such a situation began to be realized, people became panicky and began to lose faith in these large bank corporations. Eventually their share values dropped as people began to sell off the shares like crazy. Even those companies that had invested or did business with these American banks began to feel the pinch, on the possibility of a closure. Ultimately, leading to the bankruptcy of some, while others had to be rescued by the US government. A situation which was thought to be most unlikely in a capitalist economy, where there is minimum intervention by the government in most business institutions. Now, the government has actually become a major stake holder in some of the biggest American corporations.

Apparently the shocks of such a major fall were received in India as well, along with most markets around the world. But, as far as a similar situation arising in India is concerned, its most unlikely to happen. Though some business directly attached to these banks might be affected a bit. Such as a few IT companies that did their work with Lehman, AIG etc. Anyway... as told to me by someone, the credit policy in Indian Banks are far from being so liberal. Though there are quite a lot of annoying offers through telephone at a time when you are having a nice nap, they are not a representation of their actual willingness to approve your loan. Loans are given only upon reliable estimation of the person's repaying capacity. And from now on, after the US example, the checking will be doubled and tripled, just to be on the safer side. It will be the same regarding the issue of credit cards as well. 

Also in India, there is a concept, upon which most of the West sneer at, called "Saving". People here generally tend to save quite a good amount of money for an emergency or safety. Also a lot of Indians invest directly in Gold. While in US and Europe, they believe in investing all that they have...! Thus in case of any remotely possible signs of turmoil, people there tend to become fearful of becoming paupers overnight...!

Well, that's what i could dust off from my limited economic knowledge, and following up of the news, debates, and grown ups debating. There may be slight ( read as major ) inaccuracies in my analysis, which are begged to be forgiven. :)

Disclaimer : All theories, comments, opinions the sole property of the author and are purely for the purpose of killing some quality time. They should not be literally taken as any reliable advice or suggestions, unless they are confirmed by a suitable authority. Any mismatch or discrepancy is purely unintentional and due to the lack of knowledge about the subject. Any inconvenience, heart attack, tummy aches or nose itch are deeply regretted.


Philip Kingsley said...

good info. Liked the disclaimer

Visu said...

Well, I don't have much idea either. Whenever i ask some guy in the field he annoys me with his jargon and numbers and i don't give a damn. Anyway, I do hope this crisis won't be affecting the rest of the world as such. Everything will be back to square one soon, as soon as BOA buys everything and calls it a day. :P ..
But yeah, Indian financial firms are kinda stern, they do this background check et al. Ah well, whatever.