Tag Archives: Economy

Stocks Decline , Jobs Lost , Global Rout Continues

Escalating sovereign debt problems in Europe (mainly Greece , Portugal and Spain) and an unexpected rise in jobless claims put investors on the defensive just ahead of Friday’s crucial payrolls report.

ecoThe DOW briefly fell below the 10,000 mark as stocks suffered their worst losses in more than nine months. NIKKEI was down 2.6% at 1.30 PM. The euro sank to the lowest level in more than eight months against the dollar and headed for a fourth-straight weekly drop versus the greenback and yen. The European currency dropped to $1.3670, the lowest level since May 20, before trading at $1.3719 at 12:43 p.m. in Tokyo compared with $1.3723 in New York.

Countries on the fringe, including Greece, Portugal, Spain and Ireland, are having trouble paying for years of debt-driven expansion.

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Chrysler shuts down all production

 Chrysler LLC announced late Wednesday that it is stopping all vehicle production in the United States for at least a month.

All 30 of the carmaker’s plants will close after the last shift on Friday, and employees will not be asked to return to work before Jan. 19.

Chrysler blamed the “continued lack of consumer credit for the American car buyer” for the slow-down in sales that forced the move.

Chrysler ordinarily shuts down operations between Dec. 24 and Jan. 5 for the holidays. This closure would add roughly two weeks to that shut-down.

Chrysler would not say how many fewer vehicles would be produced because this shut-down. A total of 46,000 employees will be effected by the shut down. Those employees will be paid during the shutdown through a combination of state unemployment benefits and Chrysler contributions, but they will not receive the full amount of their working pay, a Chrysler spokesman said.

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Plumber makes $250,000 a year . Is that a joke?

Joe the plumber makes $250,000 a year whereas according to the Bureau of Labor Statistics, the mean annual wage for plumbers in the United States in 2007 was $47,350.

Why are these politicians calling him a plumber when in reality he is a businessman. I bet next they will next call Bill Gates an electrician.

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Bailout Pakistan , But Proceed with Caution

Prime Minister Syed Yousuf Raza Gilani on Tuesday said being a front line state in the war against terror; Pakistan has sacrificed more than any other country. 

Here’s why : –

1. Pakistan is the only country in the world which harbors terrorists and calls them freedom fighters.

2. Pakistan is the only country in the world which is accused of sheltering terrorist groups like Al-Qaeda,  Lashkar-e-Omar, Lashkar-e-Toiba, Sipah-e-Sahaba.

3. Abdul Qadeer Khan , a Pakistani scientist  widely regarded as the founder of Pakistan’s nuclear program who has confessed to having been involved in a clandestine international network of nuclear weapons technology proliferation from Pakistan to Libya, Iran and North Korea is supposedly under house arrest . He recently changed his statement and said that “President Pervez Musharraf forced him to be a “scapegoat” for the “national interest.” He denies ever traveling to Iran or Libya and claims that North Korea’s nuclear program was well advanced before his visit”.

4. Pakistani President recently acknowledged his country’s inability in combating terrorism. He said that terrorists are getting paid Rs 10000 whereas his government is only paying Rs 7000 to his soldiers.

The Pakistani economy is in shambles , inflation crossing 25% and forex reserves of less than 3 billion dollars .Mr Zardari told The Wall Street Journal that Pakistan needed a bail-out worth $US100 billion. Maybe this time the world provides money with a rider and makes Pakistan walk the talk.

 

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Credit Crisis demystified

When:

Seeds were sown way back in 1977. Known as Community Reinvestment Act  , is a United States federal law that requires banks and thrifts to offer credit throughout their entire market area and prohibits them from targeting only wealthier neighborhoods with their services. The bill encouraged the Federal National Mortgage Association, commonly known as Fannie Mae, to enable mortgage companies, savings and loans, commercial banks, credit unions, and state and local housing finance agencies to lend to home buyers.

Why

National grassroots pressure for affordable housing. Though there was considerable opposition from the mainstream banking community. Only one banker from ShoreBank in Chicago, testified in favor of the act.

Subprime Explained

Mr A seeks a housing loan to give shape to his dream home. But he doesn’t have good credit rating. This means that he is unable to clear all the stringent conditions that a bank imposes on an individual before it sanctions a loan. Since his credit is not good enough, no bank will give him a home loan as there is a fear that the chances of a default by him are high. Here enters , Mr B (a robust financial institution)who has good credit rating and is willing to take on some amount of risk and make profit.

 Given his good credit rating, the bank is willing to give Mr B a loan. The bank gives the loan at a certain rate of interest.Mr B then divides this loan into a lot of small portions and gives them out as home loans to lots of others like Mr A who do not have a great credit rating and to whom the bank would not have given a home loan in the first place.

Mr B gives out these loans at a rate of interest that is much higher rate than the rate at which he borrowed money from the bank. This higher rate is referred to as the sub-prime rate and this home loan market is referred to as the sub-prime home loan market.

By giving loan to many Mr A’s , Mr B is expecting to make lot of profit.  Mr B does not wait for the principal and the interest on the sub-prime home loans to be repaid, so that it can repay its loan to the bank (the prime lender), which has given it the loan.

So what does Mr B do? He goes ahead and securitises’ these loans. Securitisation means converting these home loans into financial securities, which promise to pay a certain rate of interest. These financial securities are then sold to Mr C (Institutional Investors)

 

And how is Mr C repaid? The interest and the principal that is repaid by Mr A through equated monthly installments (EMIs) is passed onto Mr C.

This looks so simple so what went wrong

 

The sub-prime home loans were given out as floating rate home loans. A floating rate home loan as the name suggests is not fixed. As interest rates go up, the interest rate on floating rate home loans also go up. As interest rates to be paid on floating rate home loans go up, the EMIs that need to be paid to service these loans go up as well.

What happened next is that people started defaulting on their obligations. Once more and more sub-prime borrowers started defaulting, payments to the institutional investors who had bought the financial securities stopped, leading to huge losses.  The housing bubble collapsed and mortgage-backed securities (bought by Mr C) were almost worthless . As defaults kept rising, Mr B could not service their loans that they had taken from banks. So they turned to other financial firms to help them out, but after a while these firms too stopped extending credit realizing that the collateral backing this credit would soon lose value in the falling real estate market.

 

Now burdened with tons of debt and no money to pay it back, the back of these financial entities broke, leading to the current meltdown.

Ok this is an American problem , so why are markets around the world crashing

Mr C who had invested in securitised paper from the sub-prime home loan market in the US, saw his investments turning into losses. Most big investors have a certain fixed proportion of their total investments invested in various parts of the world.  Once investments in the US turned bad, more money had to be invested in the US, to maintain that fixed proportion. In order to invest more money in the US, money had to come in from somewhere. To make up their losses in the sub-prime market in the United States, they went out to sell their investments in emerging markets like India where their investments have been doing well. So these big institutional investors, to make good of their losses in the sub-prime market, began to sell their investments in India and other markets around the world.


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And I always thought debt was a bad thing

G7 (also known as the G-7 or Group of Seven) is the meeting of the finance ministers from a group of seven industrialized nations.  The finance ministers of these countries meet several times a year to discuss economic policies. 

Now here is some data as of 2006 

1. France – Public Debt: 64.7% of GDP 

2. Italy – Public Debt: 107.8% of GDP

3. Germany – Public Debt: 66.8% of GDP

4. United Kingdom – Public Debt: 42.2% of GDP

5. United States – Public Debt: 64.7% of GDP (Change that to 71%)

6. Japan –  Public Debt: 176.2% of GDP

7. Canada – Public Debt: 65.4% of GDP

If high debt is considered a bad indicator of economy , then how come these countries are part of G7 that meet  “several times a year to discuss economic policies.” Maybe an economist can help me understand that.

Countries which are not part of G7

India – Public Debt 52.7 % of GDP

Brazil – Public Debt: 50% of GDP

China – Public Debt: 22.1% of GDP

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