Things We Have Learned From The Global Financial Crisis

Lessons From The Global Financial Crisis

First Published: December 6, 2009

The world has once again found itself in a terrible financial meltdown that has gone to affect the whole world and the consequences are only now trying to reach the ends of the planet, with each nation getting to a feel its share of the pain. This has been a long way in coming since the last such crisis which was somewhere just at the end of the Second World War. Even though there a signs of a recovery from a distance, we are yet to get out of the woods and one would say that the developing countries in particular are going to be hardest hit for reasons that they get affected by things that happen in the first world, even when they are mere spectators most of the time.

A good many people have this feeling that the current crisis was directly caused by the poor macroeconomic policies of the United States which must have led to the decline of local saving rates because of an extremely lenient money policy. This it is noted resulted in a housing boom in the US and most of the developed world and because of poor lending standards, the downfall was not too much for anyone to predict and so obviously in a little while the credit crunch was upon the Americans. It did not take long before the ramifications got to be felt in the rest of the world for the simple reason that the world is now so interconnected financially and otherwise.

It may appear that we have reached a point in time when supervision and proper regulation needs to be considered extremely carefully if we are to get out of the current crisis, leave alone avoiding a similar one any time in the future. In many countries we saw the rise of a shadow financial system for long time, which included mutual funds in the money market, private equity and hedge funds. The challenge was the use of this short term measures to fun long term investments which may not have been the wisest thing to do in a generation that is so informed like ours.

Banks will also need to get back to their standard and regulated practices, because the trend they got into of trying to compete with the smaller financial institutions which have no regulations whatsoever was a great contributor to the plague of unplanned lending worldwide. This automatically led to the over leveraging of the world’s financial system in the US in particular but also the rest of the world in varying degrees. In a little while confidence went under and it brought an abrupt stop to funding which led to the systematic collapse of structures as we know them.

We are going to need to work out fresh new forms of financial management which are going to encompass not only local financial challenges but those that will have to look at the big picture of the global financial market. The new forms of financial engineering will need to be those that are going to look at credit risk in a completely new way which is a basic requirement in any healthy financial market.

India And China Economies Continue To Grow

The Robust Economies of China and India

First Published: January 3, 2010

With the global recession in full swing, though showing some signs of recovery, the economies of India and China continue to grow.  Some argue that, in fact, India and China, with their more robust economies, are floating the worldwide economy, boosting the global recovery almost single-handedly.  Other economists predict that China will surpass the United States as an economic superpower within the decade, and still others predict that same achievement for India.  Both China and India are, to be certain, becoming global economic ‘big players,’ albeit in very different ways, and under differing governmental structures.

Right now, most economists agree that in global economic standing, the United States is above Japan and China, respectively.  India is placing in the top twenty, at position twelve.  China, despite its growth, still has a long way to go before it may surpass the United States; 2008 GDP (gross domestic product – a figure that measures all the economic outlays of a particular organization, government, and so forth) for the United States stood at the top of the heap at 14 trillion.  How do other countries stack up, particularly China and India?

World Top Economies by GDP 2008

1.   United States $14 trillion

2.   Japan  $5 trillion

3.   China  $4.4 trillion

4.   Germany $3.6 trillion

5.   France $2.8 trillion

6.   United Kingdom $2.6 trillion

7.   Italy  $2.3 trillion

8.   Russia $1.7 trillion

9.   Spain $1.7 trillion

10.   Brazil  $1.6 trillion

11.   Canada $1.5 trillion

12.   India  $1.2 trillion

NB – Figures are rounded. Source: CIA World factbook.

The point in the prediction of the growing might of the economies of China and India is not their current standing as much as that the global GDP has slowed in recent years (thus the term, worldwide recession) whereas the economies of China and India have grown, despite the realities of the worldwide economy. 

One indicator that most of us can understand is automobile sales.  Long a “canary in the coalmine” type of economic barometer; when consumers perceive the economy as ‘strong,’ they purchase big ticket items, such as cars (which, outside of a home, are usually the largest single expense that an individual undergoes).  As one of the richest nations on earth, the United States has long led this economic indicator, but next year it is predicted that China will surpass the United States by being the car-buying powerhouse of the world.  With its growth rate at an average of between 7 and 8% (depending on the report that you read), compared to the United States’ predicted growth rate of just over 1%, it should come as no surprise that China may exceed the United States within our lifetimes.

India, as well, shows a high growth rate for the upcoming years.  Currently far below China, and even further below the United States, but with one of the highest populations in the world, India’s GDP is still impressive considering the abject poverty and low (in comparison) wages.  Primarily a service based economy (almost 60% of India’s economy is service-based), India’s economy shows great potential for growth with its massive population, and extremely high knowledge base.  Most economists predict that by 2020, India will be among the top economies of the world. 

China and India are certainly worth watching as the economic world continues to diversify and becomes more complex. 

Where Are We In Terms Of The Global Financial Situation?

Happy Birthday, Global Financial Crisis

First Published: September 24, 2009

There has been so much said over the past couple of years about the dangers of recession, and much still to be said, but one event seen by many as the moment that the global financial crisis became a fact was the collapse of the American investment bank Lehman Brothers. It was one year ago this week that the bank went bust, and the realities of the crisis became clear to everyone at that point. If the Global Financial Crisis has a birthday, that date is the 16th of September. One year on, where are we in terms of the global financial situation?

The collapse of Lehman Brothers marked the point where governments around the world decided that intervention was the way to go. From that point on, many banks have been effectively nationalised – an act which in itself was massively controversial, seeing diverse reactions in different countries. In America, for example, Barack Obama’s determination to bolster the banking sector and revive the world’s largest economy led to accusations of totalitarianism, communism and Nazism. It may sound amusing, but this reaction was, seemingly, entirely serious. In other nations, a sense of skepticism over bank bailouts also persisted, but the bailouts are ratified now and the recovery is in place.

Would the world’s economy have bounced back in such a way and so soon without the government interventions that took place in most of the larger economies? It seems unlikely. Certainly, the banks which have received bailout cash have posted mixed results, with Goldman Sachs posting record numbers very shortly after receiving their lifeline, while others have suffered record losses. But many independent sources feel that the recession is in its last blasts and that this is due in no small part to government intervention. No government has given any indication that further bailout cash will be released, however, so it is now very much a matter of waiting for the situation to stabilise.

While we wait for that, it is believed that the recession has yet to do the last of its work in the sphere of employment. A recent report from the OECD claims that as many as 15million people worldwide have lost their jobs as a result of the financial crisis, and that there could yet be another 10million people made unemployed. Although economic results are improving, the effects of the recession will still be felt for a while to come.

While it would be fair to say that the financial sector has always had its critics, the overwhelming thread running through public reaction to the situation has been one of severe distrust of banks and bankers, and of injustice at the bailouts given to banks while many other industries have been left to fend for themselves. There is still a reluctance on the part of the banks to lend to customers – much to the chagrin of the governments which released the cash to save them – and it might be a while before the stability being claimed for the global economy is seen in the bank accounts and employment prospects of the “man on the street”. This story has some time to run as it blows out the solitary candle on its birthday cake.

China and India In The Next 20 Years

China or India – Or China AND India?

There is an economic miracle of sorts taking place in today’s global economy, and it is coming as no shock to the people who have been watching the global picture develop these last ten years. However unsurprising it is in general, there will be people who, although they knew it was coming, may not have expected to see it happen in their lifetime. The economic miracle is taking place in Asia. That may not be terribly specific, given the size of the continent itself (the world’s largest continent), so to specify: Where the miracle is really happening is in two particular countries: China and India.

There was always the potential for this to happen, given the raw data that is available to anyone. China and India are two of the world’s largest countries by size, and easily the two largest by population with almost 40% of the world’s people living between them. This mix of landmass and population combined with the resultant ability to call on raw materials gives both China and India the opportunity to maximize any opportunity and become global powerhouses. But this dimensional magnitude has in both cases been both a blessing and a curse. The spread of both countries, allied to China’s historic insularity and India’s numerous dividing factors, has held both back from becoming quite as successful as they might have hoped.

As the 21st century really gets going, with its first decade almost inked into the history books, both China and India look ready to make their big impact on the world’s economy. Both countries are expected to have a big century, and by the middle of this one will, on any reading of the situation, have economies which outstrip the current largest in the world, that of America. China will get there first – by 2030 on a conservative estimate, followed by India within the next 20 years. Will America and others be able to catch up in the mean time and overturn the predictions? It’s hard to say, but the economy does sometimes throw up unexpected situations.

Another question which might arise is that of whether competition between India and China will be a stalling factor in either country’s growth. This is not expected to be the case, as the economic strengths of both countries complement each other quite well, and may in fact enable mutual growth in countries which are showing greater expansion in their economies than any other major nation.

China is endlessly improving on a mass-manufacturing front, and expanding its range of industrial plants in order to cement its role as a world leader in that respect. India is marking its territory as a master of precision manufacturing and software innovation. The two working together will be able to supply the world with much of what it wants without stepping on each other’s toes. It is impressive to see how quickly both have developed, and interesting to wait and see what is next from these two future superpowers.

Goldman Sachs – Wait, How Did THAT Happen?

Goldman Sachs Tops Expectations

First Published: July 20, 2009

The financial markets are continuing to stabilize gently, but it really isn’t worth looking for anything to happen this year in terms of growth or profit for any of the wealth creation industries in the West. We know that, we have been told it often enough. Anyway, the investment banks who would have had periods of growth right about now are still punch drunk from the bailout that happened as 2008 was drawing to a close. Lehman Brothers went bust. Bear Sterns nearly followed it. All over Europe banks were bailing out other banks and then having to be bailed out by the government – witness the situation in the UK where Lloyds TSB bought out Halifax Bank of Scotland and then had to be bailed out itself as it took hold of HBOS’s balance sheet and found that it was weighed down with toxic assets.

Against this background, what would you say if it were to be reported that an investment bank had just reported record profits? Yes, I know, and most people would agree – although they might clean up the language slightly in mixed company. Yet somehow, Goldman Sachs – which, let’s remember, had to have some of that bailout money in order to keep afloat last autumn – has just reported second quarter earnings of $3.44 billion. That is pretty high during a recession. It’s pretty high during a stagnant market. In fact, it is incredible at any given time, and yet here we are during the worst financial depression since just after the Second World War and Goldman Sachs reports profits that make it look like they could pay back everyone else’s bailout money as well as their own some time soon.

Just how has this happened? And what’s more, if they needed bailing out only half a year ago and yet can turn around a huge profit in such a short space of time, should they really be paying out bonuses that make even the President of the United States’ salary look fairly cheap? If Goldman Sachs have just returned second-quarter earnings of $3.44 billion then they have enough to pay a pretty hefty bonus to every American taxpayer – after all, the taxpayer played a pretty sterling role in this recovery by making sure Goldman Sachs didn’t go to the wall.

Well, OK, we understand, that isn’t how finance works. But there is going to be a lot of scrutiny on Goldman Sachs, not least on its third quarter. Seemingly, the year in finance is going to see the market reversal at least slow down, so with those favourable conditions we should expect to see the same kind o f performance again from Goldman Sachs, wouldn’t you think? If not, then it seems something strange has been happening. Sure, they have successfully underwritten some pretty healthy projects recently, but a 65% rise on the second quarter last year seems to be in the realms of fantasy, and if there is any special knowledge involved in such wealth creation, maybe they could share it with a world that really needs it right now.