Sunday, November 30, 2008

Grouping recession

Can recession be grouped as good and bad? It appears so. Prof.Ray Barrell of the National Institute for Economic and Social Research, a London-based think tank, has two pieces of bad news. The first is that this is the wrong sort of recession: Because it was precipitated by a banking crisis, consumption may well fall much more dramatically. That's plausible: Consumers who want to smooth consumption can't borrow to do so. It is also what has happened during the 14 banking crises, in various high-income countries, that Barrell and his colleagues have studied.

The second piece of bad news relates to the first. Because consumers were already borrowing heavily in the good times, both credit constraints and a long-overdue realism are likely to bite all the more deeply. That, too, is a tendency Barrell finds in the data.

Of course, as the lucky sellers of herbal Viagra are alleged to be discovering, when consumer spending falls, some products do well and others do very badly. Nervous retailers looking for cues might wish to pick up research from the 1990s in an article by economists Martin Browning and Thomas Crossley called "Shocks, Stocks, and Socks." They find that when people are unemployed, they save money in a logical way by not buying "small durables" such as socks and, indeed, clothes in general. In the short term, people get by and save about 15 percent of their household budget. When they find a new job, they replace the tired old socks.

Bad news for Gold Toe, good news for sellers of needles and thread.

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Thursday, November 27, 2008

Unusual suspect

Normally oil rich Gulf states are immune to recession, slowdown, deflation type expressions that are often heard in less endowed geographies. Their confidence is built on the edifice of unrelenting demand for oil from all corners of the world. Though there is the occasional cacophony of cleantech, renewable energy and alternative fuels, the fossil fuel monopolised by the Arabian Gulf still remains formidable energy resource.
But there are clear signs that the leadership of Gulf economies is fast fading. Dubai, the glitziest among the GCC, is slipping into a recession. It's overheated property market bubble is about to burst.
Gone are the days when the rest of the Gulf has met Dubai’s phenomenal boom with a mixture of envy and emulation. Now there are hints of pleasure at the idea that the epicentre of bullishness may be humbled. But there are worrying questions for the others, too. Could the Dubai property slump prove contagious? Will the Gulf Co-operation Council pull together to protect the region’s economy? Should its planned monetary union be set aside as governments focus on protecting their own currency?

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Tuesday, November 25, 2008

Is Team Obama ok...?

Team Obama – does it exude confidence?

Not unless they convince they’ve learnt from their mistakes, calls out NYT editorial

“Both men, [Timothy Geithner, Mr. Obama’s choice for Treasury secretary, and Lawrence Summers, his choice for director of the National Economic Council] however, have played central roles in policies that helped provoke today’s financial crisis. Mr. Geithner, currently the president of the Federal Reserve Bank in New York, also has helped shape the Bush administration’s erratic and often inscrutable responses to the current financial meltdown, up to and including this past weekend’s multibillion-dollar bailout of Citigroup.”

Obama had better be right. If he gets it wrong, it’s ruin!

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He used to be called "citigroup"

We're getting used to this lately, ain't we...?

Thursday, November 20, 2008

"Don't disgrace potato buyers"

Nitin Desai in Business Standard talks about the market for credit.

“The market for credit is not like the market for potatoes. When I buy potatoes, I choose a vendor, select the spuds, pay the cash and that is the end of it. I do not need to know much about the vendor; nor does he need to know much about me. Once I have paid for and collected the potatoes, the relationship between us is at an end.”

I would say the metaphor is just not up. When my wife buys potatoes, she checks each spud out, rolls it in her hand and looks for any sign of decay or staleness. No she didn’t call that “due diligence”. I guess this must be the practice of every potato buyer since we don’t want to risk our health and that of the family.

But MBA’s do it differently. If there is a market for risk, then it’s not risk for them. Name of the game is slice and dice. So are the credit rating agencies. They just sniff around for a (seemingly) credible issuer (just a name) and that’s it. That’s why capital adequacy and other supervisory arrangements have failed to prevent an elaborate tower of debt, built on shaky foundations that came crashing down when the first high flyer crashed into it.

"Nitin, for God's sake, don’t bunch ordinary potato buyers with those gilt edged MBAs. They are far more caring.

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Thursday, November 13, 2008

Hang in there and you'll know

Hank Paulson is not having it easy at all.

When the Congress passed his $700 billion bailout package, the world heaved a sigh of relief. The whole world expected it to contain in its point of origin – that is the US – itself. But it was not to be. What had begun as a mortgage crisis, loomed into a financial crisis and is now threatening to be a global economic crisis.

So what does Paulson do? He goes back to the drawing board, buries his original plan and is redrawing it. Now he doesn’t intend to buy the toxic assets but prefers to recapitalize banks and non-bank financial institutions such as financing arms of America's big car companies(though not, for now, the carmakers themselves). He also disclosed that the Treasury and the Federal Reserve are exploring the creation of a “liquidity facility” to buy top-rated securities backed by credit-card, car and student loans, and perhaps mortgages. Banks used to bundle many such loans into asset-backed securities which they then sell in the capital markets. But that market has all but disappeared. Looks like he hopes private investors to come back and recreate that market.

In the end, it is clear nobody has a clue. Financial anarchy always favor the influential and connected. What I can say for sure is that average Joe is not going to get any better. Just that if you hang in till the end, you’ll know who is going to get off with the loot!

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