Fight the Recession

For the last couple of days, I was thinking of writing something but my work was keeping me away from all this. Today I have got some time, and there are a plenty of issues to be penned but one thing which is keeping me engrossed is the whole issue of fighting the recession. In every nook and corner of the world, there is discussions going around amongst the top business leaders, financial heads of state and other political leaders. 

The finance ministers and Central bank governors of the G20 group countries are meeting in England over this weekend to reach an agreement before the meeting of head of states of G20 in London in April. There is a division of opinions between the member countries with US and UK demanding for more stimulus packages to put economy back on track, European members demanding for more regulations in the financial sector instead of spending on stimulus packages and BRIC countries demanding for more say in IMF and other financial bodies in return for increasing the stimulus packages. The only point where there is consensus is that they want to fight the recession together.

For me, we should instead of submitting to the blues of the recession come out and fight it. The only way to come out of this recession is to start the flow of money and goods. And for that to happen we have to make sure that both the consumers and the banks are confident enough.  The banks have more responsibility as much depends on them and they should start lending as soon as possible. Its not going to happen only by pumping money into the banks  or the badly hit banks because it doesnot increases its confidence to start lending. Governments across the globe has to chalk out plans so as to make sure that the bank starts lending, because if it doesnot happen soon then almost all of the sectors will be hit and recovering then would be a difficult task. To make it simple, let's take for instance the automobile industry, it is also hit by the cause that since banks have stopped lending money, the customers have stopped booking new cars and that has led to decline in sales and this has compounded the woes of already struggling car industry. Similar is the case of other sectors.

UK has also recently started Quantitative Easing which means pumping cash into the economy. This was earlier adopted by the Japanese during the asian crisis of the 90's, which backfired and its economy went from bad to worse. Quantitative easing could be a good tool to boost the economy but only if it is able to boost the confidence of the customers as well as banks. The government should and is buying the mortgages and should also make sure that the house owners pay their mortgage amount on time. Once the government buys the mortgages, the bank should atleast gain a little confidence and start lending carefully.

It is obvious that greed of the banks played a part in starting the financial crisis but its us who defaulted on our payments and mortgages which led to the collapse of some of the biggest banks. We are almost as much responsible as much are the banks and the government. We should have gauged our limits how much we can spend. I do believe that wrong recruitment policies of these companies also led to their collapse. The big banks such as Lehmann Brothers and others hired best brains from the world's best universities irrespective of their field of specialization. Engineering, arts and science graduates were recruited for managing the banks, that is something weird. They might be indeed having the best of brains, but surely they didn't had much knowledge about business and economics. The reason why I am saying this is simple, an economist can understand the basic principle of supply and demand, but what these people did was they created demand by providing (supply) house mortgages to almost anybody and everybody without even checking their financial history.   

And its not only for banks almost every sector does that. Most of the employees in Infosys and other IT companies in India hire engineering graduates irrespective of the field of specialization. All of my friends from mechanical and other allied engineering courses are working for IT firms. I mean I dont understand the whole point of studying so hard for 4 years and then working in a totally different environment. And I don't blame the students for that, because they have to get a job because they just cannot waste an opportunity in this competitive world. 

Imagine an engineer going to perform an heart sugery on you, will you ever go for that. Every job must be given to the right people. Firms do say that they don't differentiate students as far as they are graduates, they just look for analytical and logical bent of mind and they can train them.  I mean you can train anybody for that role but whats the point in wasting so much time and effort when there are hundreds of graduates with the required field of study. 

I think I have deviated much from the topic but the point that I have raised is worth taking a note of. Lastly, we should all try to be optimistic and hope that the government does something to ensure that the confidence of consumers and banks grows. Let's hope that the meeting of G20 members brings some sign of happiness in not so happy times.

Bye for now.

A 

Global Recession

After a long and tiring week, it was my first weekend break this year and I had the comfort of relaxing this weekend. For me last couple of months were so draining mentally as well as physically that I desperately needed a break and once I got a transfer from Nuneaton to Birmingham, I got this break. I passed my time watching movies, news, and meeting up with friends.

These days wherever you go, where you are in a pub, in a business meeting, in a university or whatever you do, where you work in an automobile industry, or in a retail store, you will listen only one thing from your colleagues, friends and that is Recession. There are no jobs in the market, companies are going bust and people who have job are thanking god and hoping that they don't get a redundancy letter. The unemployment is rising to all time high everywhere. The number of job losses in US alone has reached 5 million that is its worst ratings in about half a century. In UK the unemployment rate is similarly rising and is at approx 7.6% which is again highest in the decade. The job loss in UK has reached near to 3 million. Other EU countries are in similar financial crisis and the state of their economy is as bad as UK/US or even worse. Emerging markets are also vastly affected by the recession and their growth is halted if not stopped. The growth of India and China is also affected and there growth is projected at 5% and 7% respectively for the year 2009 unlike there unprecedented growth at around 10% per annum for the last decade. There have been huge job losses in these countries as well, with Guandong facing most of the burns of the recession in China. The 

People often blame the greedy western banks for this mess and they are in a way right. The global recession can be seen as a successor to sub prime mortgage crisis that started in US. The banks started giving home loans to almost everybody without anticipating whether these people can return the amount or not. Most of these people defaulted and banks faced the burnt. The property prices hit an all time low and the banks who gave money as credit for the properties started going bust. Most of the big investment banks including Lehmann Brothers, Washington Mutuals and others filed for bankruptcy in US or suffered huge losses and the federal government had to propose bail out plans. In Europe the situation was similar with most of UK banks requiring bail outs by the Bank of England. Falling of some of the major banks rocked the whole world and the financial crisis deepend. The investors were wary of the returns and hence remained far from investing money and hence the global crisis worsened with stock exchanges hitting all time low ratings. The credit crisis has taken such tolls in terms of rise in unemployment, closure of banks and other companies, job losses that it is compared to the great depression period of the 1930's where the global economic growth had seen a rapid downturn. The banks are wary of lending money now which has worsened the matters and government is finding it difficult to motivate the banks to start lending money again. In UK alone the government opted for interest rate cuts five times since October 2008, it now stands at 1%.

 

UK retail industry took a hit and some of the biggest retail chains like Woolworths, MVI, Piers etc all closed their stores. The trend is still similar with Zavvi, Barrats, Priceless have started closing their stores. Automobile industry all over the globe saw reduced sales and profits declined, with Japanese major Toyota showing negative growth and losses for the firts time in its 79 years of history. The big three of America GM, Ford and Chrysler has requested an interference and bail out package from the federal government. US senate has just passed the bill for bailout for the banks and recession hit industry and the stimulus package is of $787 Billion. 

Feb' 2009 saw some growth in retail business as the inflation dipped largely due to fall in crude oil prices and the retailers in struggle to survive reduced the price considerably. There were good news for retailers in London as shoppers from foreign countries are coming to the city to shop, thanks to the falling value of Pound which is now almost equal to Euros.

Chinese and Indian economy which were growing at more than 10% for the last decade has also felt the shocks of the financial crisis. Chinese growth model was based on exports which made them richer in terms of foreign exchange. The major chunk of its exports went to US, but as US is vastly affected by the crisis that it has started to adopt a protectionist policy which has led to closure of factories in China. There have been huge job losses in China as the companies are now closing down as the demand from US is declining. But one thing positive about Chinese model is that they are investing in resources in other countries which will give them fruits in the coming years. They have recently signed a deal with Brazilian petroleum major Petrobras, and Australian mining company. Investing in natural resources can turn things around for China in the coming years. There are huge job losses in India and the companies have freezed any hiring, but the situation is not as bad as in West. Inflation has touched 3.9% this month as compared a year earlier and the RBI has suggested for further interest rate cuts. It has also urged the companies to cut the salaries instead of making them redundant.

This is surely one of the worst financial crisis that this world has seen and it needs an overhaul of the financial system and major work from the government all around to fix it. The world leaders are all having meetings almost daily to fix the problems and to tackle the issues of financial crisis. EU leaders met today at Berlin and they raised several issues from protectionism, to further regulation and supervision of financial institutions. One of the most important tasks of these leaders would be to motivate banks so that they start lending again and also to encourage the otherwise dormant investors to rise and start investing in the economy. There is another meeting of G20 in London on 2nd April and let's hope that these leaders are able to do something to put the gobal economy back on track.