Marketing or Ignorance or Is Capitalism a paradox ?

I am sure every one of us out there agree with Benjamin Barber's point that we are in a materialistic world that has dominated us from choosing our Needs and Wants.



It's not only the game gadgets that become a big hit among kids, but the gadgets like phones with added features have been overwhelming the consumers in the recent past.
The market is being flocked with so many promotions and the media has created enough buzz now than ever before.



I highly agree with Dr.Barber's point that the short term return has become the focus of current corporate world. It's not just the innovative features that strike the market, but the timings of introduction of these products have been strategically improving for the benefit of the companies.



I think this is the area where Monetarists and Keynesians should influence through their combined strengths to get the corporate world look into the real needs to improve the human life to make this place a better place. Corporations should nurture innovation for developing real products; not just innovate instruments that falsely inflates the books.

MBS, SIV, CDO explained

The following article from Chicagofed.org defines how the Mortgage Backed Securities, Structured Investment Vehicle and Collateralized Debt Obligations are positioned in the grand schema and how they work.

http://www.chicagofed.org/publications/fedletter/cflnovember2007_244.pdf

With the Fed jumping in with additional liquidity, it is of some help to ease the hardlanding, however, as one of the author in either Time/BBC puts it, there is not much use in applying grease for a broken chain of the bicycle.

My analogy from a different view:

Assume you bought a big ship to catch huge amounts of fish from an ocean and a sudden oil spill has disrupted in the fish returns. Though the Fed here tries to nurture fishes through local ponds, rivers, and releases the reserved frozen fishes, the long term demand is unlikely to be quenched. A real fix of cleansing the spilled oil seems to be beyond Fed's cusp (at least based on actions till date) and left to voluntary action from banks/institutions. In addition, the increasing fund injection through reduced rates could potentially cause other side effects.

One medicine that I see of big helping hand is the Sovereign Wealth Funds (SWF), but the side effect of that in terms of political aspirations cannot be discounted, at least not yet.

Can I agree more with Greenspan ?

Though the news from Greenspan about potential Stagflation (Title : Greenspan sees early signs of U.S. stagflation)reported by Reuters is not pleasant, it was a pleasant surprise to read this alert from Alan Greenspan. I am a novice when it comes to Economics and the indicator analysis, but it is quite encouraging to me that this news, for the lack of better term, coincides with my forecast.

The above statement will make sense if you skim my post on Stagflation ( Nov 7, 2007 and revisiting with more details on Dec 15,2007)

How RBI ( Indian Fed) deals with heavy Inflowing dollars ?

I recently read this and planning to write more on the high dollar inflow to India and the dilemma faced by RBI.

Will Stagflation win ?

Alan Greenspan talks about increased odds of recession during his interview to NPR available at NPR site

According to Alan, it sounds like the housing market slump could have been inevitable due to the nature of recent global economic behavior catalyzed by long term interest rates that is out of Fed's control.

Knowing how the economic market works and the basic business cycles, I could only opine that the above is a weak defense. We will have to wait to see more analytical support from economists and media. I personally know few people who had bought hefty mortgage loans to join the bandwagon. In addition to new home supply, the volume of exchanges of used homes and leverage on home equities increased exponentially. In a booming market, one cannot agree more on the optimistic outlook and stretch goals to hit high returns. This has inarguably blinded the eyes of the public borrowing ARM's who are influenced by the positive marketing from the issuers and the media doing a great job on charting the facts around the increasing home return trends.

The reality that people not able to adjust when the Adjustable Rate Mortgages' rate stepped up from their comfort zone leading to increased rates. The inability of people not able to make their payments have resulted in the inability of the issuer's to meet their commitments to the whole another world of Mutual Funds and other Equity funds. While the homes are not selling anymore, the poor securities were being sold in all directions causing stress to Wall Street.

In short, while the global financial factors could have indirectly fueled the above, I think that the spark was the rock bottom Fed rate. Had we gone on a different tangent and asked, what if Fed didn't lower the rates in 2001. Would the US economy been in a better place today ? Maybe someone has already enjoyed analyzing this journey. Happy googling !!

Coming back to the topic, going by Alan's word that recession odds raise and with November CPI numbers hinting inflation, Details from Bloomberg

While this can be a good coincidence at a time in point, my forecast of stagflation on my post on Nov 7th encourages to follow up closely and look at future indicators and make adjustments. Considering the evils of stagflation, I wish I am wrong. I think this would be an interesting time to look back in history as to how these perils were defeated through financial and policy innovation or if US succumbed to it due to forces within and outside (oil price, pressure on dollar, cut-throat competition for resources from emerging economies) its control. I stress innovation because the market efficiencies have never been quick at work in the past. Thanks to the internet.

As always, I am not even going into war and other political aspects including the good Green forces at this juncture.

Sub-prime mortgage loss and SWF (Sovereign Wealth Funds)

Who would have imagined that the sub-prime loss could have caused such a punitive damage in less than one year wiping off the previous year's profits. Some of the numbers as stated by BBC on the write offs by high profile financial institutions that bundled these complex loans are listed below.

UBS: $13.5bn
Citigroup: $11bn
Merrill Lynch: $8bn
Morgan Stanley $3.7bn
HSBC: $3.4bn
Bear Stearns: $3.2bn
Deutsche Bank: $3.2bn
Bank of America: $3bn
Barclays: $2.6bn
Royal Bank of Scotland: $2.6bn
BNP Paribas: $2.1bn
Freddie Mac: $2bn
Credit Suisse: $1bn
Wachovia: $1.1bn
IKB: $1bn

Source: http://news.bbc.co.uk/2/hi/business/7135872.stm

While few selected quarters discuss how the voluntary rate freeze would help, its really the monetarist theory at work where SWF's play the role of the FED, of course, for their own benefit. Though this is capitalism at work again, I wonder if these SWF's are not asking the same question and how far have they looked into their supposedly revenue generating machine, ie the companies, they just rescued. Since no medicine has been applied to the fundamental problem, within the realm of my knowledge, I am yet to understand how these investments would meet their expected returns. Only thing that stikes is CIC's rescue to Blackstone causing the former to lose 40% of its investment value due to continued poor performance of Blackstone. We will have to wait and see on case by case basis as US economy struggles to come out of this web.

As per estimates from Morgan Stanley, these SW funds have spent $35 billion since the start of last year on stakes in financial organizations, with $26 billion coming in roughly the last six months. Abu Dhabi's planned $7.5 billion investment in Citigroup is one big part of it.