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“Economic Crisis”

World markets were taken by storm as Lehman Brothers, one of the most prestigious players on the wall street filed a Bankruptcy report with the US Fed after having failed in negotiations to find a way to save the company. The collapse of Lehman brothers put tens and thousands of Jobs around the world at risk. It also sent shock waves around the Banking world with big names suggesting that the damage could be felt around the world, and could put the big countries into recession. In a separate development, Merrill Lynch, a financial management and advisory, was taken over by the Bank Of America for a mere 50 billion dollars.

The shock was felt around the world. The global markets crashed as the news spread. The US Economy was reduced to dirt, All major stocks were then available at dirt cheap prices. Indian Markets crashed, as a lot of investors lost a lot of money. Rumors about ICICI bank also filing a bankruptcy report with the RBI filled the ‘SMS’ and ‘Email’ space. Customers started withdrawing money. The news was nullified as a Rumor when a chief RBI spokesperson assured the people. Doubts about other banks on the verge of bankruptcy was also nullified. The RBI assured that all the Banks in India have enough money deposited with the RBI, The RBI also has enough money to bail these banks out in case they run out of cash.

How could a bank go bankrupt? The news focused more on what would happen now, and what are the financial advisers all over the world now predicting. Stories about how people are affected in the US made the headlines. No news channel reported about why Lehman Bothers had to file bankruptcy.

I read a lot of news articles about people not having enough money to pay back their loans, their credit card bills and what not. Us and UK went into a financial downfall. All that i could make is that, the people in the US and the UK lost all their money to the bank that went Bankrupt. Is this the real reason? Not sure.. I finally can claim to have understood the recession after having read the following article.

It’s interesting article by Yogesh Chhabria.

“LATELY, I have been thinking a lot about the Lehman crisis. Spending money that they didn’t have and going beyond their means is one of the main reasons for their situation today. In fact that is the cause for the current economic crisis in the US .

When I see all this happening, I can only remember the good old days. Then, karz was bad. People looked down upon those who took loans. Parents would not give their daughter’s hand in marriage to a man with loans.

But of course, the times have changed now. Everyone I know has a loan. The buzz word is EMI (equated monthly installment). Today, you can buy everything on EMI – a house, a television, an i-Pod. In fact I know of someone who just bought a fancy BMW 3 series on EMI, instead of buying a cheaper car outright with cash. I mostly prefer to take public transport, but then I am an old man with old thoughts!

Anyway, coming back to what caused the crisis. Imagine having Rs 2 lakh in your bank account, no regular income, yet buying a house worth Rs 65 lakh, in the hope of selling it for a higher price. Even if the price of the house fell by just 5 per cent (that is Rs 3 lakh), you will go bankrupt. This is what Lehman Brothers did; with around USD 20 billion they went and bought assets worth over USD 600 billion. Isn’t it suicidal and simply foolish?

I am sure things would have been different, had I been the head of Lehman brothers. But who wants an old conservative man like me to head a complex financial institution. But there are a few lessons that we can learn:

1. Live a balanced life and avoid overspending.
Tip: As soon as you get your monthly salary, set aside a fixed amount, usually 35 per cent, for insurance, savings and investments. You can then spend the rest.

2. Not all loans are bad. Loans that are ‘need based’ (home loans, education loans) can always find a place in your finances against those that are largely ‘want based’ (personal loans, car loans).

3. Borrow only if repayment is financially comfortable.
A thumb rule: Keep EMIs within 30 per cent of your monthly income

In that respect, there is one American who I really respect – Warren Buffet. He has lived in the same ordinary house for over three decades, drives his own medium sized car and leads an extremely regular ‘middle
class’ life. If that’s all it takes for the richest person on earth to be happy, why do all of us need to take extra stress just so that we can get things which aren’t even essential?”

That pretty much explains why a senior spokesperson from a big financial institution was talking about saving money on a news channel.(I’m not sure of his name, the news channel i was watching the interview on, I do remember the exact words he said)

“Spending mentality of people in the US and India is very different.” He said.

In India the mentality of the people is to save more than spend. If we earn Rs.100 we would at least save 10% of it for the unlikely future. In US it is the complete opposite. People usually spend Rs.200 when they earn Rs.100, they think of paying up in the next month when their next salary arrives. Wonder where they get this money from, In the US you don’t need to have a good income or a good credit history to have a loan approved. For that matter, nothing except holding a bank account with a minimum balance should earn u a credit card.  In more simpler words, they have the Spend now, Pay later mentality.

Merrill Lynch and Lehman both expanded aggressively into property-related investments, including loans to people on low incomes or with poor credit histories. The collapse of Lehman sent traders rushing into government treasury bonds – seen as a safe haven in troubled times. The dollar fell against both the euro and the yen.

“The US Fed came to the rescue of a few other institutions by offering credit of millions of dollars. WHy did it not help Lehman Brothers?” asked a member of the audience.

“The US fed has not provided free funds to the other companies, they are charging a higher rate of interest at around 11 percent when compared to their regular rate of 8 percent. About Lehman Brothers, the company has had a lot of credit on its name which includes the Money from the Fed too, They tried selling the company to a few other big financial institutions but the talks failed leaving ‘Bankruptcy’ as the only option” The spokesperson replied.

Times are changing, The ‘Call Centre’ culture has slowly made its way in India. We cannot predict our near future leave alone the future of the rest of the world. Almost everyone carries a credit card, ready to be swiped. I remember curbing myself to buying anything because i did not have cash with me. Now is the time when i have developed a habit of E shopping, I like the item, I buy it. Pay using the credit card or the Internet enabled bank account. I buy only if i have given a lot of thought to it. I analyze the need, but the spending pattern is changed. I’m somehow lured into buying the product after sometime, if not immediately.  I was better of asking money from my father when i had to buy something, he would actually help me understand the need for it. I think its time to hand the control of my salary account to him. 🙂

I’d like to bring an end to this post by quoting the same line as the speaker used. ” Such crisis only comes once in a century, there is no question of how we can avoid it. Save now, spend later.” I hope the articles brings light into understanding the economic crisis.. I did learn a lot from it.

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Kunal

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