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New York, NY - (Page Release) June 23, 2008 — Hasit Vibhakar
Everywhere you look you read or hear about bleak U.S. economic news of late, Gas is at over $ 4 dollars a gallon, milk is at over $ 4 dollars a gallon, financial institutions have gotten themselves into real trouble. The government has, bailed several of them thanks to the subprime mortgage mess. We are being squeezed by rising raw material prices, rising insurance costs, higher unemployment, falling dollar and a country against business, industry and innovation.
The difference between emerging countries (China, India, Turkey…) and the US is that emerging countries have a fundamental economic development policy, real companies with real products with real value. Now compare this with our U.S. financial industry. The problem started when banks offered loans to people who couldn’t afford them. What began as a service to customers – giving more people a chance for home ownership – turned into a system that fostered the financial mess we see today. In recent years, financial companies in the U.S. have come up with innovative ways to spread risk. The more you spread risk, the more stable markets become right? As it turned out, not so much.
Here is how these new schemes worked (my simplest version). Once a financial company sold a loan, it did not hold it but instead to spread the risk, bundled it with other loans and sent them out to the free market as mortgage backed securities. Just in case these investments didn’t pan out, they were hedged with something called “credit default swaps”. Think of it like gambling or betting or in my example banks betting whether these risky loans could or couldn’t be paid off. I truly believe that a federally insured bank such as JP Morgan, by the way the largest dealer of such swaps continues such activity, then there is a problem with the government. Which takes me to my second issue; I also believe that we don’t as a country understand the difference between real work and real economic activity. Hasit Vibhakar
Here are the REAL numbers, take a hard look
The value of the entire US Treasuries market is $ 4.5 trillion.
The value of the entire Mortgage market is $ 7 trillion.
The value of the entire US Stock market is $ 22 trillion.
The entire value of the credit default swap market is $ 45 trillion.
After these investment banks lost billions, where did the money go? These were bets, and investment bankers and financiers won some bets, some walked away with billion (individually). And of course a good point to be noted is that these people are not using this new mega wealth to create companies or employ people. Should we have an economy based on whether people make good or bad bets, or should we have an economy where people build real asset based companies, create manufacturing interests, advance innovation thus US society, and make it more productive and independent of other nations. We are rewarding people to sit at their computers and punching in bets. This is no way an economy is built, but it must be okay if the Government decides to do so. Unfortunately the 300 million plus people in the US don’t see any problems or don’t feel any problems. Look at India and China, with their focus on science and industry, and building real infrastructure based businesses, are already eating our lunch unless the American people wake up and put an end to an economy that praises and makes heroes out of speculators. My next article will delve into the flawed american business system titled, “The Business Criminalization of Everything”, By Hasit Vibhakar
