More bailouts and then some more...Peter Schiff's solution

Bailouts, Bailouts and more bailouts...this is never ending. I 've already written a bit on this topic, but I want to highlight this again, beautifully written by Peter Schiff:

Put simply, our government doesn't have enough spare cash to bailout a lemonade stand let alone a bloated and failing industry that is losing tens of billions of dollars per month. Washington can only offer funds that it has borrowed from abroad or printed. Unfortunately, the nation is in the grips of a delusion that money derived from these sources has the power to heal.
But history has clearly shown that borrowed or printed money only has the power to destroy.

The solution he proposed is correct, but too tough to implement:

Spending must be replaced with savings, and consumption with production. The service sector must shrink and manufacturing must expand to fill the void. The dollar must fall, wages in America must be brought down to a competitive level, and hopefully government spending and burdensome regulation can be reduced.
This transformation will not be fun, but it is necessary. Our standard of living must decline to reflect years of reckless consumption and the disintegration of our industrial base.
Only by swallowing this tough medicine now will our sick economy ever recover. By accepting a lower standard of living today, we will eventually be rewarded with a higher one tomorrow.

Source

Greenspan, regulation and future outlook

Greenspan , the war criminal of the global financial world has come out and finally spoken something. This is what he has to say:

Source: Economics news
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In 2005, I raised concerns that the protracted period of underpricing of risk, if history was any guide, would have dire consequences. This crisis, however, has turned out to be much broader than anything I could have imagined," Greenspan said in his testimony to the House Committee of Government Oversight and Reform on Thursday.

What?? What doea he mean by '..but it has turned out to be...", You mean you were doing tail-and-error with people's money?? It hasnt turned out to be 'much broader', it has shaken the countries across the board and millions are clueless about what needs to be done next and whether their homes, savings, pensions will be safe.

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Greenspan said a stabilization in home prices is the ultimate solution, but that is many months away "at a minimum". In the interim, he said the $700 billion Troubled Assets Relief Program is adequate to avoid a severe retrenchment in the economy and banking industry.

TARP (must have been actually called TRAP- to trap people towards a debasing currency). The bailout was ridiculous. The crisis is far beyond house prices, Mr. Greenspan!! Its credit crisis and slowly creeping into Credit cards, Derivatives and every single place where credit is involved, meaning it includes even the currency people use.

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"The consequent surge in global demand for U.S. subprime securities by banks, hedge, and pension funds supported by unrealistically positive rating designations by credit agencies was, in my judgment, the core of the problem," he said.

Why did you allow such financial instruments in the first place? You had every power to take decision.

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Once the crisis abates, Greenspan said the financial landscape will be far different and characterized by exceptional caution.

We are just praying one more Greenspan or Bernanke doesnot take charge of 'financial landscape' you are talking about.

"It is important to remember, however, that whatever regulatory changes are made, they will pale in comparison to the change already evident in today's markets," he said.

aaah, regulation? FED needs to be regulated first. Free markets will work. Its the FED who was always interventionist.

India highly prone to global credit crisis

Citigroup cites India’s very high ratio of total external finance to forex reserves and high level of mobile capital compared to the reserves as the main drawbacks, making the country highly vulnerable to the global financial crisis.

“Regardless of the future path of the financial crisis in the US, global economic and market conditions are likely to change. The world will probably no longer be the same as the one of the past decade. The global turmoil will further tighten liquidity and lead to a dramatic slowdown in global assets inflation,” says the Citigroup report. The report adds: “Rising capital outflow risks could also add greater pressure on the Indian rupee, won, peso and rupiah.”

A fund manager of a domestic brokerage house said selling by hedge funds in the Indian market is like throwing a stone in the sea. Since the depth of the sea is not known, it will be difficult to ascertain where the stone is headed or how far hedge funds will continue with their selling spree.

Source: Business Standard

Quick Inflation tutorial - 1

Inflation:
Symptom - Rising prices ( usually this is considered as cause )
Cause - increase of money supply in market
Consequences of Inflation - Dont tell me u dont know yet!!
Worst case scenario - Hyperinflation

Increase in price of a certain good can happen in any of the following cases:

1. Increasing the supply of money

2. A decrease in the supply of goods and services

3. An increase in demand, i.e. population increase

The last two cases will result in increase of a particular good and not general price levels in the market.
What is generally explained by authorities as cause for inflation could be any or a combination of below listed reasons:

1. Cost-push inflation as a result of arbitrary demands of labor unions.

2. Profit-push inflation resulting from the greed of businesses raising prices.

3. Crisis-driven inflation resulting from acts of nature or weather.

These reasons are said to account for a large rise in the general price level (not just a relative rise in some prices, such as the price of oil), the economy’s output must shrink by a large percentage. In practice, “supply shock” cases are seldom large enough to account for much inflation and are typically short-lived. For example, of the 9.2 percent U.S. inflation rate in 1980 (as measured by the GDP deflator, gP = 9.2 percent), the negative growth of real GDP (due, in part, to the OPEC oil price shock of 1979–1980) accounted for only 0.2 percentage points (gy = −0.2%). [Source]

Inflation is an increase in the quantity of money and credit relative to available goods resulting in a substantial and continuing rise in the general price level, an increase in the quantity of money caused by government.

I will deal how it happens in later post.

whats in bailouts dude?

Bailout to banks everywhere...what exactly is happening and what does it mean?

Bailout, as done by US and EU countries here means helping people who do scams so large that its better to get them out of mess than admitting mistakes for allowing it to happen. Its just that!

So, now what about the common people who lost money for mistakes of bunch of casino traders? - They can protest in front of some political offices and go back home cribbing.

Will the bailout really solves something? NO, NOT AT ALL. Close to trillion dollars have been used as bailout so far, across the continents. Nothing happens because you are trying to value assets whose worth you don't know at all.

Where does govts get that money from? They print money....simple and straight. That cause inflation as more supply increases.

Is it better if not bailed out? YES! Countries might have financial problem for following couple of years, then markets will correct themselves. Its better than debasing the currency and getting into bigger trouble.

Here is the longstanding crusader against this form of corporate socialism:

Islamic banking in mainstream

The words like religion, morality must be funny words in science, economics included. Instead of people going by perceived notions, it would be better if taken an objective look into such matters. here is one example of religion gaining success in science of economics.

Islamic finance/banking/economics is into mainstream and also providing safe haven for economies affected by present credit crisis.

Islamic finance is best defined as "Central to Islamic finance is the fact that money itself has no intrinsic value. As a matter of faith, a Muslim cannot lend money to, or receive money from someone and expect to benefit - interest is not allowed. To make money from money is forbidden - wealth can only be generated through legitimate trade and investment in assets. Money must be used in a productive way."

Islamic assets are already a trillion dollar block, with annual growth of 10-15%, reports Investor chronicle.

The fact that Islamic laws prohibit paying and receiving interest doesn't mean that that they frown on making money or encourage reverting to an all-cash or barter economy. At its core, Islamic finance is about linking the return to productivity and the quality of the project, thereby ensuring a more equitable distribution of wealth, based around a contract that manages risk.

High standards of discipline and regulation are by nature embodied in Islam's economic principles.

Dan Taylor, Head of Banking at BDO Stoy Hayward, says: “As the risk profile of Islamic Banks is generally lower than conventional western banks, this presents a more solid option for both retail and institutional investors and suggests that dealings with Islamic financial institutions will grow dramatically as people switch to more secure products in this environment.”

But, its still a long way for Islamic finance to replace mainstream.