Journalist Lisa Ling went back to her hometown of Sacramento to investigate tent cities—makeshift shelters set up by people who have lost their homes and have nowhere to go. Sacramento is among the hardest hit areas, with an estimated 1,200 people living in tent cities, but officials say these communities are popping up all over the country and won't be going away soon.
The above narration of grim economic crisis is from Oprah Winfrey’s web site which tells all about the current day situation in world’s highest per capita income of about $ 40,000 per anum, dual income homes, and technologically most advanced country.
There are many Indian stories as well, but not as vividly gets reported as in Western Media. Rahul Bajaj is very vocal in his argument that government is not doing enough to solve this problem. Rahul Bajaj is concerned, he surely has to! He says his business is affected badly because of banks charge higher rate of interest on loans towards business of his concern. He says banks built up high bad-debts because of not properly screening the creditworthy individuals and now even with enough liquidity available in the banking system they are not willing to lend. He forgets the fact that the unnatural growth in his business which he enjoyed in the previous years was purely because of banks failing to properly screen creditworthy individuals and now he is feeling the heat because banks are now starting to properly screen the creditworthy individuals!
With most of the Nobel award winning economists scrambling for answers for a way out of this global economic mess, could there be really simple solutions for this problem?
World has seen many boom and bust economic cycles over the past many decades. All over the world political class takes credit for each boom and disowns the bust. Economic busts are basically the result of over stretched economic transactions during boom period.
The primary cause of any economic boom is availability of cheap credit which is backed by the political class of that country; the same cheap credit during the last phase of boom period vanishes into thin air resulting in recession/depression.
During good times people tend to rejoice the comforts the money has to offer, but during economic distress they find it hard to depart from these comforts. So economic distress in many countries translate into social unrest, the major cause of concern for any civil society.
So the question is whether we should allow such false economic boom at the first place which is the result of access to cheap credit.
Let us look into different angles of this global economic mess:
American excesses, number of TV sets in the average U.S. household is 2.24, while in developing countries for 70% of the population to afford one TV per household would be a luxury. Excessiveness, the result of cheap credit. The earth cannot sustain such mindless act of excessiveness, imagine what happens if every country follows American excesses; neither the America itself can sustain this, as one could see from the story unfolding.
Countries all over the world announcing one or the other economic stimuli. When the productivity has reduced, there is less chance for governments to tax, there by reduction in government revenues. But then how are the governments managing to afford for the economic stimuli, they are not, instead the economic stimuli causing big hole in government budgets. The higher percentage of budgetary deficit poses its own risk. The local currency depreciates, imports such as crude oil becomes costly, the investment prospects of the country damages, and so on.
In order to make credit once again available, central banks reduce banking interest rates. In countries like India, where there are no social security programs, it is crime to bring the interest rates below 7-8% where most of the retired class depends on returns from their life time savings for livelihood.
All the above surely recipe for further complicating economic situation. So what is right formula out of this mess which would bring back the businesses on track, prevent job loses, and there by prevent social unrest?
In this globalized world no country can have isolated economic policy of its own, it will not succeed either. There has to be concerted efforts from all the countries. The solution should look towards longterm effectiveness.
In case of economic boom, we see greedy tendencies and indulge in excesses, this in turn over stretches the economy. Once banking system involved in such a situation, will not have any other option than to write off the loans. Many such write offs of loans from any bank result in filing for bankruptcy. This result in many job loses both in banking sector and in service/manufacturing sectors connected with that bank.
What we need to do is not to allow any business to collapse thereby job loses and social issues. What needs to be done in such a situation is to extend or double the loan tenure without reducing the interest rates. This ensures viability of the banking sector and also breather for ailing industries/individuals to repay the amount giving them enough time to recover. Naturally, some trimming of operations would be required from all the parties concerned, but this will not have so many job loses as when the business completely goes bankrupt.
Even though targeted economic stimulus would be indeed required, it should not be overdone.
So in gist, we should not allow for access to cheap credits, and create false economic boom cycles, after all credit should have some value it deserves! Banking interest rates all over the world should be kept between 7-8%. If there is future global economic crisis like this one, the credit repayment period should be extended or doubled based on the need of the hour. It is better not to have false boom and false hopes and in the end resulting in such an economic mess.
email: hemanth26@hotmail.com
Saturday, March 7, 2009
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