Iceland: Fish and Investment Banking

In 2003, Iceland's three biggest banks had assets of only a few billion dollars, about 100% of the nation's GDP. By the mid of 2006, the banking assets grew over USD 140 billion and were so much greater than Iceland's GDP, that there was no purpose in calculating the percentage. Many bankers, economists and authors believe that this was a phase when the banking system achieved rapid expansion. The harsh truth is that Iceland was no more a country, but a hedge fund.
The three major banks were pumping money into the Icelandic economy, driving the value of stocks and real estate crazy. Students in universities were fleeing from the economics of fishing to the economics of money.

This materialistic ambition turned out to have a downside. The collapse of the three major banks resulted in banking losses of more than USD 100 billion. For a country with a population of 300,000 the losses per person works out to around USD 330,000. The losses do not end here. Moreover, there were personal losses incurred through foreign currency speculation and collapses in the stock market. In 2011, the public debt per person stood at USD 42,714 more than USA's USD 33,555.

Learning points:

- Too much banking not good for the economic health. Do not create fake capital by trading in assets at inflated values. For example, I own apples and you own oranges. We agree that each fruit is worth millions. You sell me oranges and I sell you apples for millions. Now, we are no more fruitsellers but banks with assets worth millions.

- Give fish a chance. It will work again!

- Do not buy a Range Rover or Bentley if you cannot afford it. In the end, you are left with two options, either you burn it to get insurance money or ship it to a customer to earn in foreign currency.

Does debt really matter?

A lot of people believe or rather assume that debt does not matter as governments around the world owe money to the public, and not the aliens.

However, it matters for two main reasons. Firstly, if the debt grows at a faster rate than the economic output, it implies higher interference of the government in the price mechanism/free market economy. This results in higher taxes being levied (strict fiscal policy) to finance the deficits and we all know that taxes are bad in the current scenario as they discourage spending.

Secondly, the issues faced by current and succeeding governments. No sane government would like to lay an impression on the public that the debt per citizen is on an increasing trend. This comes with political repercussions.

This is indeed a vicious cycle and I am still figuring out the start and end points of the cycle. Kindly, assist!

The blind eye

Back in 2004, the biggest wall street banks had created the instrument for the self-destruction. The credit default swap enabled investors to bet against the price of any given bond. In simple terms, it was an insurance policy, but with a crack: the buyer did not need to own the insured asset (i.e. the risks incidental to the ownership were never transferred in actual). Consider the credit swaps the titanic and the recession the ice berg. The collision being caused by the so called sane people residents of the insane world.

We all observed the the false boom in the first world developed economies, post 2002. The economic growth was super heated and fueled by borrowing. The US national debt, alone is more than USD 15.5 trillions, and the average debt per citizen is more than USD 50,000. For a moment, imagine the global debt and the consequences that will follow up in the coming times (hope it does not). Human kind has never, for sure, witnessed this kind of accumulation of debt in world history.

Private enterprises, majorly banks, were bailed out by the local and federal governments, after all the financial institutions were big credit lenders to the governments and local bodies. The governments plunged themselves into debt and any increase in interest rates means a greater proportion of the budget being consumed to meet the interest payments on debts.

In my coming blogs, I will be analyzing the blunders in Greece and Iceland in particular. 

An Insight: The UK recession in historical perspective

UK gross domestic product is predicted to grow 1.1% in 2011, down from the 1.5% forecast in the IMF's previous World Economic Outlook report in June.

The growth forecast for 2012 has been slashed from 2.3% to 1.6%.

In order to interpret the current recession we need to analyse the earlier recessionary periods.

Interwar period (1918-1939)

UK was a dominant player in the international gold-standard system during the 1870-1914 period. The end of the first world war was followed by an international restocking boom which went into reverse swiftly. This impacted the UK exports and hence the GDP, leading to high levels of unemployment.

The recession was short lived and the recovery was weaker than that experienced by USA and Germany. 

Great Depression - 1929

During the Great Depression, the UK exports declined by 32%, but the GDP fell only by 4.8% which was less severe than the contractions faced by USA and Germany. The decline in world demand resulted in lower prices of primary products and this boosted the consumerism in the UK which was a major support to the GDP, however UK exports lost their competitiveness in the international markets resulting in high levels of unemployment

Recovery Again!

Sterling was departed from the gold standard and was depreciated to competitive levels. The BoE adopted a more lenient monetary policy which resulted in increase public spending and investments in house building. The exports, however remained less in demand due to recession in the US.  

Post-war recessions

After the second world war, consumerism played a greater role than investments and exports in running the business cycle.

1970s

This was a completely new era. The fiscal and monetary policies adopted were expansionary in nature and the banking system was deregulated. However, the oil crisis in 1973 resulted in cost-push inflation which pushed the economy into recession.

1980s

The 1979 or second oil crisis caused due to the Iranian revolution. UK experienced an appreciation in the sterling due to it becoming an oil producer. This again made UK less competitive in international markets resulting in high levels of unemployment (due to decline in productivity) and inflation caused by high oil prices. On top of all this, the fiscal policy was tightened by the Thatcher government.

1990s

Deregulation of financial institutions and consumer optimism led to growth. The consumer optimism was depleted due to the tightening of the monetary policy to support the sterling to remain in the European ERM (Exchange Rate Mechanism). 

Recovery was possible again when the sterling was withdrawn from the ERM. This resulted in the fall of interest rates which again led to consumer and business optimism. 

Current Recession

The economic growth achieved prior to 2007/2008 was mainly due to favorable demand side policies. This resulted in over-heating of the economy. The debt to GDP ratio increased rapidly, amid consistent balance of payments deficit. Credit was being easily provided and the financial institutions were not exercising self-regulation. Savings were diminishing underpinning the consumption and investment. Huge budgets were being allocated to non-productive segments, such as defense. It has to be noted, the monetary policies yet remain expansionary in nature.


Conclusion
-Depreciate of sterling to achieve competitiveness and export led growth
-Cut public debt and set priorities in budget and its allocation
-UK has good spending in Education and Health care as a percentage of GDP. It can be anticipated that the productive capacity of the UK will grow in the long run.
-Switch focus from demand management to supply-side policies, or rather both (hand in hand).


Note: The above views are personal and can be debated upon due to them being subjective and judgmental.

Recep Tayyip Erdoğan

Recep Tayyib Erdogan was elected as the prime minister of Turkey in 2003.  He graduated in 1981 from Marmara University's Faculty of Economics and Commercial Sciences.

In the current scenario, when the Balkan economy is severely hit by European debt crisis, the Turkish economy dominates and is part of the G-20, being the 16th largest economy. Erdogan helped Turkey to enter in to collaboration with world economies. Moreover, his team added spiritual strength to the Turkish economy by adding value to the currency, not only by dropping the additional zeroes and giving it a new identity (i.e. an anchor which depicts support) but by making the people realize the value of Turkish Lira in their wallets who earlier would go to foreign exchanges.

Erdogan has also been known as a diplomatic dynamo by various intellects. Be it any issue in the Middle East starting from Palestine to Syria to Iran, Turkey's input to it matters. During his tenure, the Turkish improved their economic and political dies with the arch-rivals Greece. Trade with Saudi Arabia continues to increase over time. The support towards the calamity-struck nations is highly appreciable. Not only the public has contributed towards the social causes but the ruling elite has actively led it from the front.

On basis of my brief analysis, it can be concluded that good governance can solve various issues ranging from geo-political to social to foreign policy. The Turkish model is definitely worth a look.

From Jenabhai to Jinnah

Muhammed Ali Jinnah was the son of Mr.Jenabhai, who was the most respected merchants of Karachi. At a very young age of 24 M.A. Jinnah enrolled as an advocate Bombay High Court after he passed the Bar examination. 


Very soon M.A. Jinnah's reputation in Bombay as a lawyer had become formidable. Once he was interrupted thrice by a judge who said "rubbish" on each occasion during a hearing, Jinnah said, "Nothing but rubbish has passed from Your Lordship's mouth throughout the day." He was surely turning out to be the fresh voice for Indians.

Barrister Jinnah in his chambers

Sarojini Naidu described Jinnah as " an ambassador of Hindu-Muslim unity."


Once when Jinnah appeared before the Public Services Commission in 1913 he was asked whether he was not concerned that under a system of simultaneous examinations the backward communities (like the Muslims at that time) would be at disadvantage? Jinnah firmly replied: "I would have no objection if the result happens to be, of which I am now doubtful, that a particular community has the preponderance, provided I get competent men." Then Islington (in-charge of India Office) further added: "It has been represented to me that further difficulties might arise if you put a Hindu in charge of a Mohammedan population. Do you think that a Hindu who got a few marks more than an educated and influential Mohammedan would make a better and an efficient administrator when he was in-charge of a population which was largely Mohammedan." Jinnah's response :" I say, that in this case you will be doing the greatest injustice to the Hindu...i do not see why a Hindu should not be in charge of a district where the majority happens to be Mohammedan."

This was the prime reason why M.A.Jinnah was made the member of the INC (Indian National Congress) and not the Muslim League....
When Jinnah sat for his entrance test, he chose Lincoln's Inn in 1893. It is said that he chose this Inn particularly because on one of the New Hall's main entrances he saw a fresco depicting the name of PROPHET MUHAMMED (PEACE BE UPON HIM) among the group of lawgivers of the world.

Credit Default Swaps: Financial Weapons of Mass Destruction

The buyer of a credit default swap receives credit protection, whereas the seller of the swap guarantees the credit worthiness of the debt security. In doing so, the risk of default is transferred from the holder of the fixed income security to the seller of the swap (oh Greece!). 
For example, the buyer of a credit default swap will be entitled to the par value of the contract by the seller of the swap, should the third party default on payments. By purchasing a swap, the buyer is transferring the risk that a debt security will default.

The Failed Corporations; A Lesson to Learn

1- South Sea Bubble (1711-1720)

Investors had no idea of how their investments were being utilized in the business by the directors. The troubles arose when Spain entered in war with Britain. Directors, knowing the situation, started selling off their investments secretly. This led to a depressing effect on the investors' confidence . As a result issuing shares in the UK was banned (until 1825) and investors started shifting their investments to the U.S. Some historians name this collapse as mother of all failures.




2 - Polly Peck International, PPI (1940-1990)

Asil Nadir, a Turkish Cypriot, took over a major share in PPI as a Chief Executive. The company was mainly in to the electronics trading, but later entered into the trading of foodstuff competing with giants like Chiquita and Dole. A millions of pounds of funds were transferred to subsidiaries in Northern Cyprus in form of payments. These companies were being run by Asil Nadir's son. The company started to default on its payments to creditors which alarmed the board and authorities.Ultimately, the company collapsed.




3 - Maxwell Foundation (1970-1992)

Robert Maxwell misappropriated the funds, including the Mirror Group pension fund, to finance his loss making ventures. Neither the auditors nor the board were able to prevent this misappropriation which led to miserable failures.




4- Barings Bank (1762 - 1995)

Nick Leeson headed the trading of derivatives' operations in Singapore. This business was being run/managed during a 'deregulation period'. There were no controls, segregation of duties and no division between front and back office. The traders were accounting for the transactions either incorrectly or fraudulently and reporting inflated profits to the head office. Nick Leeson was gambling the bank's money (or the public monies). The money kept arriving and Nick Leeson kept gambling. It was the Kobe earthquake which caused a stock market crash (which affected all the tiger economies) resulting in a loss of £800 million to Barings Bank. Ultimately, Barings bank was sold to ING for £1.




5- Enron (1985-2001)

An Energy company headed from Houston, Texas was run by Kenneth Lay, the chairman, who entered in to contracts to deal in energy derivatives. The company had set special purpose entities for off balance sheet financing, in order to channel funds into Enron without the need of reflecting the substance in the accounts, i.e. hide its debt. The company was downgraded by various credit rating agencies impacting the investors' confidence. The share prices were on a free fall and the company faced some serious issues with the cash flow. The results were the same: Wind it!

The Angry Bird Effect

We have Angry Birds branded games, shirts, applications, stationary, school bags and what more!
However, this all comes at the expense of loss in productivity which has possibly led to economic losses.


I came through an article on The Atlantic and thought of sharing this computation with you:

The above is an American-focused research and by the way I too play Angry Birds ;)

JINNAH & GANDHI

Comparing Gandhi and Jinnah is an extremely complex exercise but important for they were, or rather became, the two foci of the freedom of movement. Jinnah was a self made person. A self made person in the sense, he himself was solely responsible for his incredible political career where as Gandhi was born in a prominent family with a political background. His father was a diwan( prime minister). No such advantage of birth gave Jinnah a leg-up, it was entirely through his endeavours. 

"JINNAH IS AN AMBASSADOR OF HINDU-MUSLIM UNITY." -GOPAL KRISHNA GOKHALE

Gandhi was a master practitioner of the politics of protest. He did not do this by changing his nature but by changing the very nature of politics in India. Gandhi took politics out of the spacious halls to the soil of India. Hector Bolitho in his book "In Quest of Jinnah" writes:' Jinnah was a source of power...Gandhi an instrument of it....' Gandhi was inspired of Tolstoy ( a russian novelist) and Jinnah recognised the political impress of Dadabhai Naoraji(the first asian to be the british MP) and Gokhale(mentor to both Gandhi and Jinnah).

When Gandhi attended the Gurjar Sabha (council) his words to Jinnah were:'glad to find a Muslim not only belonging to his own region's sabha, but chairing it.' Yes, Jinnah was chairing that event. Gandhi got a very warm welcome by Jinnah who wanted to enlist his services for the Hindu-Muslim unity. Jinnah in his presidential address welcomed Mr. and Mrs. Gandhi. He impressed upon Gandhi that the greatest problem was ' to bring about unanimity and co-operation between the two communities (Muslims and Hindus) so that the demands of India (from Imperial Britain) may be made absolutely unanimously. Jinnah praised Gandhi a lot and this was greatly applauded by the large Hindu audience. However Gandhi's response was not a very good one. He said that he would study all the Indian questions from his point of view and on top of that he thanked Jinnah for presiding over a 'Hindu gathering.' This was an ungracious and discouraging response to Jinnah's warm welcome and intentions which was immensely pure and peaceful and this had a dampening effect....

We can clearly comprehend that Jinnah was the voice of India and Gandhi started off with the Hindus who were in majority.
Gandhi's leadership at this time had almost an entirely religiously provincial character and Jinnah on the other hand was then doubtless imbued by a non-sectarian, nationalistic zeal. 

These are independent views/opinions/findings and are not meant to hurt anyone.

History Repeats Itself

I was going through the newspaper a few days back and I was surprised to read that an unemployed Chinese turned to a millionaire when he borrowed money from the bank to trade in 100 tons of garlic. To my surprise he made a profit of 125%…Wow!!! so is this a better investment than gold ? My answer is YES!…
Reasons: the demand for vegetables tends to be inelastic which means whatever happens to your income there will be a negligible impact on the amount you spend on food items. The second reason which I want to bring to your knowledge is that what exactly happened in the 1930′s “Great Depression”. There was a transition in an economy , a clear shift from the agriculture sector to the manufacturing sector and then in the 90′s when the Asian stock markets (known as the tiger economies) declined there was a shift from manufacturing to service industry. So what will happen now? Is there another sector left to exploit ?NO…The present scenario suggests that most of the non-oil producing countries will gradually shift to the traditional industry – YES the agricultural industry. Russia which is currently experiencing negative growth asked its steel workers to start potato cultivation on state owned lands. China is providing its farmers with cheap credit so that they can afford luxuries in order to encourage agricultural production, and EU pays excessive subsidies (under the Common Agricultural Policy) to its farmers. Agriculture sector will further grow due to increase in investments made by Saudi Arabia in Australian lands for crops and many other Non-Agricultural industries are investing in countries like Pakistan, Bangladesh and etc.
More importantly this will also serve to the basic need of every human being and that is to live in an environment free from carbon, but nevertheless it will have drawbacks attached to it.