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Thursday, September 17, 2009

What about RECESSION?

I believe that nobody ever suspects what happened to Lehman Brothers about a year ago would actually took place. And if that is not enough, let us take a look at one of the struggles that the Wall Street wizard, J. Christopher Flowers had to endure lately. Of late, Flowers is struggling to salvage a series of ill-timed investments that he made just before the financial crisis got really ugly and dragged already distressed institutions down further than he thought possible. His billion-dollar stakes in Japan's Shinsei Bank and in Hypo Real Estate and HSN Nordbank, both in Germany have crumbled.

Such is the impact of what many claimed to be the worst economic crisis ever since the Great Depression. Probably some of us want to know how the economic crisis all started?

Not long ago, a US homeowner did something that he hadn't done for quite a while. He sold his house for less than the listed price. When enough other sellers did the same, the house prices that on average had more than doubled since 2000 began to fall. That first fateful sale burst a real estate bubble, a runaway increase in prices not justified by any rational economic calculation and triggered a downward slide that by the end of 2008 had knocked almost 25 percent off the value of the average American home and sent the world economy reeling.
"Housing is the business cycle." UCLA economist Edward Leamer has written, noting that housing slumps have preceded eight of ten postwar US recessions. Housing is crucial because for most people, their major asset would be their home.

When your home lose value, homeowners cut spending. And when consumer stop spending, firms can't sell their goods and services, leading to business owners lay off workers and in a vicious cycle, spending is cut further.

Housing downturns have always been bad for the banks. If the borrowers ran into trouble, the bank might have to take possession of a home or two, which might not be a serious problems when house prices were high. But selling houses in a down turn market means losing money. Make a habit of it and the bank is doom to fail.

But this time, the securitisation of mortgages have spread the trouble more widely. Beginning in the 1990s, financial institutions started bundling mortgages together and selling off the rights to the income streams that they generated. Investors liked the higher rates of return they offered. And note that many rating agencies gave them high marks for safety. But when the US housing market fell further and faster than anyone could anticipate, many of these securities plummeted in value. Banks that owed them were forced to call in or not renew loans they had made, so as to raise liquidity, cash or financial assets that can be sold quickly to build their reserves and pay back any of their own borrowing that might not be renewed. This rush to liquidity created


Some didn't the introduction of this post mentioned earlier: Lehman Brothers Holding Inc. And it also hit the world's largest insurance company, AIG.

Now that this might sound depressing, but it serves only as a warning to us of what could be worse if we are not being an ethical consumer. This might just bring about the responsibility revolution in our economy world. There have been stimulus plans, packages and others being done by the government with the help of economists but no one can truly say they know what is next.

I will talk more about the RESPONSIBILITY REVOLUTION towards CONSUMERISM as well as some of the stimulus packages.
Of course I'm not a professional economist or an investor but doing detailed research as well as studies on Actuarial Science professional paper has exposed me into some of these realities. It helps me to see that financial matters in the real world.

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