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Double-Dip – A Reality?

March 5, 2010

There has been much talk of the world economy going back into recession, after some signs of recovery. This phenomenon of the economy nose diving again into negative growth is being termed by the pundits as double-dip. The prophets of doom are many. Much as I would like to believe that the worse is over, my gut feeling says that it will be sometime before normalcy returns. And things could go worse before they turn for the better. And that could mean that the double dip, as they term it, could be a reality.

Those who say that the economy is back on its feet and that the worse is over point to China as an example and say that since the Chinese economy is doing better than expected, therefore there is no reason to believe that the recession is going to last very long. Figures can be deceptive. The Chinese government is forecasting a growth of more than 8% in this fiscal year. Experts believe that the Chinese economy will do better than that. Some of the investment banks including Goldman Sachs have already announced bumper bonuses for their employees including their CEO. A chill runs down my spine when I hear such audaciousness from the financial sector. The artificial propping up of the economy has already begun and speculators are trying to spread around a ‘feel-good’ atmosphere which is far away from the ground reality.

What makes me skeptical of this whole ‘recession is all but over’ theorists is the fact that those who were behind the housing bubble and who had underwritten all those bad loans and sold them off as assets, making huge profits in turn have still not been brought to book. The moneys have landed up in tax havens like Caicos and St. Kitts. We are talking about billions of dollars and more here. The actual figures might never be revealed. The world tail spun into a recession. A motley group laughed their way to the banks. Madoff and his ponzi scheme was a victim of the crash and not the reason per se. Had the ‘good times’ continued it would have been some more time before the man would have been unmasked. The subprime mortgage crisis was the making of these unscrupulous banking behemoths. Some of these investment banks like Merril Lynch and Lehman Brothers went turtle and billions went down the drain. Where did these money’s land finally, that is the question. Obama administration introducing measures to curb speculation and dealing in futures and debts by companies who have no business in such financial instruments is like trying to close the barn when the horses have bolted. The bad news is that such financial jugglery has not stopped and what Goldman Sachs has done in Greece is a pointer to the fact that going by the book is not a priority of those who deal in matters financial.  A bit of orthodoxy in matters concerning finance should be the culture of the financial world. The facts point to a streak of recklessness and of short term gains, being the order of the day. It is like playing ‘passing the parcel’ with the last guy who is left holding the piece of shit that is touted as a pot of gold, once the bell stops ringing, is the one who is the fall guy and those who packaged the shit and wrapped it up nice and beautiful get away, making a neat pile in turn. The bad news is that even the guy who is caught holding the piece of shit is not the one who really gets clobbered – it is we the people who are the ultimate suckers and who have to finally foot the bill for those who have made a fast buck and made a faster getaway.

What is happening in Iceland is a pointer to the fact. Banks failed and now there is a referendum as to whether the public should pay for the losses incurred by the banks as the nation had made deals with UK and the Netherlands to make good the losses of those three banks in question. The people are furious and rightly so. This is a scam and those in power cannot wash their hands off this, whether it is in the US or UK or Europe or elsewhere. The malaise runs deep and the foxes have been let off lightly. They want to play the game again and again they want to create a bubble and a false sense of euphoria, a double digit growth rate and what have you. But this time it will be a bit tougher and such euphoric ‘development’ may be sometime away. For can you tell 15 million unemployed Americans that all is well and that the economy is doing great and that this is the time to invest. They are lucky if they can pay their bills. Any such synthetic ‘growth’ is like a slap on the faces of the millions out of jobs the world over. The global rise in prices of food items is another cause for worry.

Here in India, we are told that the recession did not really affect us as the banking fundamentals are sound. We are being told that since our banks are largely public owned therefore we are safe. But it is also true that these ‘safe’ banks have written off loans of big corporate houses to the tune of Rs 60,000 crores. Where is this money going to come from? This is bad banking practice. Yes the government can always print more notes, but that leads to inflationary pressure. It is also true that Bank of Baroda and the ICICI did have some exposure overseas and have lost money in the recent economic meltdown. My fear is that the nexus between the corporates and the banks here in India is so unholy that someday the whole banking system will collapse and this economic meltdown will be India specific. We have remained largely untouched because of our outdated banking practices that are not in consonance with the global financial system and not because of ethical banking norms.

It is being said that Spain, Portugal and some other west European economies are also shaky. The Euro is under pressure and Germany is at sixes and sevens as to how to reconcile the huge deficit. The Euro is one of the favored banking currencies the world over and after the dollar the most widely traded currency too. If there is a real pressure, the Euro could wilt and this could have a cascading effect. Germany is taking the brunt and while it is true that Germany has solid economic moorings, it may be ambitious even for Berlin to try and shoulder the burden of the whole of Europe.

Dubai may have been bailed out again by the UAE, but that does not mean that Dubai is back on its feet. The fact is that this city state is a shadow of itself. The real estate has still not recovered and things are looking bleak. The Middle East as such has lost its sheen and with another war on the horizon, the world economy could be in for another jolt.

After the economic meltdown, the US government should have moved in swiftly and caught those that were behind the financial scam that ruined many a lives and left the world in tatters. What the governments the world over did was just the opposite. They started by pumping in money to prop up the economy, what they called as stimulus package – investing in infrastructure and the like to create jobs. The face saving measure was the austerity drive introduced by all the major economies the world over. A bunch of hoodlums made their kill and the world governments were left to clean up the mess. The mess was so thorough and so awful that even after a year and a half, we are yet to get anywhere near getting the place back in shape. This recession is much deeper and much more fundamental than what most people think. What bothers me most is that the guilty are roaming around scot free and are in fact the same forces that are now claiming that all is well and things are back to ‘normal’. They want to do an encore and the way things are moving, my fear is that they might well be able to pull off another heist in broad day light – what most pundits are calling a double dip.

Update 17.04.2010: Goldman Sach’s transgression in floating securities they knew had to fail has been reported widely. This is financial demeanour. CNN has reported the story thus:

The SEC’s civil fraud complaint alleges that Goldman allowed hedge fund Paulson & Co. — run by John Paulson, who made billions of dollars betting on the subprime collapse — to help select securities in the CDO.

Goldman didn’t tell investors that Paulson was shorting the CDO, or betting its value would fall. When the CDO’s value plunged within months of its issuance, Paulson walked off with $1 billion, the SEC said.

“The product was new and complex but the deception and conflicts are old and simple,” said Robert Khuzami, director of the Division of Enforcement for the SEC.

Goldman said Friday morning that “the SEC’s charges are completely unfounded in law and fact and we will vigorously contest them and defend the firm and its reputation.”

After the market closed, the firm added that it is “disappointed that the SEC would bring this action related to a single transaction in the face of an extensive record which establishes that the accusations are unfounded in law and fact.”

This goes to show that events leading to the sub-prime crisis were building up and that the bubble had to burst – because there were speculators and investors who were betting that it would. And most of these investors and speculators were men and entities that had solid reputation. This is the most worrying part.

8 Comments leave one →
  1. March 6, 2010 8:20 am

    This blog is great. How did you come up with the idea?

  2. March 8, 2010 8:29 pm

    Will you share more about it? We just want to know more. I think you are cool.

    • sharma24 permalink*
      March 9, 2010 1:52 am

      Be specific, what do you want to know?

  3. March 20, 2010 7:31 am

    Thanks to the author for article. The main thing do not forget about users, and continue in the same spirit.

    • sharma24 permalink*
      March 20, 2010 10:38 am

      It takes a real person to come out in the open and say upfront what one wants to say, beating around the bush may seem smart but it really is cowardly and smacks of lack of confidence.

  4. March 22, 2010 5:50 am

    The subject is fully clear but why does the text lack clarity? But in general your blog is great.

    • sharma24 permalink*
      March 22, 2010 8:34 am

      Sometimes it is difficult to figure out the obvious. I like to have things spelt out to me. Thanks any way.

  5. April 17, 2010 11:29 am

    It is useful to try everything in practice anyway and I like that here it’s always possible to find something new. 🙂

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