The Root Cause Of Sub-Prime Issue

Heard of these:

  • The famous tale of a janitor in a large corporation telling one of the senior staff at pantry that she just bought a house in anticipation of selling it at higher price soon; a tell tale sign of lack of thorough credit evaluation in US
  • You have numerous writings by shrewdest real estate investors to promote minimum- or zero-down concept to ride on of one of the longest waves of economic expansion in America since 1929, with the aim to generate serious wealth, only to be followed by (in majority) those half-baked real estate investors; this is a time-bomb
  • Smart financiers re-packaged what seem to be, on its own merits, a low grade financial papers, into somewhat an attractive instrument called CDOs, and sold it to refinance their portfolio for greater leverage power, has helped expose many global financial players to this genuis investment-marketing breakthrough; the results need no special mention here, if you do read financial news for the past 3 months

My take:

  • The root cause of sub-prime issue is really about reckless consumption or investment (if you like) with obvious lack of foresight and hard-driven by greed, to start with. It reminds me of 'theory of greater fool' ; that is to buy something hoping for another (greater) fool to buy at even higher price) and this will go on for some times until the axe falls. While some will learn from this lesson the hard way, the scary part is some will never learn or have a short memory.
  • If the consumers are reckless, what about the financiers who suppose to be smarter (indeed some were very smart to sell a rotten apple to fresh foods sellers) but along the way got themselves excessive exposed to credit risks? If there is anything to explain why smart institutional investors took up massive exposure in CDOs i guess it could all square down to being eager to display top performance in their portfolio with lucrative returns from CDOs-related. All large banks like Merill, Citi, UBS, to name a few, have all been trying to address the issue with massive write-offs but no one could be sure if the measure adopted has been adequate but one thing for sure is the act of write-off is like throwing good money into bad
  • Then you hear about crying-for-help calls to solicit for lowering of base and discount rates by Fed and for government and congress to approve rescue package to stimulate what seem to be high probable of risk of economic slowdown in US, and they got exactly that. While the effort will ease and possibly avoid the economy from sliding in recession, at least for now, it still left the root of the issue largely unsolved; that is on the 'behavioural' part of consumers who think that their reckless act is condone by the Fed and US administration, so MAY BE they should not be fearful to continue with such act again when the time is ripe for another quick quick profits.

So you judge whether the sub-prime issue has been adequately addressed by some of the recently announced measures?

Comments

Post a Comment

Popular posts from this blog

This Recession Was Brought to You by the Letters U, V and L

A popular question [1] for economists lately has been what shape this recession will take. Will it be a “U,” a “V,” or maybe an “L”? Could we even find ourselves caught up in the roller coaster of a “W,” just when we think we’ve finally voted out that letter once and for all? What’s with the alphabet soup? This categorization is a kind of verbal shorthand for describing the shape of the ups and downs of the gross domestic product and the broader economy. It’s not an exact science, which is part of the reason there’s so much debate [2] about which type the United States is experiencing. There’s no governing body or think tank tasked with crunching the numbers and officially declaring a recession one letter or another. In general, V-shaped recessions are those that last for a few quarters, while the more unpleasant U-shaped recessions can drag on for up to a couple of years. It’s the difference between a head cold that clears your system in a week and a case of bronchitis that leaves y
Read more

Steam Bath

Iceland: a transit point between Greenland and Britain in the board game Risk to some, a source of lush adventurous pop music for others, and a blank to many. The small, rocky outcropping of 300,000 people and (allegedly) 500,000 sheep usually doesn’t get our attention. But this week, the banking crisis that has swept across North America and Europe is dealing a mortal blow to the entire country. The government nationalized or took control of its three biggest banks this week, its debt has been downgraded, and its plunging króna currency is barely trading on the international market. The crisis has even taken on a geopolitical tint; our NATO ally is in talks with Russia for a 4 billion euro loan, a move that would nearly double its foreign-currency reserves. Why are Iceland’s banks so big, and why are they, the currency, and the national economy in such trouble today? Quite simply, leverage. Like a light-swinging baseball player who’s just discovered creatine, Iceland’s banks bulked up
Read more

City State Ponders Its Future

Last Saturday (14 June 2008), I came across an article written by columnist, Seah Chiang Nee, on his weekly ‘Insight Down South’, on The Star. The writer sighted waning interest among many in Singapore in areas that were the cornerstone of Singapore’s development, i.e., engineering and even legal profession which experiences shrinking supply amid rising demand for lawyers. Retired civil servant, Ngiam Tong Dow was quoted to express concern with the present development. According to him, “Britain’s economic decline set in because the best and brightest from Oxbridge, instead of going into engineering and running factories, went into the (financial) City of London... they are not creators of wealth, they just shuffling asserts around the place. In US, the best went to Wall St, their best still go into engineering. This trend is not unique to Singapore. Many countries, in pursuit of greater socio-economic growth, are facing such reality. But this is never an easy issue to tackle and any p
Read more