The New York Times carried four major articles today on the proposed governmental intervention in the present financial crisis. According to reports, the US government is planning to inject USD 700 billion to rescue the various sick units in the mortgage industry. It has already taken over Fannie Mae and Freddie Mac. Lehman Brothers has been taken over by Barclays for a song. Merrill Lynch is being taken over by BoA for USD 50 billion. Bear Stearns was taken over by JP Morgan Chase earlier. Economists have estimated an amount of USD 1.1 trillion as the requirement of the troubled housing mortgage industry. This will definitely cool off the situation and bring in some stability to the battered financial system. This will also make the US government's fiscal deficit further balloon to 11.3 trillion dollars. Any deficit will have to be met by the taxpayers in the long run. However, all these are short term measures. A paradigm shift is needed.
Where did th industry go wrong ?
Money is a commodity but an artificial one. It is a means of exchange of goods or services. It has no intrinsic value of its own. It can be used to produce something but cannot produce anything on its own. When people in the industry start trading it like goods or services based on securitization, speculation and complicated financial engineering, which very few can understand, the result is there for everyone to see. This is the price one pays for deregulation and poor controls.
Questions to US Government and FRB
The first question that I would like to ask is, is it not bailing out a lot of bad and corrupt managements, while saving the industry ? Some people at the top have made billions and have them stashed away in various forms. Such people will have to be pursued and punished. How is the government going to take that action ? If the government is not clear on this aspect, more people will do the same thing and it will become an open general license to manipulate and then leave a mess for the governments to rescue with the honest tax payers money. It is not fair at all.
The second question that is raised is, is the bastion of Capitalism is going through the socialistic route of nationalizing all sick units ? While this will reduce the risks, it will also bring in mediocrity and not necessarily good management.
The third and last question is, is it prudent to make such major moves at the fag end of the present government's term of office ? It appears that the present administration is not only bailing out of lot of sick units, it is also leaving a big deficit for the new administration that will come in shortly.
© Copyright, Sep 21-08 . Without prejudice. All rights reserved
Government intervention in the present financial crisis - To learn more about this author, visit Madhavan T Gopalachary's Website.
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Madhavan T Gopalachary
(Visit Madhavan's Website)
Madhavan Gopalachary, nick name "madgopes"
(g pronounced as in go) given by IIT
classmates, is a Mechanical Engineer and
an alumnus of Indian Institute of
Technology, Madras having passed out
specializing in IC Engines &
Thermodynamics.
He has nearly 35 years of experience in
the Corporate World. He started off as a
trainee and handled sales, marketing,
manufacturing, product management, profit
center management, strategic planning and
corporate development including R & D in
various organizations and at various
levels before becoming a CEO. His last two
professional assignments were at CEO level
before embarking to start management
consultancy business on January 01, 1998.
He has worked for British, Swedish MNCs as
well as very large Indian business houses.
He has spent a large portion of his time
from June 1998 till date in East African
Countries practicing as an independent
Management Consultant.
More details can be obtained at the
following web sites:
mmg.name
/mtg.html;
mmgconsu
lting.biz/
Madhavan's articles can be accessed at www.madgopes.com
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Interesting David Levy piece in the current issue of Institutional Investor. Here is the money ‘graf(s):
