Global recovery: How can it really happen?

As in China we too should come up with larger stimulus packages so that we can get our manufacturing industries to recover as they are the backbone of our economy.

I am not sure whether China can overtake US economy in the near future. Chinese are more practical minded than Indians. They adopted the free market route very early I think from the 70's onwards they were planning a change over to proletarian free market economy which they eventualy did and is being succesful at it.

About recovery I think it is already on. One of the last hurdles to recovery was the Banks holding refund agreements where a Bank lends to an Investment bank and the Investment bank inturn buys mortgage securities from the lender bank which gives a refund agreement in case of default of the tranche of mortgages sold to Investment banks. A tranche means a cluster of mortgages the bank has initiated which may not be investment grade per se. Now the Investment bank gets it rated through a credit rating  agency which gives them a AAA which is investment grade. They have their reasons for doing so since if there is a default the investment banks are assured payment by the bank through a refund agreement. The Investment bank creates a collateralised debt obligation (cdo) using this and sells it to special purpose vehicles of Mutual Funds or other Investors who nobody knows who they are. Now if the collataral defaults which  are subpirme then the chain breaks the originating banks are to refund for the tranche that defaulted. This whole process culminates in defaults atleast as we saw happen where by 27 banks foreclosed and many were bailed out. Now the situation it seems is under control and many banks have paid back their bail out money from the Federal Reserve bank. 260 mn  mortgages were initiated only 99mn were subprime of which only 15$defaulted. The usual safe limit is 7% default within which the banks can be solvent. If it went beyond 15% there would have been larger drop in housing prices and more banks would have collapsed which didn't happen. So we can assume that the worst is over and the US economy is getting up again to breath fresh air. I feel the recovery has already started and once the interbank transaction which collapsed due to banks in a quandry for refund agreements is called the credit crunch is still goin on and once the refund agreements are taken care off the interbank transaction will start along with all the structured debt and derivative trading in financial instruments may be this time with more care and we are back.

Whatever mention in the article is true but one thing I could like to say that China has very big role in current economic crisis. China’s economy is export driven almost 65% of China’s revenue comes from export.

China's policy is that they don't invest money domestically to improve their cost of living or consumption rather they prefer money to be invest elsewhere. China has  investment of around $1 trillion with US treasury. This has created excess liquidity in the US,  US banks provided more loans to individual and companies without stringent regulation. We have seen after effect of this when US mortgage market gone drastically with lots of default and bankruptcy of US mortgage giant Freddie Mac & Fannie Mae etc.

If you remember, at G-20 talk China has suggested that new global reserve currency should be created because they are in catch-22 situation. If they withdraw money from US treasury then US treasury market will go down and value of their investment is eroded but if they can’t withdraw then also they have problem as US economy is not going to revive fully in near future. 

Recently they started withdrawing money gradually from US treasury and pumping it in domestic market.

One good thing China has done as mentioned in the article is that in spite of decline in export market china has achieved 9% growth. This is a very big achievement for a country which is mostly export driven to give emphasis to their domestic demand by providing lot of stimulus package to manufacturing sector, improving domestic consumption and achieve world’s top growth.

I think Indian which is normally domestic driven economy could not provide this kind of stimulus to increase domestic consumption. It is an ideal opportunity for a country to take advantage of cheap commodities prices and build infrastructure for the future growth. But I think India could not expedite the process…

The 30's recesession in USA one of the worst in history was tackled and the then President Eisehower embarked on a wider National Public works investment which crated the present Interstate and other highways of the US. Now these infrastructure support their economy in their recovery. It would have been wiser on our part if we did something like that creating scientifice road system for the Nation for it's commerce to take off not the likes of what we have now, unscientific and accident prone and gas gushers. Full resielience of the economy cannot be achieved without scientific infrasturctre which can support in speedier deployment of commerce and strategies.

We are resilient because our banks are restircted in their functions. It doesn't serve the masses. It serves only restiricted audience. American banks took calculated risks and probably it is the interference of the hetrogeneous agents like imbalances with china that created the price depletion in assets which triggered the subprime crisis. Even after the dollar holding tight mystically the asset prices went under and it is not the banks altogether that need be blamed here it is the exogeneous interference of globalization and more cheaper products in the system from imports and lowered wages of the citizen that need be the culprits. Our banks are limited function old fashioned institutions and so their functions are not fully useful for the citizen while American banks are useful even to the marginalized. So taliking about resilience achieved through limited services which I believe in the long run need not be our direction.

xxx