Sunday, 2 June 2013

When the veterans ignored the warning signs.

I am no economist and neither am I a prospective student in that avenue. However, I always crave to stay abreast with a little bit of what goes in the financial world. I follow articles, certain news channels and certain other resources on the Internet to find intricacies in what is supposedly the main pillar of the present world - its economy. Countries have been trading ever since the inception of trading amongst humans. Initially, trading was done in commodities which happens even till date, for that matter. But with time, the subjects of trading moved from more inherent and manifested modes to more tacit and virtual platforms. This constitutes of stocks, liquidities and other things which though have a market value certified by creditors, rating agencies, auditing agencies and even regulatory bodies, but these components still have certain vicissitudes because they never exist as such. They only exist on paper and act at the behest of market values,company results and a plethora of other implicit and explicit factors. I wrote this prologue to my post just to vehemently assert my conjecture that the global economy has necessarily became much more complicated ever since its inception.

So now, why link up this potpourri with a moral theme of learning from the warning signs ? Well, I actually held this notion that there's no better way than to learn from a story that is just a verbatim vesting of a real life story. I came across this topic of ignoring the warning signs and I don't know why but some part of my conscience tethered me to a realization which has been mentioned in various books and various journals over the past few years. Ladies and gentlemen, this may not be a story in the conventional sense, but this an honest attempt to show you how the most virtuoso of economists failed to recognize the warning signs that eventually waned the happiness and prosperity of a countless number of people. This is a superficial yet indicative account of how the Global Recession or the Great Recession of 2008 could have been avoided. Most of the things discussed here are presented in context of the US economy and its constituents because the commencements largely burgeoned there.

A collection of the headlines which newspapers all across the world used to describe those turbulent times.

It is believed that the Great Recession wouldn't have arrived if the appropriate market factors were checked on time and subsequent rectification methods were forced. The first of these was the burst of the housing bubble. A few years prior to this great recession, interest rates on house loans were brought down substantially and buyers were also allowed to refinance their mortgages(i.e changing certain specs of the loan midway like monthly amounts or a change in the very security or possession against which loan was obtained etc.). These were the reasons because of which housing debt kept increasing as people were allowed to be very casual in paying back for their homes. And above all, banks and investment agencies provided investment products that were based on the premise of these home loans being paid back on time. And suddenly, things started tumbling in this venue in 2006-07. The underpinnings are very complex but the global economy started showing warning signs that a lot of home loan possessors would be defaulting on a host of subsequent payments. The investments in home sector kept declining more and more voraciously during the whole 2005-08 period. This was one warning sign, which if it was checked on time by govt authorities and other agencies, could have avoided the much larger fiasco that ensued later. But as the legend has it, even after a little bit of wariness from a few experts, the issue was largely ignored. When the housing bubble burst, initially loan repayments were defaulted but as a cascade effect the investment products based on these repayments collapsed woefully, resulting in the biggest financial chaos.

A cartoonist's impression on how even after knowing that recession is looming, people waited for it to become more evident.

The second indicator was the fall of consumer and company spending. Although the ambit of this was somewhat restricted because there is always some variation, but this was a warning sign, nonetheless. It is believed that as and when consumers start spending less on retail and other other ventures and when companies start getting more wary of their expenditure and restrain their expansion and mass spending plans, it is a sure shot sign that some kind of trouble is brewing. Although the initial signs in this regard were wry and quixotic to infer upon, but a few good months before the recession, certain market gurus started predicting these as a predecessor to a more massive drop in overall spending. And as it turns out, a massive drop in spending was witnessed when the Great Recession was officially declared. Once again, a very very comprehensive warning sign was simply ignored just to witness the underlying  phenomenon of that sign becoming more impregnable later on.

The expression said it all.

The third indicator was a conglomerate of various market factors which are assumed to be the flagpost of conventional markets. This includes a multitude of things like copper prices, NYSE(New York Stock Exchange) margin debt and oil prices. It is believed that these factors show certain peculiar out of the track trends just before a recession or just after an economy is revamping post a recession. These factors may either dwindle or show a rather capricious behavior during these indicative times. History has it that even during the Great Recession, these factors clearly elucidated the probability of something abnormal shoving up in the markets. But as always, even though the signs were duly acknowledged, they were largely ignored after being termed as rare seasonal variations which might dissolve with time. What eventually happened was something quite different.

The decline in USA's GDP growth, courtesy of the Great Recession.

Although the above indicators were the most comprehensive in terms of suggesting a possible recession, there were a plethora of other factors which various university and market economists deemed to be the signs of a doom. Most of these factors too were considered illegitimate and non-viable in that context and were simply ignored. Now, the question is that even after being the most inimitable and indomitable of all economies, why is it that the top notch decision makers in the US ignored such plausible signs ? That is because the overall economy was largely considered to be self-sustained and self-controlled. The nation thought that courtesy of all the regulations and monetary bodies in charge of funds and flows, the market will be able to steady and stabilize itself with the minimum of efforts. It was believed that these warning signs were somewhat intermittent and acting at their behest would have been a whimsical approach. Instead of that, it was believed that following the usual budgetary and regulatory actions was all that was needed. Eventually, the economy started to feel the blunt of not acting on these warning signs and when they acted, it was already too late.

The Great Recession seemed to have a penchant for destroying complete sects of the economy. Investment banks whose proclivity for underestimating undulating risks was the prime cause of the recession, were the first ones to feel the heat. The world literally shuddered when one amongst the largest of financial institutions, Lehman Brothers, completely collapsed in September 2008. That was the first big picture of the recession. Post that, there were reports of a substantial number of people in the US and Europe losing out on their homes as well as jobs. Consumer spending came down drastically, more and more financial institutions crippled and went away with the wind, manufacturing came to an altogether halt, investments went down to an all time low, more and more austerity measures had to be forced every now and then and to sum it all, quite a lot of people were compelled to terminate their lives. It seems that this recession was a very very ravenous one. One that was benevolent enough to warn us well before its arrival but one which, when it arrived, devoured things as rapaciously as it could. The world eventually came out of the tribulation however Forbes believes that the recession has left an everlasting impact. The govt came up with figures about the cost of the recession but given the fact that a single human life is in itself priceless, it was the most ludicrous of things to present. We sustained that recession but it has taught us a lesson of our lives. Never ever ignore the warning signs. They're there not to scare you, but to spare you.

When an institution as large as Lehman Brothers failed to sustain.

This post was written with the intent of submission towards Indiblogger's Colgate #WarningSigns blogging drive. It is an attempt to encourage bloggers to blog about the atrocities that form the ramifications of not treating warning signs with due diligence. This post had a much larger purview but we humans too have an appetite for being apathetic towards warning signs. We ignore problems in our gums and teeth deeming them as something that would go away in a while. But that is not to be. Blood can be the sign of bigger gum problems like gingivitis, receding gums or even tooth loss if left untreated. One should not ignore the warning signs your body gives you!

A view of all the products from the Colgate Total range that are in the offering.

To know more about keeping your dental assets in perfect condition, please visit this link. 

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