Economic Crisis - Have we even defined the problem right?

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Though after writing this article, I got a little lesson on commercial paper market drying up at the 4th McCombs Alumni Conference, it however did not convince me fully.

Today, as I read thru the articles on "Wells Fargo's" Windfall earnings, I felt these prove my belief on the topic of Credit Worthiness - Banks are lending and there is credit available for those who are credit worthy; however, I guess they are lending to who they deem are "Credit Worthy". So if anyone is not getting credit - may be like Mahatma Gandhi Said - It is time to look in the mirror.

Some Links
http://finance.yahoo.com/loans/article/106893/Wells-Cashes-in-on-Mortgage-Boom
http://tampabay.bizjournals.com/tampabay/stories/2009/04/06/daily56.html?ana=yfcpc


Thanks
Nagesh
The views represented in this blog are my personal views and are not a reflection of or opinions of any of the institutions I am associated with or have worked for.

Economic Crisis - Have we even defined the problem right?

My Basic Education was in Mechanical / Industrial Engineering with some focus in Operations Research. I still remember the first thing my Professor said way back. 95% of the solving the problem is about "Defining the problem right" remaining 5% is about "applying the right algorithm".

Off late, as I have been questioning whether we have even defined the problem right?

Looks like the root cause economic problem is defined as "Lack of Lending" or "Lack of Credit Flowing"?

So the solutions to the problem range from Re-capitalization to Closing Banks. The current govt solutions are trying to meet in the middle with plans like public-private partnership etc etc as noted in Prof. Brandl's Blog today - http://blogs.mccombs.utexas.edu/brandl/2009/03/25/geithner/

So I took the liberty to comment on the blog entry, the essence of which is as follows

1. If we truly believe there are good well run banks in the mix - then why are they not lending and why are we focussing on the so called large insolvent banks? With interest rates close to 0% the good ones should be able to borrow and lend infinetly? ( Net - Net - It should really not matter if the insolvent ones do not !)
2. Lend to whom ? The american consumer is so much in debt. When was the last time any bank lent to the person who has maxed out his borrowing capability or does not have a job? Would you, if you were running a bank lend to a consumer profile who is already saddled with debt he cannot pay?
3. Assuming, we are successful in re-capitalizing the banks. The banks will naturally try to find the most credit worthy and profitable consumer profile to lend to. Are we really sure that, THAT consumer profile is really the American Consumer ? If not, Question who this consumer is and will money start flowing to that consumer?

As I think thru this subject, I really, would like some economists to illustrate which credit worthy institution / individual is not able to borrow ? and if there is such an example, I would like to further understand why the so called well run banks are not lending to them ? That may shed light on what the real problem is?

So what is My Take: My Gut tells me that the real problem, America now faces is not availability of credit, it is credit worthiness of American Consumer. So the solutions should make American Consumer Strong and Credit Worthy Again.

In the short run this may be best acheived by letting the American Consumer - The individual who is acutally working 8 hrs a day and makes a salary around the national average keep more of his money and " by American Consumer I do not mean American Businesses or citizens who make say more than 2x of national average". The mid-term solutions lie in executing national projects like upgrading National Infrastructure - Highway Systems, Air traffic Control Systems, Power Grids etc and The longer-term solutions lie investing into education, re-training, and providing funding future technologies - Energy Independence, Regulatory Frameworks, Tax-Code re-write etc.

Finally, we cannot ignore the psychology of markets, we have to recognize that as long as every one, which includes banks feel that there will be a better opportunity (option) in future they will stay out which will make things worse. John Maynard Keynes recognized this way back, so long as government in this case keeps the hope that more help is one the way to the banks, it will stall the recovery.

Thank you for reading. Your feedback is appreciated.

Thanks

Nagesh

The views represented in this blog are my personal views and are not a reflection of or opinions of any of the institutions I am associated with or have worked for.

Animal Spirits - What are they?

In my recent post on Hope, I made a suggestion to what "John Maynard Keynes" may have have meant by "Animal Spirits of Business People" when he first coined it way back.


Today, driving to work , I was listening to MarketPlace Morning Report on NPR. Guess what the subject was - A new book titled "Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism" by Dr. George Akerlof and Dr. Robert Shiller.


The link to the report : http://marketplace.publicradio.org/display/web/2009/03/24/am_animal_spirits/


Though, I have not read the book, from what I heard on NPR today, I felt they were kind of saying the same thing I said in my blog and that is:-"Hope in GOOD TIMES combined with uncertainty and availability of good imagery that is easily accessible leads to “Irrational Exuberance” whereas in BAD TIMES the same hope, combined with uncertainty and availability of bad imagery that is easily accessible leads to “Irrational Pessimism” and staying on sidelines in the hope of an even better opportunity." So Government should respond differently based on the situation. In good times it should respond with more scrutiny and in bad times it should respond with real support. However the Authors contend though the government is on the right track, the real support offered so far (greater than 1 trillion) is not big enough.


My take: I concur with all of what was said by the authors on market place except on the comment that the real support was not big enough. I am not sure the current issue is the size of the real support, my gut tells me that it is ambiguity around the support that is causing the issue and may eventually render the size of the support smaller than needed. So for e.g yesterday when a plan was put forward on how to deal with Toxic Assets, it produced some certainity, thereby a positive response and Hope. Hence, In my opinion, What we need at this time is "CERTANITY" more than anything else. The certainity will then lead to real expectation of the need/support needed that can be offered by government/private or a combination of both.

Happy listening and reading.

Thanks
Nagesh
Note: The views represented in this blog are my personal views and are not a reflection of or opinions of any of the institutions I am associated with or have worked for.

Follow up to my earlier post on "Hope"

Three days ago, I published a blog entry "Hope - is it not a positive thing anymore?". Today, I was surprised to the "Image and Story" of Rikki on how she is overcame her "lay-off" on the front page of "USA Today". Follow the link to read further.
http://www.usatoday.com/money/economy/2009-03-12-economy-american-dream_N.htm

Though the overall news is not really good, the imagery of success and how Rikki did it; is inspiring and provides "Hope". This is was one the key points I was trying to make earlier my earlier post (http://kunamneni.blogspot.com/2009/03/all-my-life-i-have-associated-hope-to.html) and glad to see it starting to happen.

Thanks
Nagesh

Note: The views represented in this blog are my personal views and are not a reflection of or opinions of any of the institutions I am associated with or have worked for.