The Economy Turmoil !!

A little serious topic that I figure would be quite interesting to blog as practically everyone seems to be talking about it may it be in weddings, gatherings or at our infamous `kopitiams'. Besides, is a good topic to have a friendly debate with your peers or family and heck, it might be even used by the interviewers when you apply for an investment related job. Do note, that whatever I am about to write is purely a conclusion of what I understand from my pass readings in the newspaper and should I go wrong in any part do please please feel free to leave a constructive comment as well...I guess its better to be well informed of our mistakes than to be an ignorant ass and make a fool of ourselves when we debate about this issue with other people.

Some of you might wonder, how on earth did the world's economy took a hell of a beating in which seemingly at one point of time was growing at a steady pace. Or how did the subprime issue that emerged two years ago became one of the main factors that cause multiple international banks to close down? Well, many have argued that the economy turmoil today had its beginning when the issue of subprime mortgage emerge in year 2005 but I for one strongly believe that the economy downfall had its beginning instead in the aftermath of Sep 11 2001 attacks. Do allow me to elabortate, directly after the attack, the share market prices especially in the US plummeted down as consumers were in a state of gloom and there was a loss in confidence. The Federal Reserve (FR) decided that the only way to stimulate the economy once again was to offer a low-interest rate regime so as to get investors to borrow and spent. Before Sep 11, the FR discount rate (rates that Banks have to pay to borrow from FR) was approximately 3.7% with cost of fund for prime rate (a reference interest rate used by banks) was at 6.5%. By the year 2002, the discount rate was only a mere 1% and prime rate for loans was at 4%, and because it was so cheap to borrow, more banks were borrowing more from the FR so as to fund for their investments especially for housing.

And because it was so cheap to borrow, almost every bank lowered their requirement to borrow money so as to attract members of the public to take loans from their particular organization. Mortgages were given to those without good records meaning those with no employment nor any stable income. This policy adopted by all the banks lasted all the way to 2005 as by that very year, there was a steady rise in house prices and banks treated this houses as a very good collateral owing to the fact that in case of a foreclosure, the price of the house itself is much higher that the mortgage. In addition, at this point of time the world's economy appeared to have recover from the depression period during the attacks.

Unfortunately, inflation soar up high and by 2006, the FR could no longer sustain the low interest rates and had to increase their discount rate to about 5% and the prime rate to 8%. Do note that this was even higher than the rates before the attacks. This resulted in people having to pay for mortgage payments through their ass and many eventually had to forego their properties. Banks have no choice but to take away the houses and this created a slump in the market. By 2007, almost all banks who participated in the `low-interest rate borrowing' were facing difficulties and this includes one of the most prominent bank as well, CITIBANK. Most banks were seeking injections of funds so as to try save their buttocks from being rape by both shareholders and the public itself and that is only the initial stage. The property market kept on dropping and this eventually caused the Lehman Brothers as well as Fannie Mae and Freddie Mac (both are infleuntial primary organization for housing loans) to be in some real deep shit as well. Fannie Mae and Freddie Mac had even packages their loans and resold them to buyers which include countries like China and Japan. Malaysia was obviously not one of them as we do not have the financial means nor the balls to take such risk. This is one of many few reasons that why our beloved country Malaysia was not affected as badly as other countries like New Zealand, Japan, China and etc. I guess it does pay to be poor at times huh......

Anyway, hope the information above help in gaining a better understanding of our current economy. Bad times are coming people but it is an EXCELLENT time to go shopping as things will eventually get cheaper to attract member of the public to spent. My prediction, HUGE ASS PRICE SLASHES by december.....Cheers people and do have a jolly good weekend...XOXO


You Know You Want to know,

Durwin Tan