Orissa Cyclone Phailin

This has been taken from our blog”Brinks of economic thoughts”

Orissa cyclone-”-phalin”

During last week, state of Orissa faced one of severest cyclones in last few years. As it was getting clear that cyclone Phailin is about to strike,,people got reminded of mass scale life loss caused during last such cyclone during last century in 1999,,which was considered one of deadliest such cyclones generated in this region.

 

Surprisingly we did see minimal loss of life .Alertness and preparedness of administrative body is worth praising this time. There were contradictions within US marine and Indian meteorological department about the severity of the cyclone. Although IMD stuck to its stand, which finally proved right.

 

This nation has had lots of natural disasters faced during last decade. None can forget that mass      destruction of lives caused due to excessive rainfall in holy Hindu shrine at Kedarnath this year[2013]. What happened there could have been more but due to 2 slopes ,,one before Kedarnath,,,and another after Kedarnath,,,slowed the speed of debris ,,,which otherwise could have caused high level of loss of human lives till Haridwar.

 

 

In case of Orisaa we saw that authorities were very active in managing the crowd,,,during such large scale natural catastrophe  ,,,,when you have to carry out evacuation of millions of peoples ,,,it is very tough task to ensure that you end up with very less number of loss of lives…

 

It was also seen same when Indian army along with Indian Air force combined together to carry out one of largest evacuation process during Kedarnath tragedy.

 

Orisaa in not very developed state…it is tribal in nature….but the mannerism in which the entire administrative bodies woked,,,and ensured,,,that people are being sent to safer places…that is worth commending.

 

India is a very large nation,,,7th largest in terms of areas in world..Here if any kind of such tragedies are minimised,,,must be praised…

That also leaves better aspecst for preparation for future,,as these natural catastrophes are bound to happen,,floods,,,landslide,,,cloud bursting,,,cyclones,,,these all natural disaster can be dealt in same efficient manner…

 

 

We can sometime feel proud that we can show to the world that we are not to be rated as mere corrupt,,,we are efficient also,,,and that bureaucratic body also is not always involved in red –tapism,,,or corruption,,,,they work also,,,effectively,,,

 

 

thanks…

harsh vardhan pathak

doon university

msc eco integrated,

sse-i-09

 

 

[i am many a times reminded of the tragedies which happened during my childhood,,in orisaa,,,1999,,then gujarat,,earthquake,,,cyclone,,,i feel great and praise the alertness of various administrative bodies which coordinated during this time ,,ensuing mass evacuation,,,thus making life loss very less

These are old blogs which we are shifting to our website.These are of incidences which happened 3-4 years ago,but then latest have been of events happening lately.

 

A note on outright monetary transaction carried out by ECB in 2012..

This has been taken from our blog ;Brinks of economic thoughts”

A note on outright monetary transaction carried out by ECB in 2012..

 

OUTRIGHT MONETARY TRANSACTION.

SOURCE..

 

[during the peak of euro zone crisis,,we saw many efforts made by strong economies to get the stuck economies of PIGS out of the mess….this was one such attempt…conducted by ECB…

there were times when yields on 10 years bond were touching 7 % ,,which is in  a way considered punitive charges by lenders…there were serious doubts about capabilities of nations to repay back the debts…

we witnessed trouble withing euro zone nations too…Germans were many a times reluctant to help and fund for the discipline lack in conduct of financial matters in south European nations…which was main center of euro crisis…

German have carved their economy into a strong exporting powerhouse,,thus attaining them exports surplus..they have strongest economy in europe…

OMT was effort by ECB to buy the bonds so as to ensure that rates on them do fall,,,,,and normalcy is restored…]

BBC NEWS,,,ECB OFFICIAL WEBSITE FOR PRESS RELEASE.]

 

 

 

 

Outright Monetary Transactions (OMTs)

 

 

INTRODUCTION,,AND DEFINITION

 

The term used for the European Central Bank’s programme of buying government bonds with maturities of between one and three years with the aim of reducing a specific country’s borrowing costs. OMTs were only triggered if a country had applied to the European Financial Stability Facility or European Stability Mechanism for financial assistance and were conditional on a government putting in place financial reforms approved by eurozone financial authorities and monitored by the International Monetary Fund.

 

 

 

EUROPEAN CENTRAL BANK APPROVED IT..

 

Mario Draghi, president of the European Central Bank, had unveiled details of a new bond-buying plan aimed at easing the eurozone’s debt crisis in 2012,September. The ECB aimed to cut the borrowing costs of debt-burdened eurozone members by buying their bonds. ECB’s actions came in response to eurozone economic contraction in 2012, with continued weakness which was likely to continue into 2013. It was  insisted that the ECB was “strictly within our mandate” of maintaining financial stability, but reiterated the need for governments to continue with their deficit reduction plans and labour market reforms.

 

 

 

OMTs were only to be carried out in conjunction with European Financial Stability Facility or European Stability Mechanism programmes.

In other words, countries had to request a bailout before the OMTs are triggered.

 

The maturities of the bonds being purchased was to be between one and three years and there was to be no limits on the size of bond purchases.

 

 

 

IMMEDIATE REACTION IN THE BOND MARKETS AND SHARE MARKETS

 

 

The Spanish government raised 3.5bn euros on the debt markets, selling bonds due to mature in 2014, 2015 and 2016.

 

The implied cost of borrowing over two years fell from 4.71% to 2.80%; the three-year rate went from 5.09% to 3.68%; and the four-year borrowing cost fell from 5.97% to 4.60%.

 

On the secondary market, where government bonds already in circulation are traded by banks and other financial institutions, the yield on 10-year bonds fell below 6%. In recent months[during 2012 september], yields had topped 7%, the level at which Ireland, Portugal and Greece had been forced to seek international bailouts.

 

The yield on Italian 10-year bonds also fell.

Investors in European companies also appeared upbeat about the plan. European stock markets closed up.

 

The FTSE 100 ended 2.1% higher; the German Dax, 2.9%; the French Cac 40 index, 3.1%; and the Spanish IBEX, 4.9% at the close.

 

Bank shares in particular rose sharply, as they stand to lose billions of euros should any eurozone government default on its debts as a consequence of the crisis.

 

French banks Credit Agricole and Societe Generale both closed up 8%, while in Germany, Deutsche Bank rose 7% and Commerzbank, 5%. In London, Lloyds banking group rose 7%.

 

POLITICAL RISK AND  GLOBAL THREATS…

 

 

Jens Weidmann, president of Germany’s Bundesbank, remained vigorously opposed to the ECB’s plan, concerned that member states could become hooked on central bank aid and fail to reform their economies sufficiently.

 

But the majority of the 23 ECB council members support the plan.

And the Organization for Economic Co-operation and Development (OECD) added its support for the ECB bond-buying plan on Thursday, as it warned that the eurozone crisis posed the greatest risk to the global economy.

 

 

 

PRESS RELEASE[FROM ECB]

6 September 2012 – Technical features of Outright Monetary Transactions

 

 

As announced on 2 August 2012, the Governing Council of the European Central Bank (ECB) has today taken decisions on a number of technical features regarding the Eurosystem’s outright transactions in secondary sovereign bond markets that aim at safeguarding an appropriate monetary policy transmission and the singleness of the monetary policy. These will be known as Outright Monetary Transactions (OMTs) and will be conducted within the following framework:

 

 

Conditionality

 

A necessary condition for Outright Monetary Transactions is strict and effective conditionality attached to an appropriate European Financial Stability Facility/European Stability Mechanism (EFSF/ESM) programme. Such programmes can take the form of a full EFSF/ESM macroeconomic adjustment programme or a precautionary programme (Enhanced Conditions Credit Line), provided that they include the possibility of EFSF/ESM primary market purchases. The involvement of the IMF shall also be sought for the design of the country-specific conditionality and the monitoring of such a programme.

 

 

The Governing Council will consider Outright Monetary Transactions to the extent that they are warranted from a monetary policy perspective as long as programme conditionality is fully respected, and terminate them once their objectives are achieved or when there is non-compliance with the macroeconomic adjustment or precautionary programme.

 

Following a thorough assessment, the Governing Council will decide on the start, continuation and suspension of Outright Monetary Transactions in full discretion and acting in accordance with its monetary policy mandate.

 

Coverage

 

Outright Monetary Transactions will be considered for future cases of EFSF/ESM macroeconomic adjustment programmes or precautionary programmes as specified above. They may also be considered for Member States currently under a macroeconomic adjustment programme when they will be regaining bond market access.

 

Transactions will be focused on the shorter part of the yield curve, and in particular on sovereign bonds with a maturity of between one and three years.

 

No ex ante quantitative limits are set on the size of Outright Monetary Transactions.

Creditor treatment

 

The Eurosystem intends to clarify in the legal act concerning Outright Monetary Transactions that it accepts the same (pari passu) treatment as private or other creditors with respect to bonds issued by euro area countries and purchased by the Eurosystem through Outright Monetary Transactions, in accordance with the terms of such bonds.

 

Sterilisation

 

The liquidity created through Outright Monetary Transactions will be fully sterilised.

 

Transparency

 

Aggregate Outright Monetary Transaction holdings and their market values will be published on a weekly basis. Publication of the average duration of Outright Monetary Transaction holdings and the breakdown by country will take place on a monthly basis.

 

Securities Markets Programme

 

Following today’s decision on Outright Monetary Transactions, the Securities Markets Programme (SMP) is herewith terminated. The liquidity injected through the SMP will continue to be absorbed as in the past, and the existing securities in the SMP portfolio will be held to maturity.

 

FEW ONLINE VIEWS

 

 

 

‘’New proposal is different from the ECB’s previous bond-buying programme in important ways.

 

The bank accumulated more than 200bn euros in bonds issued by Greece, Ireland, Portugal, Italy and Spain under its Securities Market Programme, but those purchases were always described as limited, and they were never accompanied by any formal conditions.

 

The OMT, on the other hand, is described by Mr Draghi as potentially unlimited in size.

Countries will first have to apply for assistance to eurozone bail-out funds, and they will have to agree to ‘strict and effective’ monitoring of efforts to reform their economies.

 

Ideally, the ECB would like the International Monetary Fund to be involved in that process too, and the Fund says it is ready to co-operate.

It all begins to sound like ‘bail-out lite’ – and it puts the ball firmly in the court of political leaders like Mariano Rajoy in Spain and – a little further down the line – Mario Monti in Italy.

 

They will have to decide whether they want more intrusive external surveillance of their economies – something they have been keen to avoid.’’

 

ASSIGNMENT ON OUTRIGHT MONETARY TRANSACTIION [OMT]

FOR

ECO. OF BANKING

BY

HARSH VARDHAN PATHAK SSEI-09

MSC INTEGRATED ECONOMICS

5TH SEMESTER

USA Sub Prime Mortgaze crisis 2008

This has been taken from our blog’Brinks of economic Thoughts”

USA SUB PRIME MORTGAGE CRISIS,,2008

 

‘It is believed that someone who has experienced near to death re-evaluates his priorities and values in life”

 

joseph stiglitz freefall

 

i had lots of memories of 2008 crisis,, me just sitting lone at home,,,who was  watching that oil prices are jumping 147 $ a barrel,,,just thenn saw lehmann brothers collapsing,,,and read in hindi news paper about details of crisis,,,

shrinking of Japanese economy,,,USA bailout,,indian rbi measures to inject nearly 1.75 lakhs cr in markets,,,,just to enhance demand,,[reminder of keynesian economics,,,increase demand]…

 

 

sources,,,

 

”freefall” joseph stiglitz,,,

 

”time for a visible hand-lesson from 2008 crisis”]

 

 

RECESSION OF 2008[SUB PRIME MORTGAGE CRISIS]

 

 

Sub prime mortgaze crisis  had been affecting USAs bank from 2006 itself,,,by 2008 start Bear sterns had suffered and was turned out to be a casuality…same was case with Freddie mac and Fannie Mae.

By September 2008,,we saw giant like Lehmann brothers collapsing,,,same was with Meryll lynch,,Wachovia,,and many prominent banks of USA,,,what transpired in USA did shock the entire world markets,,and lead to meltdown in global economy..

 

We saw Japanese economy shrinking for 2 consecutive quarters,,,in later part 0f 2008,,,we saw USAs government releasing bail out packages,,,Citigroup was to about to be bifurcated…

 

What were the main causes,,that has been discussed here..

 

Many factors contributed to the 2008 problem, including lax regulations and a flood of liquidity. There were incentives for providing misleading information and conflicts of interest. Two additional elements were present: incentives for excessive risk-taking and fraudulent behaviour (a problem that played an important role in the savings and loans, S&L, debacle).5 Perhaps more important though than these perverse incentives was a failure in modelling: a failure to understand the economics of securitization and the nature of systemic risk.

 

 

Few reason for crisis..

 

Incentive problem

 

Executives compensation system

 

Executive compensation schemes (combined with accounting regulations) encourage the provision of misleading information. Executives that are paid with stock options have an incentive to increase the market value of shares, and this may be more easily done by increasing reported income than byincreasing true profits.

 

Though the Sarbanes-Oxley Act of 2002 fixed some of

the problems that were uncovered in the Enron and related scandals, it did

nothing about stock options. With stock options not being expensed, shareholders often were not fully apprised of their cost. This provides strong incentives to pay exorbitant compensation through stock options.

 

-INCENTIVES FOR ACCOUNTING FIRMS

 

-SECURITISATION

 

-RATING AGENCY INCENTIVES

 

-NEW CONFLICTS OF INTEREST AND A NEW CULTURE:

REPEAL OF GLASS-STEAGALL

 

 

-THE BERNANKE-GREENSPAN PUT AND MORAL HAZARD

-CREATING A CREDIT FREEZE

 

-TRANSPARENCY AND COMPLEXITY

 

-INCENTIVES—AND OPPORTUNITIES—FOR FRAUD

 

-REGULATORY AND ACCOUNTING

ARBITRAGE,,MISPRICING RISK AND EXCESSIVE LEVERAGE

 

-Modeling Problems

 

-FAILING TO UNDERSTAND DIVERSIFICATION

DETECTING PONZI SCHEMES

 

INTELLECTUAL INCOHERENCE

 

The failure of the financial system to perform its essential functions:

 

  • Housing Price Bubble and Collapse.
  • Financial Market Freeze and Collapse.
  • US Housing Bubble created by
  • Low interest rates
  • Lax regulation of sub-prime mortgages with adjustable rates, two year teaser rates
  • Securitization of  mortgages, sold to unwary buyers as highly rated
  • US Bubble popped when
  • Interest rates rose in 2006, housing prices fell
  • Subprime mortgages and securities defaulted
  • Subprime Debt Obligations made in USA held around the world caused global financial shock.
  • Failure of Lehman Bros in September 2007 caused massive panic over counterparty risk. AIG required $180 billion bailout to cover Credit Default Swaps, insurance against bond defaults underwritten without reserves.

 

  • COURSE OF THE CRISIS

 

  • MORTGAGE CRISIS.

 

  • COLLAPSE OF COMMERCIAL REAL ESTATE

 

  • BANKING CRISIS

 

  • DECLINING VALUE OF EURO.

 

Few steps and suggestions to correct that crisis

 

It is believed that someone who has experienced near to death re-evaluates his priorities and values in life. There was a completer need to reform the economics and check the innovation economics. Something which can be referred as ‘’reform economics’’. There was need felt for efficient markets and markets with proper information.

 

We need to ensure that our resources are properly allocated, and we must shape our values properly, it is more about moral decline, and lack of peoples who take responsibility.

 

There were a series of financial sectors reform

 

A  strong and independent financial product safety commission to protect ordinary Americans against rampant abuses prevalent in the industry.

A systematic regulator who sees the system as whole.

 

Curbs  on excessive risk sharing.

 

Curbs  on derivatives.

 

Few things from this USA crisis later on transpired some effect to Euro zone crisis..

 

 

harsh vardhan pathak

msc integrated economics

doon university

 

sources 

 

‘It is believed that someone who has experienced near to death re-evaluates his priorities and values in life”

 

joseph stiglitz freefall

 

i had lots of memories of 2008 crisis,, me just sitting lone at home,,,who was  watching that oil prices are jumping 147 $ a barrel,,,just thenn saw lehmann brothers collapsing,,,and read in hindi news paper about details of crisis,,,

shrinking of Japanese economy,,,USA bailout,,indian rbi measures to inject nearly 1.75 lakhs cr in markets,,,,just to enhance demand,,[reminder of keynesian economics,,,increase demand]…

 

 

sources,,,

 

”freefall” joseph stiglitz,,,

 

”time for a visible hand-lesson from 2008 crisis”]

 

 

RECESSION OF 2008[SUB PRIME MORTGAGE CRISIS]

 

 

Sub prime mortgaze crisis  had been affecting USAs bank from 2006 itself,,,by 2008 start Bear sterns had suffered and was turned out to be a casuality…same was case with Freddie mac and Fannie Mae.

By September 2008,,we saw giant like Lehmann brothers collapsing,,,same was with Meryll lynch,,Wachovia,,and many prominent banks of USA,,,what transpired in USA did shock the entire world markets,,and lead to meltdown in global economy..

 

We saw Japanese economy shrinking for 2 consecutive quarters,,,in later part 0f 2008,,,we saw USAs government releasing bail out packages,,,Citigroup was to about to be bifurcated…

 

What were the main causes,,that has been discussed here..

 

Many factors contributed to the 2008 problem, including lax regulations and a flood of liquidity. There were incentives for providing misleading information and conflicts of interest. Two additional elements were present: incentives for excessive risk-taking and fraudulent behaviour (a problem that played an important role in the savings and loans, S&L, debacle).5 Perhaps more important though than these perverse incentives was a failure in modelling: a failure to understand the economics of securitization and the nature of systemic risk.

 

 

Few reason for crisis..

 

Incentive problem

 

Executives compensation system

 

Executive compensation schemes (combined with accounting regulations) encourage the provision of misleading information. Executives that are paid with stock options have an incentive to increase the market value of shares, and this may be more easily done by increasing reported income than byincreasing true profits.

 

Though the Sarbanes-Oxley Act of 2002 fixed some of

the problems that were uncovered in the Enron and related scandals, it did

nothing about stock options. With stock options not being expensed, shareholders often were not fully apprised of their cost. This provides strong incentives to pay exorbitant compensation through stock options.

 

-INCENTIVES FOR ACCOUNTING FIRMS

 

-SECURITISATION

 

-RATING AGENCY INCENTIVES

 

-NEW CONFLICTS OF INTEREST AND A NEW CULTURE:

REPEAL OF GLASS-STEAGALL

 

 

-THE BERNANKE-GREENSPAN PUT AND MORAL HAZARD

-CREATING A CREDIT FREEZE

 

-TRANSPARENCY AND COMPLEXITY

 

-INCENTIVES—AND OPPORTUNITIES—FOR FRAUD

 

-REGULATORY AND ACCOUNTING

ARBITRAGE,,MISPRICING RISK AND EXCESSIVE LEVERAGE

 

-Modeling Problems

 

-FAILING TO UNDERSTAND DIVERSIFICATION

DETECTING PONZI SCHEMES

 

INTELLECTUAL INCOHERENCE

 

The failure of the financial system to perform its essential functions:

 

  • Housing Price Bubble and Collapse.
  • Financial Market Freeze and Collapse.
  • US Housing Bubble created by
  • Low interest rates
  • Lax regulation of sub-prime mortgages with adjustable rates, two year teaser rates
  • Securitization of  mortgages, sold to unwary buyers as highly rated
  • US Bubble popped when
  • Interest rates rose in 2006, housing prices fell
  • Subprime mortgages and securities defaulted
  • Subprime Debt Obligations made in USA held around the world caused global financial shock.
  • Failure of Lehman Bros in September 2007 caused massive panic over counterparty risk. AIG required $180 billion bailout to cover Credit Default Swaps, insurance against bond defaults underwritten without reserves.

 

  • COURSE OF THE CRISIS

 

  • MORTGAGE CRISIS.

 

  • COLLAPSE OF COMMERCIAL REAL ESTATE

 

  • BANKING CRISIS

 

  • DECLINING VALUE OF EURO.

 

Few steps and suggestions to correct that crisis

 

It is believed that someone who has experienced near to death re-evaluates his priorities and values in life. There was a completer need to reform the economics and check the innovation economics. Something which can be referred as ‘’reform economics’’. There was need felt for efficient markets and markets with proper information.

 

We need to ensure that our resources are properly allocated, and we must shape our values properly, it is more about moral decline, and lack of peoples who take responsibility.

 

There were a series of financial sectors reform

 

A  strong and independent financial product safety commission to protect ordinary Americans against rampant abuses prevalent in the industry.

A systematic regulator who sees the system as whole.

 

Curbs  on excessive risk sharing.

 

Curbs  on derivatives.

 

Few things from this USA crisis later on transpired some effect to Euro zone crisis..

 

 

harsh vardhan pathak

msc integrated economics

doon university

 

A short note on the Recommendations of Malhotra committee on insurance sector,,,

This has been taken from our blog,Brinks of economic Thoughts.

A short note on the Recommendations of malhotra committee on insurance sector,,,

 

INSURANCE REGULATORY AND DEVELOPMENT ACT 1999

 

In 1993, the Government set up a committee under the chairmanship of RN Malhotra, former Governor of RBI, to propose recommendations for reforms in the insurance sector. The objective was to complement the reforms initiated in the financial sector. The committee submitted its report in 1994 wherein, among other things, it recommended that the private sector be permitted to enter the insurance industry. They stated that foreign companies be allowed to enter by floating Indian companies, preferably a joint venture with Indian partners.

 

Following the recommendations of the Malhotra Committee report, in 1999, the Insurance Regulatory and Development Authority (IRDA) was constituted as an autonomous body to regulate and develop the insurance industry. The IRDA was incorporated as a statutory body in April, 2000. The key objectives of the IRDA include promotion of competition so as to enhance customer satisfaction through increased consumer choice and lower premiums, while ensuring the financial security of the insurance market.

 

In its report submitted in 1994, the committee recommended, among other things, that:

 

Private players be included in the insurance sector.

Foreign companies be allowed to enter the insurance sector, preferably through joint ventures with Indian partners.

The Insurance Regulatory and Development Authority (IRDA) be constituted as an autonomous body to regulate and develop the insurance sector.

 

The key objectives of the IRDA would include promotion of competition so as to enhance customer satisfaction through increased consumer choice and lower premiums while ensuring the financial security of the insurance market.

 

Brokers representing the customer be brought in as another marketing and distribution channel, a practice prevalent in most developed markets

Raise the level of professional standards in risk management and underwriting and speed up settlement of claims.

 

Following the recommendations, the IRDA was constituted as an autonomous body in 1999 and incorporated as a statutory body in April 2000. With the coming into force of the IRDA Act, 1999, the insurance industry was opened up to the private sector

Under the IRDA Act, an Indian insurance company will be allowed to conduct insurance business provided it satisfies the following conditions:

 

It must be formed and registered under the Companies Act, 1956; The aggregate holdings of equity shares by a foreign company, either by itself or through its subsidiary companies or its nominees, should not exceed 26% paid up equity capital of the Indian insurance company;

 

 Its sole purpose must be to carry on the life insurance business or general insurance business or reinsurance business.2 To operate the insurance business in India, the Indian insurance company has to obtain a certificate of registration from IRDA.

 

It has also been provided in the IRDA Act that on or after the commencement of the IRDA Act, no insurer will be allowed to carry on the life and general insurance business in India, unless it has a paid up equity capital of Rs. 1 billion. For carrying on the reinsurance business, the minimum paid up equity capital has been prescribed as Rs. 2 billion. The Reserve Bank of India(RBI) has also issued guidelines for banks entry into the insurance business.

Harsh vardhan pathak

Msc economics integrated

 

while studying insurance sector i came across with malhotra committee recommendations to invite foreign players in indian insurance sector..,,i prepared this note from online news material,,,it was more of copy pasted,,,but i read each line in my continuous journey to explore field of contemporary finance]

 

Role of [federal reserve]one central bank,,,in last 5 years,, Specific reference to role of federal reserve in 2008 aftermath,,

This has been used from our blog’Brinks of economic thoughts”

 

Role of [federal reserve]one central bank,,,in last 5 years,, Specific reference to role of federal reserve in 2008 aftermath,,

What is s central bank?

 

Central bank is central agency

It   stands at the centre of national banking system.

Played  a key role in in development of modern monetary system.

Mission of central bank?

Macroeconomic   stability.

Low and stable inflation  , increased growth and employment.

Financial  stability.

To ensure that nations financial system functions properly, avoids  and prevents financial panics.

 

Policy tools of central bank

 

Monetary policy.

Adjusting lever of  short  term interest rates, to influence spending, production, investment.

Provision  of liquidity.

For short term finance and ensuring that financial institutions do not collapse, they provide liquidity, thus acting as lender of last resort.

 

Financial regulation and supervision.

 

Central banks do ensure supervision, thus reducing loss of confidence of public and minimising financial panics.

Role during  crisis as lender of last resort in 2008 crisis.

Lessons from  great depression.

In a financial panic central bank need to lend freely to halt runs and restore functioning.

Highly accommodative financial policy helps support economic recovery and employment.

Global response was,

Prevent fallout of globally important financial institutions.

Work to normalise credit market.

Restore depositors  confidence.

Ensure financial institutions access to funds.

 

Federal reserve action.

 

Federal lends to bank through credit facility called discount window.

Maturity of discount loan was extended and interest rates reduced.

Regular  auctions of discount window funds was conducted to encourage participation of financial firms.

All loans were required to be secured by collaterals.

New programs allowed to provide liquidity to  financial  institutions and end illiquidity problems.

Purpose was to enhance stability of financial system.

Promote availability of funds to US business and house hold and thus ensure recovery

 

Institutions and markets covered by fed ‘s action of last resort.

 

Banks [through discount window]

Brokers –dealers[financial firms that deal in securities and derivatives]

Commercial paper borrowers

Money market funds

Asset backed securities markets

Federal reserve established special programme to repair functioning in CP market and restart flow of credit.

In march 2008,,fed had facilitated take over of failed broker-dealer, bear sterns by bank JP Morgan chase.

In oct 2008 fed intervened by takeover of largest insurance company AIG .o prevent its collapse,fed reserve loaned 85 bn $ using AIG assets as ciollaterals.rescue of AIG prevented even greater shocks to wodl economy.

Fed worked closely with regulatory bodies such as FDIC and SEC,

Coordinated with foreign nbanks by issuing foreign currency swaps.

Fed led the stress test in start of 2009 of 19 banks,which helped restoring investors confidence and allowed banks to raise private capital.

Followed conventional monetary policy during financial crisis.

Fed reduced federal funds rate from 5.25 to nearly  0.

Fed undertook large scale purchases of treasury government sponsored enterprises mortgage related securities.

Large scale assets purchases.[also known as quantitative easing]

 

Harsh vardhan pathak

 

Short note on great Depression

This has been used from our blog,’Brinks of economic thoughts”

Short note on great depression.

 

{One of the most interesting topics in financial economics,financial crisis ,

And what can be more interesting that 1930s crisis which not only shocked the global economy but also paved way for emphasis on the demand side of economy than the supply side by great economist J M Keynes}

 

In 1929 world was hit by great depression. In USA stocks markets crashed in October 1929.and largest bank in Austria failed in 1931.Output and prices fell in many nations and many fell political turmoil.

 

Depression continued until the USA entered in WW2.

 

 

CAUSES OF GREAT DEPRESSION.

Economic and financial repercussions of WW1 including effects of reparations payment.

 

Structure of international  gold  standard.

 

Bubble in stock prices.

 

Financial  panic and collapse of major financial institutions.

 

LIQUIDATIONIST  THEORY which viewed depression as a necessary corrective to the excesses of 1920s.

 

’liquidate labor,,liquidate stocks,,liquidate farmers,,liquidate real estates.’’

 

Andrew Mellon, Secretary of treasury ,1931.

 

Monetary  policy errors.

 

Tightening  of monetary policy in 1928 and 1929 to stem stock market speculation.

 

Policy  tightening in 1931 to halt a speculative attack on dollar.

Policy  inaction in 1932, despite high unemployment and falling prices.

 

Tight monetary policy led to sharp decline in prices and steep declines in output and employment.

 

Effects of policy error were globally transmitted through gold standard.

 

Fed kept the money tight in part as it wanted to preserve the gold standard.

 

Franklin D Roosevelt abandoned gold standard in 1933 and then deflation ended.

 

Fed responded inadequately to bank runs and contraction on bank lending, providing only minimal credits to bank.

Bank failures swept the country, nearly 9700 out of 25,000 banks suspended operations between 1929 and 1933.bank failures continued until deposit insurance was formed in 1934.

 

Fed appeared to be  believing the liquidationist  theory that banking and credit had expanded too much and needed to be reduced.

 

Franklin d Roosevelt tried many steps to end recession.

 

Deposit insurance for banks ended run.

Abandonment of gold standard allowed money supply to increase  and end deflation.

 

Federal Reserve failed in both its mission.

It did not use monetary policy to prevent deflation and fall in output and employment.

It did not adequately use its function of last resort, allowing many bank failures and a resulting contraction in credit.

 

Academically this crisis left many situations to be studied by academics, wide lessons were learnt, and it was a major happening of the previous century.

 

Harsh vardhan pathak

Msc economics

LIBOR

This has been taken from our blog,”Brinks of economic thoughts”

LIBOR

 

This was written by me during the time when LIBOR crisis had shaken the financial markets.

 

LIBOR [LONDON INTER BANK OFFERED RATE].

 

This is the rate at which banks in London  lend money to each other for short-term in a particular currency. A new LIBOR rate is calculated every morning by financial data firm Thomson Reuters based on interest rates provided by members of British Banker ’s  Association [BBA].

 

This rate officially came into existence in 1984. LIBOR  rates are calculated  and published daily at 11;30 a;m [GMT] by Thomson Reuters.

Every day a group of  leading banks submit rates for 10 currencies  and 15 lengths of loan[borrowing periods] ranging from overnight to one year .It is a global bench mark interest rate used to set a range of financial deals. It is also a measure of trust in financial  system   and faith banks have in each other’s financial health. LIBOR is used to set arrange of financial transactions  worth an estimated $ 800 trillion which is equal to 12 times of global GDP. Many financial institutions , mortgage  lenders  and credit –card agencies set their own rates relative to it.

 

As early as 2005 there was evidence that Barclay’s had tried to manipulate dollar LIBOR at request of it’s derivative traders and other banks. It was clearly in 2008,Wall Street Journal published a report that questioned integrity of LIBOR.

 

It was in 20009 BBA had circulated guidelines for all contributor banks on setting   LIBOR rates in same manner. Barclay’s made no change to it’ s system to take account of BBA guidelines .Important rules as such of having distinction between derivatives team and submitters were violated.

 

It was finally in JUNE 2012, Barclay’s admitted to misconduct. The UK’S FSA imposed a euro 59.5 mn penalty.FSA[Financial service authority],US Department of Justice of Commodity futures trading Commission [CFTC]imposed fines worth euro 102 mn and euro 128 mn respectively ,thus way forcing Barclay’s to pay a total of around  euro 290 mn.

 

 

When financial crisis peaked in late 2007,many banks stopped  lending to each other over concerns about their financial health with some banks submitting much higher  rates than others.  Barclay ’ s  was the bank which was submitting higher rates. This prompted rumours that Barclay’s was in trouble. This followed a series of internal debate and controversial conversation with bank of England official, Barclay’s began to submit much lower rates. A bank has to pay a higher interest rate to borrow funds if other lending banks have less confidence in it.

Mechanism  with which LIBOR was fixed.

 

Bank submit rates

 

            A                                 B                                     C                                  D

 

            1%                               2%                                    3%                            4%

 

 

Lower bottom is discarded-

 

 

            1%                                 2%                                   3%                            4%

 

 

Avg. is calculated of remainder-   2.5 % This is LIBOR.

 

 

In same way rates if submitted by 16 banks were considered ,lower and upper 4 rates ,means overall 8 rates were discarded and average of rest 8 were calculated on which transactions took place.

 

As a consequence  of  it, those paying interest on loans would have benefitted from lower LIBOR rates, savers and investors would have lost out.

Barclay’s had to pay $ 453 million to settle U.S and British authorities’ allegations that British bank had tried to manipulate London interbank offered rate.

 

Barclay’s was not be the only bank put through wringer over question of rate manipulation .Barclay’s  also likely to faced civil cases, as customers on wrong side of LI BOR  movements bring claims.  at least   12 banks were involved in LIBOR investigations  around the world. Fines on Barclay’s may heralded similar penalties on others.

 

Investigations of more than a dozen bank by authorities on 3 continents  started   to   unearth evidence  that some banks improperly  sought to alter LIBOR.

 

Now it is a another case of globally working trade .Analysts said industry  may have to shell out billions of dollars to settle the cases and other  bank chiefs could find themselves in troubles.

Roughly a  dozen  banks acknowledged being under criminal or civil investigation in various countries in the matter.

MORE THAN $  800tn in securities were linked to the Libor ,including $ 350 tn in swaps & 10 tn $ in loans ,including home and auto loans. These transactions take place globally.

 

Britain’s financial services industry is a national asset. It has thrived for many reasons that include London’s   favourable  time –zone, that allows it to trade with Asia and  America .It was a fact of great prestige that Britain did effectively set interest rates for rest of world .As of now Britain’s ability to play by and police the rules is under scrutiny.BBA[British Banker’s Association] is considering a LIBOR revamp. Instead of  estimated  rates actual rates are considered to be used.

 

 

Harsh Vardhan Pathak

Efficiency of Financial Markets

This has been taken from our blog,Brinks of economic thoughts.

Efficiency of financial markets

 

Financial markets are very crucial part of a modern economy, we have by now come across an understanding that financial markets do provide an opportunity to the peoples who have an excess of funds or surplus of funds to interact in a market place and meet with peoples who have an deficit of funds,,,financial markets help in channelizing the funds and attaining efficiency and profit maximising intention too.

 

For proper functioning and  efficiency of a market it is important that market is fully regulated, and properly monitored,,

 

With advent of more and more demand of increasing deregulation, we are witnessing newest of financial explorations in terms of financial products, [like credit default swaps,,these were considered as weapons of mass economic catastrophe by WARREN BUFFET] ]it is not known many a times that these product are how much toxic in naturehow much can they hurt an economy if they falter..,

 

In  a way financial economy has taken over the true economic production,,,we see an era when financial products are created to make more and more profits, after the downfall of 2008 there were many a times questions raised about the use of such innovative operations,,,

 

To ensure that markets work efficiently, these explorations should be accompanied with very strong and stringent regulation framework..

Then important is free flow of information, proper information should be available to investors,,,

 

Another tendency which is widely witnessed is of insider trading,,this has to be curtailed,,,eg,rajat gupta of board of goldman sachs was responsible for insider trading .

Insider trading is when one of the prominent members of a board of company who has an excess to confidential reports of company, leaks them to outside to make individual profits.

So important thing for efficient markets is a market which is fully regulated,,,well monitored,,,allows every one to participate,,,also ensures that information is available to all,,and keeps a necessary check on the insider trading.

 

Harsh Vardhan Pathak

Changes in monetary stance in last Decade

This has been taken from our blog,”Brinks of economic thoughts.”

Changes in monetary stance IN LAST DECADE

 

[This had been written when Raghuram Rajan was appointed the RBI governor.

Last year we saw many issues which came up during the time when he left the job at RBI.

Given a fact that he has had immense contribution to the economy and we as a student respect him with high regards.]

 

 

We know that central banks follow a policy of minimising inflation level,,,so wee did see many times in past 5 years,,that RBI did prefer hiking rates to control excess liquidity in the market,,sucking liquidity ,,thus making its efforts to contain inflation.

 

Even during when newly appointed governor of RBI  raguram rajan,,there was lots of hype that RBI may now prefer easing prime rates,,,but even he did prefer containing inflation as his prime target,,

 

The link between the real interest rate and nominal interest rate is provided by the famous Fisher equation which postulates that the nominal interest rate is the sum total of a real interest rate and expected inflation.5 One implication of this is that the nominal interest rates should move in tandem with inflation. In the real world, nominal interest rates may not change one for one with the inflation rate but the direction more often is similar. Countries with higher inflation tend to have higher nominal interest rates than countries with lower inflation. Accordingly, the nominal interest rates in advanced countries tend to be lower than in emerging market and developing countries.

 

  • A central bank can influence real interest rates through financial repression/reforms and lagged monetary policy response to inflation. Real interest rate is a real phenomenon, but it could change in the short-run depending on how monetary policy responds to inflation and inflation expectations.
  • For the determination of growth and investment at the macroeconomic level the real interest rate is more relevant, even though the nominal interest rate is important for investment planning at the firm level.

 

In the last 10-year period from 2003-04 to 2012-13, monetary policy response can be broadly categorised into four phases based on growth-inflation outcome and the rapidly changing monetary policy response:

 

Phase I of 5 years of 2003-08 of high growth but rising inflation concern towards the later part of the period when repo rate was raised from 6 per cent to 9 per cent and the cash reserve ratio (CRR) was raised from 4.5 per cent to 9 per cent.

 

  • Phase II of 2 years of 2008-10 following the global financial crisis when the repo rate was reduced from 9 per cent to 5.25 per cent and CRR was reduced from 9 per cent to 5.75 per cent.

 

  • Phase III of 2 years of 2010-12 of monetary tightening responding to rising inflation when policy rate was raised from 5.25 per cent to 8.5 per cent but CRR was reduced to 5.5 per cent.

 

Phase IV of over a year of monetary easing in 2012-13 and 2013-14 so far with the repo rate reduced to 7.25 per cent and CRR lowered to 4.0 per cent; though since mid-July 2013, the RBI has tightened the monetary and liquidity conditions without changing the policy repo rate and CRR to address exchange market volatility

 

Harsh Vardhan Pathak

 

Mutual Funds In India

This has been used from our blog ,Brinks of economic thoughts.

Mutual funds in india,

 

 

A mutual fund is a financial intermediary that pools the savings of investors for collective investment in a diversified portfolio of securities. The Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 defines a mutual fund as a ‘a fund established in the form of a trust to raise money through the sale of units to the public or a section of the public under one or more schemes for investing in securities, including money market instruments’. The definition has been further extended by allowing mutual funds to diversify their activities in the following areas: 

 

· Portfolio management services

· Management of offshore funds

· Providing advice to offshore funds

· Management of pension or provident funds

· Management of venture capital funds

· Management of money market funds

· Management of real estate funds

 

A mutual fund serves as a link between the investor and the securities market by mobilising savings from the investors and investing them in the securities market to generate returns.

 

Benefits of Mutual Funds

 

An investor can invest directly in individual securities or indirectly through a financial intermediary. Globally, mutual

funds have established themselves as the means of investment for the retail investor.

 

1.       Professional management:

2.       Portfolio diversification:

3.       Reduction in transaction costs:

4.       Liquidity:

5.       Convenience:

6.       Flexibility:

7.       Tax benefits

8.       Transparency

9.       Stability to the stock market

10.   Equity research

 

 

Growth of Mutual Funds in India

 

The Indian mutual fund industry has evolved over distinct stages. The growth of the mutual fund industry in India can be divided into four phases: Phase I (1964-87), Phase II (1987-92),Phase III (1992-97), and Phase IV (beyond 1997).

 

Phase I: The mutual fund concept was introduced in India with the setting up of UTI in 1963.

 

Phase II: The second phase witnessed the entry of mutual fund companies sponsored by nationalised banks and insurance companies. In 1987, SBI Mutual Fund and Canbank Mutual Fund were set up as trusts under the Indian Trust Act, 1882. In 1988, UTI floated another offshore fund, namely, The India Growth Fund which was listed on the New York Stock Exchange (NYSB).

 

Phase III: The year 1993 marked a turning point in the history of mutual funds in India. Tile Securities and Exchange Board of India (SEBI) issued the Mutual Fund Regulations in January 1993. SEBI notified regulations bringing all mutual funds except UTI under a common regulatory framework. Private domestic and foreign players were allowed entry in the mutual fund industry. Kothari group of companies, in joint venture with Pioneer, a US fund company, set up the first private mutual fund the Kothari Pioneer Mutual Fund, in 1993.

 

Phase IV: During this phase, the flow of funds into the kitty of mutual funds sharply increased. This significant growth was aided by a more positive sentiment in the capital market, significant tax benefits, and improvement in the quality of investor service.

 

Types of Mutual Fund Schemes

 

The objectives of mutual funds are to provide continuous liquidity and higher yields with high degree of safety to

investors. Based on these objectives, different types of mutual fund schemes have evolved.

 

Functional Portfolio Geographical Other

Open-Ended Event           Income Funds   Domestic       Sectoral Specific

Close-Ended Scheme       Growth Funds   Off-shore       Tax Saving

Interval Scheme               Balanced Funds ELSS

                                             Money Market Special

                                             Mutual Funds

                                                                                                     Gilt Funds                                               

                                                                                                     Index Funds

                                                                                                     ETFs

                                                                                                     PIE Ratio Fund

1.      Open-ended schemes: In case of open-ended schemes, the mutual fund continuously offers to sell and repurchase its units at net asset value (NAV) or NAV-related prices. Such funds announce sale and repurchase prices from time-to-time. UTI’s US-64 scheme is an example of such a fund. The key feature of open-ended funds is liquidity.

 

2.      Close-ended schemes: Close-ended schemes have a fixed corpus and a stipulated maturity period ranging between 2 to 5 years. Investors can invest in the scheme when it is launched. The scheme remains open for a period not exceeding 45 days. Investors in close-ended schemes can buy units only from the market, once initial subscriptions are over and thereafter the units are listed on the stock exchanges where they dm be bought and sold.

 

 

3.      Interval scheme: Interval scheme combines the features of open-ended and close-ended schemes. They are open for sale or redemption during predetermined intervals at Nonrelated prices.

 

Portfolio Classification

1.       Income funds:

2.      Growth funds:

3.      Balanced funds:

4.      Money market mutual funds:

5.      Gilt funds:

6.      Load funds:

7.      Index funds:

8.      PIE ratio fund:

9.      Exchange traded funds:

 

Mutual Fund Investors

Mutual funds in India are open to investment by

a. Residents including

· Resident Indian Individuals, including high net worth

individuals and the retail or small investors. Indian

Companies

· Indian Trusts/Charitable Institutions

· Banks

· Non-Banking Finance Companies

· Insurance Companies

· Provident Funds

b. Non-Residents, including

· Non-Resident Indians

· Other Corporate Bodies (OCBs)

c. Foreign entities, namely, Foreign Institutional Investors

(FIIs) registered with SEBI. Foreign citizens/ entities are

however not allowed to invest in mutual funds in India

 

harsh vardhan pathak