Lokpal agitation and Democracy

I hope we understand what democracy brings. Not just rights but responsibilities as well and it takes a lot of courage to understand and defend it. Mahatma Gandhi brought us freedom. Freedom to work towards issues one feels strongly about, generate public support, and get into political process if required. Why is then some people defying what Mahatma Gandhi brought us, and choosing threat over defined process, being celebrated? In my mind, calling it "the second freedom struggle" is nothing less than trouncing on the martyrs' graves and the entire freedom struggle. If general election and parliamentary route aren't the way, the martyrs laid down their lives in vain.

I had the same question with "Rang De Basanti" movie in which three murderers, I repeat – murderers, were compared to the likes of Bhagat Singh, Sukhdev, and Rajguru and we made the movie a thundering hit. I guess we can now accept even distaste as entertainment, or we have a long way to go as a society. If we are taking this Lokpal agitation only as an entertainment, despite its cost on our tax money (yes - it costs money to maintain law and order), I'll choose to be okay since such threats can't be the guiding light. Otherwise next we'll see fast unto death threats fixing underwear prices.

Let's make no mistakes - the current government is in the office because of a "crystal clear" public mandate in the last general election. So unless corruption started in the last two or three years or unless we are talking about recent “political” corruptions alone, every political party and even the people are equally responsible for it. Everyone needs to imbibe the anti-curruption doctrine since it's very much like one finger pointing at others while the other four pointing at oneself. Now, I will not say this agitation is mocking the choice one billion people made in the elections. Agitation is certainly one of our democratic rights to make our voices heard loud and clear. However, calling this demand the voice of one billion people will sure be a stretch. In democracy, there is only one collective voice of the people – the vote, and let’s not forget that responsibility.

Operational issues is another reason I see this as nothing more than a few people wanting to bask in the glory of one issue and steer clear of taking responsibility. I say this because there will be enormous operational challenges in implementing even the bill government is willing to move forward with. One just doesn't legislate one's pains away. Democracy demands dedication and effort to preserve and, more importantly, such legislations require a mindset change – where, I’m not sure, we have collectively arrived yet. Don't we also have legislation against child labor, and isn’t primary education now a fundamental right? Are those legislations and rights fully implemented to the letter of the laws? If not, is government not allowing their implementation or it's the people who don't want to part with "Chhotus and Ramus” of the world? It's a mindset change that legislations can't bring about. It certainly is one of the first steps though. So let’s legislate what we easily can and not waste people’s money any further.

To summarize my views, if Anna and team feel so strongly about the coverage of the bill, they should start a party, get into the general election, form a government, and write/amend the bill the way they intend to, and then TAKE RESPONSIBILITY to make it fully operational. Otherwise they have done enough to make their voices heard and should now fall in line with the recommendations of the standing committee on the bill. That is the only way one exercises freedom with responsibility in its true spirits and upholds democracy. Fasting in front of Mahatma Gandhi's banner or at his last resting place doesn't, and will not, bring anyone even an inch closer to the greatest statesman of the country. It takes a lot more action, and threats have no place in that journey.

This certainly is not any freedom struggle since freedom fighters have already given us the power to free ourselves of any political ills through either active participation or the next general election. I hope our fellow countrymen are aware what the freedom fighters fought for, what sacrifices they made, what rights they brought, and what responsibilities defending them will entail. That is the only way one can understand the difference between revolution and a blackmail, and why a true Gandhian will NEVER want to be Anna.

2008 - A year that was.

US Economy
Ben B. had taken the chair of Fed Reserves in 2007 and consistently maintained economy was going strong and that there wasn’t any need for rate cuts. Well, until 2nd week of Jan ’08. Then BAM!!! He cuts the discount rate by 75 basis points – a first in almost a quarter of century. For a new chairman, even if the need was for such a large cut, I would’ve appreciated a 25 basis points cut on that day followed by 50 basis points cut the following week. Actions from leaders usually act as signals for people and people want their leaders to be in control. So what happened here? Was Ben’s analysis wrong or he simply panicked? I will never know the answer to that but the signal was of a panic confirmed by a heavy sell off in the world market. That was when I lost faith in the guy.

Of course nobody would’ve listened to me but they listened to Henry P. who once wanted to use $700B of tax payers’ money to buy junk assets – great going dude! – And hires one Neel K. to lead the TARP; for his expertise? Well, I don’t know that too, but may be – hey, he’s my GS buddy, that’s why. GS guys know all and can run the world; didn’t we tell the whole world that Oil was going to cross $200 per barrel? Goodie!! Such arrogance or nonsense can’t take the US very far and must change.

Well, the cows have come home now and they are trying a combination of monetary, fiscal, and mortgage rate as the measure to tackle this. Whoopee!! We are only nine months late. So what we have lost over 2 million jobs and counting? Bottom line – I think that the US is finally on the right track now. If it continues on it, things will improve but the signs of improvement won’t be seen until at least end of 2nd quarter of 2009. For Ben B and Henry P, Obama can/should cut them loose. One additional thing Obama might want to do is to start making the public services more structured like it’s in India (or England). The Henry P. choosing Neel K, and Obama choosing Harvard classmates on committees won’t work in the long run and will be extremely detrimental to the future of US at both national and local levels.

I did pretty well with my predictions here – Govt. has become sane to apply fiscal and mortgage rate reductions as well to fix the economy (only if they had followed it earlier) as I had asked for. Obama won the Presidency as expected, more oversight for corporations has arrived, and green technologies are already being talked about. Also, the US dollar has appreciated against most of the currencies, China is feeling the heat of decreased export demand and foreign investments, and the true home run is – there is some activity in Somalia already (see my blog).

India and MNS Issue
Great going Indians and folks in the Indian government, including top offices, for not saying anything against one maniac trying to split the country on regional lines. It was expected from the Executives, a group of eunuchs – as we should call them, but I am very surprised that the judiciary is still staying arrest warrant against Mr. Thakrey. I was also surprised with the Indians and media entertaining blogs on multiple sites suggesting that north Indians (particularly Biharis and UPites) should indeed be pushed out of most of the developed states. I am pretty sure that most of the Marathis and even other Indians aren’t misguided by this philosophy and believe in one India. This issue was another Khalistaan in the making but thanks to Mumbai attack that re-united the country and this issue got diluted. I hope we all believe that we need to address this as we did Khalistaan. We need to make that decision now because this issue has the potential for raising its ugly head again.

I have only a few messages of shame for those who are still misguided. Aren’t UP and Bihar the heart and true identity of India? Be it known that no matter which part of the country you (you = misguided ones) are from and which part of the world you reside in, your Indian identity is legitimized only by a Bihari emblem – that’s right, the Lion capital of the great Mauryas of Magadha, shame on you to live and breathe under the Bihari sign. So is our national flag bearing Ashoka’s dhamma chakra, shame on you again. Also, Mauryans were the only “true Indian empire – as the misguided would learn” after Nandas (another Bihari) to have checked foreign invasion in its true sense (Chandragupta v/s Seleucus Nicator) until 1965; so much for our bravery. May be renaming cities, airports should count for some valor I guess.

Again, no matter which part of India we live in, a true Hindu can’t do away with Rama (Ayodhya), Krishna (Vrindavan), Shiva (Varanasi), or even Buddha (Gaya). Our first Prime Minister (UP) and President (Bihar) should also remind the misguided on the center of our freedom struggle. It’s a shame to malign a great emperor (Aurangzeb) to highlight one’s own clan (that fuelled strengthening of Muslim league in late 19th century) and then to burn down the library (a few years back) to stop any research trying to study the facts. When the nation called during our first freedom struggle in 1857, learn what Holkar, Gaekwad, Bhonsle, and Schindhia did. Khub ladi mardani woh to “North India” ki rani thi. Shame, shame, shame. Time to show courage again – in light of the terrorist attack, let’s rename the Taj Hotel to …– you know what I mean.

Satyam n’ maytaS – Almost Dan Brown’s Angels and Demons.
My problem is I can’t keep my mouth shut although things are turning out to be true. “I will win $100M in lottery this year.” One of my friends informed me in the morning that Satyam board approved the purchase of Maytas, run by the chariman’s son. My first statement was, “This guy will go to jail. How can he justify purchasing a construction company being an IT company – that too without giving the investors enough time to react?” My mistake – I was underestimating the capacity of Indians corporate owners. I thought it was more of a corporate governance issue and couldn’t connect that there could be an accounting fraud.

With the Satyam fraud fact out in the open, I can bet that we will see 5-10 more companies riding the same boat. There is never only one cockroach in the kitchen. I feel even some PWC folks should be put behind bars if they can’t prove the cash was actually present in the banks. So unless Mr. Raju siphoned out the $1B out of the banks after the last audit, there is a lot PWC will need to answer. This isn’t Enron as they claim it; Enron had accounting creativity all over its books, BUT not in its cash. There is no hiding cash through accounting magic; it is hard cash that must reconcile with the total of bank statements. Period.

Indian Economic Outlook in 2009
My prediction on Indian economy will be mostly bearish for 2009 since govt. isn’t taking the steps necessary to revive it. In fact, it’s doing the opposite. Infusing liquidity will only make the situation worse. In the short-term it’ll make borrowing cheaper so people can borrow cheap to buy stocks. That will certainly give a short-term boost to the Sensex. To me it looks nothing more than an election time house cleaning exercise from the government.

My feeling at this time is that a big IT company in India will be bought over by Reliance (Anil Ambani group) by end of 2010; it will be interesting to see which one. Also, I’m not going to say that Rupee will depreciate another 20% to 60 per dollar by the end of 2009, but for NRIs in the US, it will become 20-30% cheaper to buy properties in India by then. It can be due to either Rupee or property prices declining by 20-30% in the next year. I feel inclined towards 60 to a dollar but that can be maneuvered by RBI if they got sentimental with it.

It’s not possible to keep the interest rates low for such a long time without hurting the exchange rate. Low interest rate in a worsening economy will worsen the budget deficit. It will also lead to inflation when output is going to decline. Drying up of foreign fund flows will also put pressure for increased government spending to keep the GDP level up, which will hurt the deficit further. All these are pointing to a severe decline in the Indian Rupee vis-à-vis the US dollar. Regarding Sensex I can say 2009 will see it find its new support around 7000, particularly after April when the first quarter results start showing up.

Goldman Sachs has predicted that Rupee will strengthen in 2009. This reinforces my belief since I see GS is now desperate for people to buy Rupee on their guidance that will make Rupee stronger. Well, that’ll be the golden time for GS to liquidate its holdings and say Ta-Ta to its investments in India. If GS is so sure, they should’ve bought heavily on Rupee futures before making the prediction. If not, they should be investigated if they in fact end up liquidating their Indian holdings in 2009.

I did well here as well with my March 2008 prediction on Indian Rupee depreciation to 46-47 to dollar came out to be true. Further, my prediction on 50 to dollar was also vindicated. Sensex is right where I had predicted; around 9000 mark. Most interesting one was my March prediction on FIIs. I’d said (see my blog) that FIIs will start liquidating their Indian holdings after two quarters and BINGO, they actually started doing that after two quarters.

When good is actually bad for India – what are the steps?

In the time of financial turmoil affecting the world, India isn't fully immune as I’d already said earlier this year. One key deciding factor in India's case is state of foreign fund inflow. However, I clearly notice two things within the Indian context that I don’t really agree with. One, general people priding themselves as being affected by the global credit crunch and two, government (RBI and finance ministry) scrambling with CRR, cash to banks, debt-equity investment ratio etc. to correct the declining stock market. Expectation is that somehow these steps will improve liquidity, transactions, and eventually help rupee rebound against dollar. This will reinstate foreign institutional investor’s (FII) faith in Indian markets and their exit can be checked. So one would think that these steps are good for India, right? Wrong!

My take here is that injecting more liquidity into the system in India is going to be actually bad for Indian economy and government must stop that. In India, actual money flowing in the system is difficult to gauge since bulk of the sectors in India isn’t monetized. Without this knowledge, rushing untold liquidity in a declining growth environment will only push the inflation up. Second, I don’t think the credit crisis has the same nature in India; Indian banks aren't as exposed to the subprime mortgage related securities. Also, Indians still keep a lot of money under their mattresses for rainy days and that they will continue to do so. The fact then is borrowing and hence lending is on the decline in India giving a sense of squeeze in banking. Of course, people aren’t borrowing – would you at this rate? And mind you, as inflation continues to flare up so would this rate leading to even lesser borrowing.

Next, let’s consider the FIIs. These guys are investing in the country to, obviously, make money. They keep close track on the pace of reforms in India and they know it will be a long time before sensex sees 18000 again, so they don’t have any incentive to stay. What happens if rupee declines further against dollar? FIIs further loose faith and exit faster. What happens if rupee strengthens? FIIs cut their losses and exit fast in an uncertain Indian financial market. So if one thinks the exchange rate is going to save Indian market from FII exit, it’s a wrong notion per my hypothesis. So what’s the solution? Before we get to the solution, we must agree that FII’s cash out of Indian market will be a disaster since it’ll start moving overall investments out of the country. So, let’s get to what could be done.

Well, I have already mentioned the cause. So that’s where we need to start. First, I believe that exchange rate movement in either direction won’t help so there should be measures to keep it steady. Second, FIIs do not see any incentive to stay so how about giving them some? I suggest a guaranteed exchange rate in steps for the next few years will be the ideal measure. Government should guarantee to FIIs an exchange rate of 46.55 to dollar by December 2009; 44.22 by December 2010; 42.00 by December 2011; you get the point, right? A guaranteed 5% return on their investments on top of any stock market returns for the next 2-3 years. This will be better return than money can find elsewhere.

Now, the government should use this measure only to buy time and needs to ensure that they don’t get squeezed by this exchange rate promise. So they must also take steps to improve the market and eventually the exchange rate. First step here will be to curb inflation which can be done through two known measures. Control of liquidity and improvement in domestic production. How? Stop pushing unnecessary liquidity into the system and start investing in rural infrastructure. More farm equipment projects, more irrigation projects, and transportation (particularly roadways) to connect rural to urban and suburban India must be started now. This should be done through both deficit financing and available forex reserves (to balance impact on the exchange rate). These steps will spread the wealth down to the primary sector and both manufacturing and services will get a push by demand from primary sector.

An important question now is to understand where to start some of these projects. Government needs to be wise here. If it wants to have sustainable growth and see eventual progress in India, it should also focus on regions like eastern UP, Bihar, Orissa and MP. The idea is not to spread wealth down only to primary sectors but also to every region so the wealth reaches a broader mass. Bihar and UP in particular have large population and highly skilled people who end up migrating to other states due to lack of opportunities. This change will keep them closer to home as well as help ease some of the regional tensions. Keep also in mind one staying close to home always gets involved in its development since one always wants to help those whom one grew up with or whom one cares about.

With growing wealth across regions, industries will notice increased demand from within the country and become profitable. Before long, there will be more demand on concrete houses, services etc. from even rural areas. Construction and other services industries will get a boost and the stress on the property prices in the country will also ease. Result? Stock market will move upwards and at this point it will be easier for the government to ease the control on the exchange rate without seeing FII’s exit as the opportunity cost of exiting a growing market will be higher than the short term gain on the exchange rate.

One might question whether this is possible in such a short time frame given the vastness of the country but then one needs to keep in mind that money doesn’t come in at the market’s peak but at the signal of right direction. So the role of government is to ensure that it shows its commitment to bring broader mass of population into play and thereby also removes stress on labor market due to concentration of industries in specific regions. Once the broader mass is invigorated there is no stopping their demand; and that doesn’t exclude demand for better governance from the politicians. The final question then is: are the Indian politicians up for this challenge?

Monetary Response – Is the end to the crisis near?

One would like to think/hope that the financial institutions, marred with the deepest credit squeeze since the great depression, are looking for coordinated monetary responses from the world leaders and that would kick start the inter-bank lending and bring this whole crisis to an end. I am certainly one of those hopefuls. However, the more I look at their planned responses, the more I’m convinced that it’s far from over. The monetary action, in my opinion, is a going by the book response. These are extraordinary times and I believe just the monetary response won’t work, call it coordinated, unprecedented, or whatever.

This crisis has three different aspects in my view and every aspect needs to be addressed at the same time to see a definite result by next year. I’m very sure someone will learn that lesson before the world economy learns it the hard way. First aspect is certainly the credit squeeze that the entire world is witnessing. Second is the lack of trust between banks and main street that’s hurting the consumer lending in the US. And the third is the declining home prices in the US. The monetary response is an attempt to fix the first aspect only and the hope that it’ll trickle down into the economy soon enough, has little ground.

A quick analogy to the two missing aspects in the response can be cited here. Consider a laborer who makes his living by lifting loads (say 200lbs). Assume he is bleeding now and thus is growing weaker by the day. He is using one of his hands to control the bleeding hence he can’t bear the load properly with another. With both hands full, he doesn’t take medication since he doesn’t trust the medication will work faster to stop his bleeding and believes he is better off using one hand to keep a stop on the bleeding. Will providing the man with too much of medication (liquidity in our case) help?

The ideal response should be (in that order): Lighten the man’s load (to say 100 lb), put some sort of bandage on his wound to stop the bleeding and then administer the medication for healing. This will help the man heal and get stronger again. The fed has learned that the man (economy) is not willing to take the medication and hence it has decided to administer the medication into the man itself (taking ownership in the banks and deciding to lend directly to corporations). But is that the solution? The medication might take time to heal the wound and the man might get crushed lifting the load with one hand before the healing happens. I believe measures must be taken on the other two aspects as well and the time is now.

The second aspect is a larger issue that must be addressed soon. With the shrinking job market in the US and increasing unemployment, people aren’t spending as much. Additionally, banks aren’t willing to lend to common man since they don’t know how risky the person is with declining wealth through the US housing. We have already seen this mistrust hurting the auto dealership, retail, housing etc. and it is directly affecting the economy through declining consumption. The good news is that this direct impact to economy is true in times of improvement as well. A quick solution here lies in the fiscal policy through a long term tax break (as opposed to one time rebate checks) for common man that will improve consumption and will have positive impact on the US economy immediately. Improvements to the world economy will follow.

The third aspect is the declining home prices that are making the wealth disappear from the US. In reaction, it’s hurting the mortgage backs and due to exposure to these securities by foreign countries, world economy is feeling the heat as well. Believe it or not, it’s in the interest of the world at large to ensure the US home prices stabilize and that too, very soon. The inaction here might lead to similar symptoms in asset backed and even in treasury securities as wealth continues to get wiped off. As I have said earlier, either some principal write off or a permanent rate cut in the existing mortgages around 1-2% will not be a bad deal for the world after all.

These two responses will have an immediate income effect on the US population overall and rebuild the lost trust between lenders and common borrowers. The permanent increase in income would get the consumers out of their doors to start spending and banks will see the transactions going up. The increased transactions will make the banks look for more short-term cash, inter-bank deals, and lending. This is where the liquidity infusion (medication) into the system will really help.

To conclude, my belief is that this is an extraordinary situation that requires matching responses. The response should be not only top down (Monetary) but also bottom up (Fiscal) and side ways (Government direct support to home owners). Unless the policy makers realize this, we are all in for a continued long term mess, and as someone rightly said, a mess that might provide Mr. Bernanke another chance to study the great depression better.

03/12/2006 The Indian Strategy?

Manmohan singh visits US in Sep '05, asks US to support India's UNSC permanent seat bid. US says "no" but offers nuclear fuel support (which it knows has to get approved by the congress and hence not a done deal). India says it can find its own energy source and proves it through the Iran-Pak-India and Burma-Bangladesh-India pipelines. It also twists western arms by planning to open Nathula pass showing signs of getting closer to China whose defense spending grew to about $100 Billion this year. US plays its cards and sells F-16s to Pak thinking India will follow antagonising China by doing so. India plays an ACE here by asking Prat & Whitney to either transfer the technology or lose the deal to French Mirage. With democratically elected president in Iran and smooth transition of power, a strong influence in the region appears in the making. West doesn't want yet another variable in the equation; blames Iranian nuclear energy pursuit to bomb making spree. This in the hope that Iran will be alienated and India will suspend its pipeline project, thereby getting India back into its fold. India, however, doesn't budge and US couldn't ignore India with its sound civilian nuclear technology and its good relations with Iran. It gets serious with the nuclear fuel deal in return for Iran's referral to UNSC. India buys it knowing that China or Russia will surely Veto any military action against Iran. Since UNSC permanent seat is the only strong card left with the US, it delays the voting on it until after the Iran episode is over in order to hold the strong card longer. India continues to hurt US business by Indian Airlines buying aircrafts from Airbus instead of Boeing. In the meanwhile, another headache appears with Hamas winning Palestinian elections and Europe & Arabic world agreeing to support it as Hamas gives a visit to Russia. US plays another card, President visits India, agrees upon the nuclear fuel deal (still knowing it's not a done deal) and makes a U-turn on the Iran-Pak-India pipeline (knowing it can still influence the pipeline through Pak). This (pipeline) also gives US a bargaining card with Iran to control Iranian support to Hamas. India still wants a permanent seat in UNSC and hence it will keep the deal success/failure a low key affair and should play its card soon. keep watching.

10/03/2008 Is bailout the solution? And future.

I still believe the bailout is just an attempt to cure the symptom rather than a fix to the cause. The root cause of this financial mess is the dropping home prices and the inability of home owners to continue paying their mortgages. Sure, one might argue that the subprime lending practice itself was flawed but that’s more of a regulation failure in my opinion rather than the root cause.

The bailout was certainly a necessary step to keep the situation getting from bad to worse but I don’t think it’ll help any turnaround. The fundamental problem the US economy is facing is the lack of trust between the lender and the common borrower (consumption factor). Sure the inter-bank lending might ease up but the same can’t be said about lending to common Americans, particularly with increasing unemployment rate. This will keep consumption low and continue to hurt the GDP and overall effort to fix the economy.

My belief is that US financial sector has just crossed the core of this problem comet and there is still a long tail it needs to travel before coming out of it. I feel it’ll at least be two years before we start sensing a financial sector revival unless we see appreciation in US home prices or a write down on principals. Another thing we need to note is the ripple effect of this on the overall US economy which hasn’t hit the core yet (since it comes with a lag). So, I feel there is more we are yet to witness before the overall economy revives.

Europe – If I had money, I’d short Euro. The impact of the US financial meltdown will hit Europe with a lag and it’s not too far into the future. The problem I notice with European countries is their sizes. Because of that, none of the countries there is self-sufficient and hence a lot of their fate depends upon the continued trade among one another. As we’ll see more bailouts in Europe, individual currencies will devalue erratically and hurt the trades and unemployment will rise. This will erode the trust on Euro and USD will gain over Euro (I see 1USD = 1 EUR again by end of 2009).

India – Unfortunately India hasn’t seen the worst yet. The rupee will further devalue to 50 or even beyond against the USD. Why? The slowdown in the US and Europe will hit India’s services sector and other exports. Unemployment will rise and the inability to pay rising mortgages payments due to ARMs will lead to crash in housing prices by mid-to-late next year. Banks that have loaned ARMs will feel the heat. In India, govt. comes to rescue the people so it’ll save the banks by covering them (printing more money). As the economy slows, FIIs will pull more of their money out of India. The repatriation of USD and printing money will put severe downward pressure on rupee/USD exchange rate.

The problem with India is its lack of internal demand. True, it has best in class technology available but the penetration is pretty much limited to 5% of the haves. The have nots are still tied to the primary sector and are not in a position to make services demand to compensate for the drying up of the external ones. The increasing wealth gap, unemployment rate, rising inflation (will stay up as money is printed), continued discordant male to female ratio, and dawn of the growth era will push people towards their mundane regional, religion and caste issue. A social unrest can’t be ruled out in the coming years.

China – I don’t know much about internals of China but I feel it will move more towards democracy (more rights, more freedom) and will continue to get stronger. Why? China is a manufacturing powerhouse with about 1.3B population. China’s economy is also export oriented which will face the decreased demand due to global slowdown. However, unlike India, which is a services giant, China is a manufacturing giant. It produces machinery for which internal demand in the primary sector can be created by enabling the farmers. There will be two parts to this enablement. One, making finance available to the farmers and second, training the farmers on the machineries. Increased wealth and knowledge across China will create opportunity as well as demand for more rights.

The USA – The USA will inch a little towards commu… with the govt. overseeing and interfering into more than it should. However, with strong processes and quality adherence in place, it’ll emerge as the strongest economy again with USD gaining against all major currencies. In Asia, Pakistan will not be a close ally to the US (it’ll probably be India to balance China and Russia). I can see US’ and NATO’s interest growing more in African nations, particularly Sudan and Somalia in the coming years to counter China’s influence in the continent.

Well, what if the bailout works?

03/22/2008 Financial Crisis – Where is the US and the world headed?

I agree on the financial market situation. However I'll be extremely happy if the turmoil lasts just 2 years. This, in my opinion, will come very close to the great depression and the financial systems will be overhauled. I could be too pessimistic but so far I've not been too off. I found about the subprime months after I purchased my house (I blame office work load for that) else I wouldn't have bought this house.

Consider this, Bush's deal has deferred the ARMs adjustment by 5 years and despite that the foreclosures have crossed 1M mark. By end of this year 75% of mortgage borrowers will have mortgage loans higher than the value of the asset. Many of these borrowers will simply walk on their commitments putting further stress on the property prices. I have discussed this with multiple people and they appear clueless. One suggestion from the Fed chairman (in the newspaper, of course) was for Banks to write off some of the principals. This will certainly be a bold step and might be one of the few possible solutions but extremely difficult to implement since issuing Banks do not own those mortgages. They have been packaged and sold to investors. Asking the investors to take the hit will kill the investment banking institutions for a good number of years. Even if some interim relief is brought this way, ARMs will start adjusting eventually and more stress will come on the housing.

Second possibility - Fed brings in more liquidity by reducing interest rates and printing more money (which it has been doing) to enable more confident and easy lending. But both steps will further weaken the USD and push the inflation up. With limited consumer confidence, this situation means severe stagflation.

What this means to the world economy - A disaster. And India will be one of the first countries to be hit. It's not 1998 - now over 25% of GDP is tied to foreign demand and exports. My prediction on the Sensex has so far been right on the money and I was lucky to clean house with all my Indian stocks last year. I think it will fall below 10K by early next year and stabilize at about 9K. Second, I believe that Rupee will decline to 45-46 level by end of this year. The slowdown in Indian economy from 10 down to 6% is a drastic indication of the tip of the iceberg. Two more quarters of slowdown and FIIs will pull their money out of the market and guess where Sensex will go (I think FIIs still have first option out). This means Indian investors will loose shirt and there will be blood bath on dalal street. Govt is already taking steps to get the money out of the market (Rupee is now convertible, right?) so that inflation and rupee devaluation can stay in check.

What's next - Indian housing will crash. Why? Last year when I was trying to buy an apartment in India, I approached ICICI bank for loan. The guy there went overboard to convince me that interest rate will stay low and that ARM was the best option. I was very troubled because what if the banks had sold similar loans to the million new home owners. There is already a lot of speculation built in home prices in India and those prices are sustainable only with rising income and further growth in services sector. With limited internal demand and slowing global economy, both the possibilities are questionable. With the way we Indians react to panic news, the country should brace for multiple black days for capital and real estate markets.

Anything positive - For long USD has provided the peg for other economies to march behind. This will erode in the coming years. The high inflation in Europe is providing safe haven for higher interest seekers to move their assets from USD to Euro. I don't think Euro can lead since the EC is useless in decision making and there is multiple stresses within already. It is good for pan-European trade but that's it. End of story. What I sincerely hope is that with tighter job situation, high inflation there may lead to an early trouble. Since Euro era is relatively new, it will fail to prove its credibility over USD and the trust will return to the greenback.

Harbingers - great depression (Keynesian demand push and World War II), the 50s (Korean War), 70s (Milton Friedman's monetary controls - an overhaul), 80s (Gulf War I), 90s (Internet), 2001 (Sub-prime market). The initial belief was that 2001 recession would be tackled by the "Nano" revolution, which never happened so hope was on the 2nd gulf war which didn't help much either. Instead the sub-prime market pushed the economy up into the mess it's in. By the time this mess is cleaned up, I feel that the "Go Green" revolution will be hot. The financial institutions will be made to drastically mend their ways - more oversight will come. As in the past, the US will take the lead on the new "Green revolution" and the world will follow suit.