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Thursday, November 6, 2008
Monday, October 13, 2008
Lessons from the Global Financial Crisis with special reference to Emerging Market
* Statement of Dr. Duvvuri Subbarao, Governor, Reserve Bank of India, and Leader of the Indian delegation at the International Monetary and Financial Committee Meeting, at the International Monetary Fund, Washington DC, on October 11, 2008
1. Since the collapse of the leading US investment banks in August-September 2008, there
has been a breakdown of trust in inter-bank and inter-institutional lending. Given that this kind
of extreme risk perception will be reversed only slowly, the full resolution of the crisis will
inevitably take time.
2. Additionally, there is the problem of contagion – across markets, across institutions and
across countries. Each day, there is news of the crisis spreading to a newer part of the world
or to a newer institution. What we are going through is an unprecedented crisis; and we will
be failing the world if we do not draw lessons from the crisis to prevent its recurrence. It is on
these lessons that I want to focus.
3. First, financial supervision has drawn widespread critique. The stereotype perception is
that risk management and supervisory practices lagged behind financial innovations and
emerging new business models. The present crisis underscores the need for regulation
staying ahead of the curve, and for continually upgrading the skills and instruments for
financial regulation and supervision. However, there is need for a note of caution here. There
is a distinct risk that in trying to stay ahead of innovation, regulation may get so stringent that it
stifles innovation. This is a risk we must guard against.
4. The second lesson relates to the inter-agency coordination. The origins of the current
crisis can be traced to both the build up of macro-global imbalances as well as the mispricing
of risks in the financial system, which in turn, was encouraged by prolonged easy monetary
policy and excess liquidity. We endorse the IMF view that the respective roles of central
banks, regulators, supervisors, and fiscal authorities regarding financial stability needs to be
revisited. Central banks should play a central role in maintaining financial stability and should
have the necessary informational base to do so effectively. This implies close co-operation
among all the agencies entrusted with the task of maintaining financial stability.
5. The third lesson is that the large scale bail-out packages will have implications for the
regulatory architecture of the financial system and for the fisc of countries. Besides, the
rescue packages offered by one country could have ramifications for other countries, even
when they are far from the epicentre of the crisis. A relevant issue in this context is the
efficacy and coverage of deposit insurance. What should deposit insurance cover? How are
small deposits to be defined? Apart from small deposits, should we, in a crisis situation like
this, consider extending guarantees to the money markets and mutual funds?
6. Fourth, the unfolding crisis has revealed the weaknesses of structured products and
derivatives in the credit markets. This throws up questions about the appropriateness of
various structured product like credit derivatives and their financial stability implications. Are
exchange traded derivatives superior to over the counter (OTC) derivatives? Do we need to
focus on prescribing and instituting appropriate clearing and settlement practices even for
OTC products? In what way can we eliminate the shortcomings of the “originate-to-distribute”
model?
7. Finally, the near meltdown of the US financial sector is seen by some as evidence that
markets and competition do not work. This is clearly the wrong lesson to draw. The right
lesson to draw is that markets and institutions do succumb occasionally to excesses, which is
why regulators have to be vigilant, constantly finding the right balance between attenuating
risk-taking and inhibiting growth.
8. Let me now make a brief comment on India.
9. India, with its strong internal drivers for growth, may escape the worst consequences of the
global financial crisis. Indian banks have very limited exposure to the US mortgage market,
directly or through derivatives, and to the failed and stressed financial institutions. The equity
and the forex markets provide the channels through which the global crisis can spread to the
Indian system. The other three segments of the financial markets - money, debt and credit
markets - could be impacted indirectly. Risk aversion, deleveraging and frozen money
markets have not only raised the cost of funds for Indian corporates but also its availability in
the international markets. This will mean additional demand for domestic bank credit in the
near term. Reduced investor interest in emerging economies could impact capital flows
significantly. The impending recession will also impact on Indian exports.
10. To sum up, even EMEs which do not have direct or significant exposure to stressed
financial instruments and troubled financial institutions are experiencing the indirect impact of
the financial crisis, and this impact is by no means insignificant or trivial. Indeed, it could
intensify in the months ahead.
11. It is heartening that there is coordination among developed countries in the management
of the crisis. That is welcome and necessary, but not sufficient. In as much as emerging and
developing economies are likely to be increasingly impacted by the crisis, going forward two
things are necessary. First, in managing the crisis, the implications of that management for
emerging and developing economies should be explicitly factored in. Second, emerging and
developing economies should be taken into confidence and consulted whenever the policies
and actions of the developed countries have implications for them.
No risk for ICICI UK arm: Moody's, S&P
Battered by rumours casting doubts about its financial health, ICICI Bank on Sunday received a shot in the arm
with global rating agencies Moody's and S&P giving it a thumbs up, saying its overseas arms have no significant subprime risks.
“ICICI Bank’s UK subsidiary has no high risk subprime securities and enjoys robust asset quality and liquidity,” Moody’s said in its latest credit report. It said the bank’s credit fundamentals remain sound and any mark-to-market loss would not have any significant impact on its credit profile. These ratings assume importance in the wake of reports that it was over-exposed to risk caused by the global meltdown and that the bank’s loan profile was not fully secured and credible. Moody’s reaffirmed its rating on ICICI Bank UK with a “stable outlook” in its latest credit opinion, which was released after a sharp plunge of about 20% in ICICI Bank’s share price on Indian bourses. Moody’s also said ICICI continues to have highest rating for senior debt among Indian banks.
S&P’s senior director, financial institutions ratings, Asia, Ritesh Maheshwari, said, “Credit fundamentals of ICICI Bank continue to remain sound despite the reports on its exposure to Lehman Brothers or the Bakerie group. These have to be seen in the context of the $10 billion capitalisation of the bank and one-billion dollar of profits.”
He added that while the overseas investment portfolio might be subject to mark-to-market valuation loss but it should not be significant enough to hurt ICICI Bank’s credit profile. Moody’s retained its ICICI Bank UK rating at ‘Baa1’ for senior debt, which is higher than the foreign currency senior debt rating of any Indian bank.
The rating reflects the bank’s improving core banking activities and robust asset quality, as well as the developing franchise within the UK, Moody’s said, adding that the corporate banking business is centered on providing services to Indian corporates which are in the UK, including merger and acquisition advice, forex business and syndicating Indian paper.
“It has robust asset quality ratios with no loans classified as impaired. It has also stated that ICICI Bank UK maintains a rather conservative investment policy and does not hold any sub-prime assets, nor does it have exposure to CDOs, SIV/SIV lites and leveraged loans.”
“The mark-to-market impact in its investment book is not associated with any structured or high-risk subprime related securities but is due to the general widening of the credit spreads due to the global market conditions,” the agency said.
It further asserted that ICICI Bank UK has a robust liquidity position and that ICICI UK has a relatively high level of capitalisation, with total capital adequacy at 19% at March 31, 2008 and ICICI UK has a strong backing from its parent ICICI Bank.
S&P’s senior director, financial institutions ratings, Asia, Ritesh Maheshwari, said, “Credit fundamentals of ICICI Bank continue to remain sound despite the reports on its exposure to Lehman Brothers or the Bakerie group. These have to be seen in the context of the $10 billion capitalisation of the bank and one-billion dollar of profits.”
He added that while the overseas investment portfolio might be subject to mark-to-market valuation loss but it should not be significant enough to hurt ICICI Bank’s credit profile. Moody’s retained its ICICI Bank UK rating at ‘Baa1’ for senior debt, which is higher than the foreign currency senior debt rating of any Indian bank.
The rating reflects the bank’s improving core banking activities and robust asset quality, as well as the developing franchise within the UK, Moody’s said, adding that the corporate banking business is centered on providing services to Indian corporates which are in the UK, including merger and acquisition advice, forex business and syndicating Indian paper.
“It has robust asset quality ratios with no loans classified as impaired. It has also stated that ICICI Bank UK maintains a rather conservative investment policy and does not hold any sub-prime assets, nor does it have exposure to CDOs, SIV/SIV lites and leveraged loans.”
“The mark-to-market impact in its investment book is not associated with any structured or high-risk subprime related securities but is due to the general widening of the credit spreads due to the global market conditions,” the agency said.
It further asserted that ICICI Bank UK has a robust liquidity position and that ICICI UK has a relatively high level of capitalisation, with total capital adequacy at 19% at March 31, 2008 and ICICI UK has a strong backing from its parent ICICI Bank.
Sunday, October 12, 2008
What made Hindus angry in Karnataka
François Gautier First Published : 06 Oct 2008
I was born in a Catholic family. My uncle was a priest, a wonderful man of warmth and compassion and I spent most my early years in Catholic boarding schools. When I was young I wanted to become a missionary and to ‘convert’ pagans in Asia. What I was taught by priests was that Hindus worship false gods and they needed to be brought back to the True Word by Jesus Christ.
Then of course, I came to India and discovered that actually Hindus, far from being the heathens, as had been portrayed in Europe, not only believed God’s diversity, the wonderful concept of avatar, but had given refuge to all persecuted minorities of the world, whether the Syrian Christians, the Parsis, the Jews (India is the only country in the world where Jews were not persecuted), the Armenians, or today the Tibetans.
I am also aghast at the one-sided coverage by the Indian media of the Christian- Hindu problem: blasts after blasts have killed hundreds of innocent Hindus in Varanasi, Delhi, Mumbai train blasts, Jaipur, etc. Yet, neither Manmohan Singh nor Sonia Gandhi have pronounced once the word ‘Islamic terrorism.’ But when furious Hindus, tired of being made fun of, of witnessing their brothers and sisters converted by financials traps, of seeing a 84-year-old swami and his Mataji brutally murdered, of reading blasphemy about their Gods, vent their anger against churches, many of them makeshifts, the Indian government goes after the soft target which the Hindus are. The same thing applies to the United States: they never warned Muslim organisations in India about the killing of Hindus, but when dollars are used to buy new converts and it angers the majority community of India,Washington has the arrogance to issue a warning, and Manmohan Singh does not have the pride to tell the US to mind its own business.
Neither the Indian press nor the western correspondents bothered to write about what made Hindus angry in Karnataka: Newlife, one important westernfunded missionary centre ( http://www.newlifev oice.org) , began making conversions in and around Mangalore by accosting poor people in market areas, or in bus stands, befriending them and then taking them to churches to introduce them to the father.
Upon introduction they were paid Rs 2,500 per person and then taken to the Velankanni shrine, in Tamil Nadu, where they would get another Rs. 3,000.
When they finally converted to Christianity by changing the name, they got an incentive of Rs 10,000 onwards.
Newlife would then give them instructions to abandon wearing tilak on forehead, not to visit and offer prayers at the Hindu temples, replacing the photos and idols of Hindu gods and goddesses with a Cross, etc.
But what really angered local Hindus was when Newlife went one step further and published a book in Kannada — Satya Darshini — which was widely distributed by its missionaries. Here below is the translation of some of the most abusive passages: “Urvashi — the daughter of Lord Vishnu — is a prostitute.
Vashistha is the son of this prostitute.
He in turn married his own Mother. Such a degraded person is the Guru of the Hindu God Rama. (page 48).
When Krishna himself is wallowing in darkness of hell, how can he enlighten others? Since Krishna himself is a shady character, there is a need for us to liberate his misled followers (page 50). It was Brahma himself who kidnapped Sita.
“Since Brahma, Vishnu and Shiva were themselves victims of lust, it is a sin to consider them as Gods. (page 39).
When the Trinity of Hinduism (Brahma, Vishnu and Shiva) are consumed by lust and anger, how can they liberate others? The projection of them as Gods is nothing but a joke. (page 39). God, please liberate the sinful people of India who are worshipping False Gods. (Page 39).” When blasphemy and much worse is brought against the most sacred Hindu Gods, Hindus are supposed to take it meekly as sheep and let themselves be converted to a foreign religion! There are more than 4,000 foreign Christian missionaries involved in conversion activities across different states.
In Tripura, there were no Christians at the time of independence. There are 1,20,000 today, a 90 per cent increase since 1991. The figures are even more striking in Arunachal Pradesh, where there were only 1,710 Christians in 1961, but 1.2 million today, as well as 780 churches! In Andhra Pradesh, churches are coming up every day in far-flung villages and there was even an attempt to set up one near Tirupati.
Christians throughout the ages have strived on the concept of persecution and as a brought up Catholic, I remember feeling bad about all those martyred saints of Christianity. Christians in India like to say that they are only two per cent and can do no harm. But it is a sham: in the Tamil Nadu coastal belt from Chennai to Kanyakumari, there must be now 10 per cent Christians posttsunami and the same may be true in other parts of south India.
My heart goes out to Karnataka Chief Minister BS Yeddyurappa who took a courageous stand against unethical Christian conversions, but is now under pressure from the Centre.
The BJP, having learnt from bitter experience that the Congress has no qualm in invoking President’s rule under fallacious pretexts in states which are ruled by non-Congress governments is in a quandary: it must show some action against militant Hindu groups while remaining true to itself.
This is why Yeddyurappa took some action against Hindu groups while saying that his government will not tolerate forcible conversions and will take stringent action against missionaries involved in conversions.
And ultimately, the blame must fall on Hindus: they are 800 million in India, the overwhelming majority; they have the brains, they have the money and they have the power. But either their intellectual and political class sides with the minorities, out of fear, inferiority complex imbedded by the British or just sheer crass political opportunism, or the bigger mass is indifferent inert, selfish, un-civic conscious. Every Hindu is the inheritor of the only surviving spiritual knowledge which at the moment is under a concerted attack by Christian missionaries, Americanisation, Marxism and Islamic fundamentalism.
fgautier@rediffmail.com
I was born in a Catholic family. My uncle was a priest, a wonderful man of warmth and compassion and I spent most my early years in Catholic boarding schools. When I was young I wanted to become a missionary and to ‘convert’ pagans in Asia. What I was taught by priests was that Hindus worship false gods and they needed to be brought back to the True Word by Jesus Christ.
Then of course, I came to India and discovered that actually Hindus, far from being the heathens, as had been portrayed in Europe, not only believed God’s diversity, the wonderful concept of avatar, but had given refuge to all persecuted minorities of the world, whether the Syrian Christians, the Parsis, the Jews (India is the only country in the world where Jews were not persecuted), the Armenians, or today the Tibetans.
I am also aghast at the one-sided coverage by the Indian media of the Christian- Hindu problem: blasts after blasts have killed hundreds of innocent Hindus in Varanasi, Delhi, Mumbai train blasts, Jaipur, etc. Yet, neither Manmohan Singh nor Sonia Gandhi have pronounced once the word ‘Islamic terrorism.’ But when furious Hindus, tired of being made fun of, of witnessing their brothers and sisters converted by financials traps, of seeing a 84-year-old swami and his Mataji brutally murdered, of reading blasphemy about their Gods, vent their anger against churches, many of them makeshifts, the Indian government goes after the soft target which the Hindus are. The same thing applies to the United States: they never warned Muslim organisations in India about the killing of Hindus, but when dollars are used to buy new converts and it angers the majority community of India,Washington has the arrogance to issue a warning, and Manmohan Singh does not have the pride to tell the US to mind its own business.
Neither the Indian press nor the western correspondents bothered to write about what made Hindus angry in Karnataka: Newlife, one important westernfunded missionary centre ( http://www.newlifev oice.org) , began making conversions in and around Mangalore by accosting poor people in market areas, or in bus stands, befriending them and then taking them to churches to introduce them to the father.
Upon introduction they were paid Rs 2,500 per person and then taken to the Velankanni shrine, in Tamil Nadu, where they would get another Rs. 3,000.
When they finally converted to Christianity by changing the name, they got an incentive of Rs 10,000 onwards.
Newlife would then give them instructions to abandon wearing tilak on forehead, not to visit and offer prayers at the Hindu temples, replacing the photos and idols of Hindu gods and goddesses with a Cross, etc.
But what really angered local Hindus was when Newlife went one step further and published a book in Kannada — Satya Darshini — which was widely distributed by its missionaries. Here below is the translation of some of the most abusive passages: “Urvashi — the daughter of Lord Vishnu — is a prostitute.
Vashistha is the son of this prostitute.
He in turn married his own Mother. Such a degraded person is the Guru of the Hindu God Rama. (page 48).
When Krishna himself is wallowing in darkness of hell, how can he enlighten others? Since Krishna himself is a shady character, there is a need for us to liberate his misled followers (page 50). It was Brahma himself who kidnapped Sita.
“Since Brahma, Vishnu and Shiva were themselves victims of lust, it is a sin to consider them as Gods. (page 39).
When the Trinity of Hinduism (Brahma, Vishnu and Shiva) are consumed by lust and anger, how can they liberate others? The projection of them as Gods is nothing but a joke. (page 39). God, please liberate the sinful people of India who are worshipping False Gods. (Page 39).” When blasphemy and much worse is brought against the most sacred Hindu Gods, Hindus are supposed to take it meekly as sheep and let themselves be converted to a foreign religion! There are more than 4,000 foreign Christian missionaries involved in conversion activities across different states.
In Tripura, there were no Christians at the time of independence. There are 1,20,000 today, a 90 per cent increase since 1991. The figures are even more striking in Arunachal Pradesh, where there were only 1,710 Christians in 1961, but 1.2 million today, as well as 780 churches! In Andhra Pradesh, churches are coming up every day in far-flung villages and there was even an attempt to set up one near Tirupati.
Christians throughout the ages have strived on the concept of persecution and as a brought up Catholic, I remember feeling bad about all those martyred saints of Christianity. Christians in India like to say that they are only two per cent and can do no harm. But it is a sham: in the Tamil Nadu coastal belt from Chennai to Kanyakumari, there must be now 10 per cent Christians posttsunami and the same may be true in other parts of south India.
My heart goes out to Karnataka Chief Minister BS Yeddyurappa who took a courageous stand against unethical Christian conversions, but is now under pressure from the Centre.
The BJP, having learnt from bitter experience that the Congress has no qualm in invoking President’s rule under fallacious pretexts in states which are ruled by non-Congress governments is in a quandary: it must show some action against militant Hindu groups while remaining true to itself.
This is why Yeddyurappa took some action against Hindu groups while saying that his government will not tolerate forcible conversions and will take stringent action against missionaries involved in conversions.
And ultimately, the blame must fall on Hindus: they are 800 million in India, the overwhelming majority; they have the brains, they have the money and they have the power. But either their intellectual and political class sides with the minorities, out of fear, inferiority complex imbedded by the British or just sheer crass political opportunism, or the bigger mass is indifferent inert, selfish, un-civic conscious. Every Hindu is the inheritor of the only surviving spiritual knowledge which at the moment is under a concerted attack by Christian missionaries, Americanisation, Marxism and Islamic fundamentalism.
fgautier@rediffmail.com
PSUs told to give business to banks on nomination
PSUs told to give business to banks on nomination): In a surprise move, the Finance Ministry has asked public sector companies to stop inviting competitive bids from banks for parking their surplus funds and directed them to give such business to state-run banks on nomination basis.
The directive would mean that the PSUs would lose out on getting the best returns on their surplus cash because the nominated bank may even dish out below sub-prime rates as they would be guaranteed of the business irrespective of the rates they offer, industry sources said.
With banks like State Bank of India losing out on PSU business due to aggressive competition, the Finance Ministry has stepped in to direct PSUs like ONGC to stop calling for competitive interest rate offers and park at least 60 per cent of their surplus cash with state-run banks.
Sources said the Oil and Natural Gas Corp (ONGC) is the first to resist the directive, saying it may lose Rs 400 crore annually on interest income.
ONGC, which has cash surplus of about Rs 25,000 crores, at present asks banks on its panel to quote interest rates they would offer for short-term deposits. The card rates of banks published on their websites are not applicable for bulk deposits for which banks quote the rates on demand.
Prevailing card rates would be about 200 basis points lower than the rates obtained by ONGC through competitive bidding, sources said adding giving business on nomination basis breeds malpractices and favoritism.
But for competitive quotes, ONGC has no other method of knowing the best rates available, the official said.
The directive would mean that the PSUs would lose out on getting the best returns on their surplus cash because the nominated bank may even dish out below sub-prime rates as they would be guaranteed of the business irrespective of the rates they offer, industry sources said.
With banks like State Bank of India losing out on PSU business due to aggressive competition, the Finance Ministry has stepped in to direct PSUs like ONGC to stop calling for competitive interest rate offers and park at least 60 per cent of their surplus cash with state-run banks.
Sources said the Oil and Natural Gas Corp (ONGC) is the first to resist the directive, saying it may lose Rs 400 crore annually on interest income.
ONGC, which has cash surplus of about Rs 25,000 crores, at present asks banks on its panel to quote interest rates they would offer for short-term deposits. The card rates of banks published on their websites are not applicable for bulk deposits for which banks quote the rates on demand.
Prevailing card rates would be about 200 basis points lower than the rates obtained by ONGC through competitive bidding, sources said adding giving business on nomination basis breeds malpractices and favoritism.
But for competitive quotes, ONGC has no other method of knowing the best rates available, the official said.
Now a Chartered Accountant can enter into a Multidisciplinary Partnership Firm
Institute of Chartered Accountants of India has issued a notification no. Na.1-CA(7)/116/ 2008 dated 25-9-2008incorporating various amendment to the Chartered Accountants Regulations, 1988.
There are 16 amendments to the regulations. One of the major amendments is provisions relating to multidisciplinary partnership firm.
These amendments are summarized as under:
Earlier vide Chartered Accountants (Amendment) Act, 2006 [w.e.f. 17.11.2006] the provision of First Schedule of the Chartered Accountants Act, 1949 amended substantially and central government has allowed multidisciplinary partnership firms.
It took almost two years to prescribe other qualifications (professionals occupying such qualifications) which are eligible for valid partnership or to share profits / remunerations with a practicing chartered accountant.
The qualifications to share profits / remunerations / commission / brokerage etc. [ Regulation 53A]
(i) Company Secretary within the meaning of the Company Secretaries Act, 1980;
(ii) Cost Accountant within the meaning of the Cost and Works Accountants Act, 1959;
(iii) Actuary within the meaning of the Actuaries Act, 2006;
(iv) Bachelor in Engineering, from a University established by law or an Institution recognised by law;
(v) Bachelor in Technology from a University established by law or an Institution recognised by law;
(vi) Bachelor in Architecture from a University established by law or an Institution recognised by law;
(vii) Bachelor in Law from a University established by law or an Institution recognised by law;
(viii) Master in Business Administration from Universities established by law or technical institutions recognised by All india Council for Technical Education.
Prescribed qualifications of a eligible partner who is not a member of ICAI [ Regulation 53B]
(a) Company Secretary, member, The Institute of Company Secretaries of India, established under the Company Secretaries Act, 1980;
(b) Cost Accountant, member, The Institute of Cost and Works Accountants of India established under the Cost and Works Accountants Act, 1959;
(c) Advocate, member, Bar Council of India established under the Advocates Act, 1961;
(d) Engineer, member, The Institution of Engineers, or Engineering from a University established by law or an Institution recognized by law.
(e) Architect, member, The Indian Institute of Architects established under the Architects Act, 1972;
(f) Actuary, member, The Institute of Actuaries of India, established under the Actuaries Act, 2006.
(g) Professional bodies or Institutions outside India whose qualifications relating to accountancy are recognised by the Council.
How America went bust
I am not sure if you have seen this earlier. But wonderful analogy. Makes the point very clear. Just ignore the lack of Wren and Martin in the English. ( after all it's america we are talking about )
Once there was a little island country. The land of this country was the tiny island itself. The total money in circulation was 2 dollar as there were only two pieces of 1 dollar coins circulating around.
1) There were 3 citizens living on this island country. A owned the land. B and C each owned 1 dollar.
2) B decided to purchase the land from A for 1 dollar. So, A and C now each own 1 dollar while B owned a piece of land that is worth 1 dollar.
The net asset of the country = 3 dollar.
3) C thought that since there is only one piece of land in the country and land is non produceable asset, its value must definitely go up. So, he borrowed 1 dollar from A and together with his own 1 dollar, he bought the land from B for 2 dollar.
A has a loan to C of 1 dollar, so his net asset is 1 dollar.
B sold his land and got 2 dollar, so his net asset is 2 dollar.
C owned the piece of land worth 2 dollar but with his 1 dollar debt to A, his net asset is 1 dollar.
The net asset of the country = 4 dollar.
4) A saw that the land he once owned has risen in value. He regretted selling it. Luckily, he has a 1 dollar loan to C. He then borrowed 2 dollar from B and acquired the land back from C for 3 dollar. The payment is by
2 dollar cash (which he borrowed) and cancellation of the 1 dollar loan to C.
As a result, A now owned a piece of land that is worth 3 dollar. But since he owed B 2 dollar, his net asset is 1 dollar.
B loaned 2 dollar to A. So his net asset is 2 dollar.
C now has the 2 coins. His net asset is also 2 dollar.
The net asset of the country = 5 dollar. A bubble is building up.
(5) B saw that the value of land kept rising. He also wanted to own the land. So he bought the land from A for 4 do llar. The payment is by borrowing
2 dollar from C and cancellation of his 2 dollar loan to A.
As a result, A has got his debt cleared and he got the 2 coins. His net asset is 2 dollar.
B owned a piece of land that is worth 4 dollar but since he has a debt of 2 dollar with C, his net Asset is 2 dollar.
C loaned 2 dollar to B, so his net asset is 2 dollar.
The net asset of the country = 6 dollar. Even though, the country has only one piece of land and 2 Dollar in circulation.
(6) Everybody has made money and everybody felt happy and prosperous.
(7) One day an evil wind blowed. An evil thought came to C's mind. 'Hey, what if the land price stop going up, how could B repay my loan. There is only 2 dollar in circulation, I think after all the land that B owns is worth at most 1 dollar only.'
A also thought the same.
(8) Nobody wanted to buy land anymore. In the end, A owns the 2 dollar coins, his net asset is 2 dollar. B owed C 2 dollar and the land he owned which he thought worth 4 dollar is now 1 dollar. His net asset becomes -1 dollar. C has a loan of 2 dollar to B. But it is a bad debt. Although his net asset is still 2 dollar, his Heart is palpitating.
The net asset of the country = 3 dollar again.
Who has stolen the 3 dollar from the country?
Of course, before the bubble burst B thought his land worth 4 dollar.
Actually, right before the collapse, the net asset of the country was 6 dollar in paper. his net asset is still 2 dollar, his heart is palpitating.
The net asset of the country = 3 dollar again.
(9) B had no choice but to declare bankruptcy. C as to relinquish his 2 dollar bad debt to B but in return he acquired the land which is worth 1 dollar now.
A owns the 2 coins, his net asset is 2 dollar. B is bankrupt, his net asset is 0 dollar. ( B lost everything ) C got no choice but end up with a land worth only 1 dollar (C lost one dollar) The net asset of the country = 3 dollar.
************ ****End of the story******* ********* ********* **
There is however a redistribution of wealth.
A is the winner, B is the loser, C is lucky that he is spared.
A few points worth noting -
(1) When a bubble is building up, the debt of individual in a country to one another is also building up.
(2) This story of the island is a close system whereby there is no other country and hence no foreign debt. The worth of the asset can only be calculated using the island's own currency. Hence, there is no net loss.
(3) An overdamped system is assumed when the bubble burst, meaning the land's value did not go down to below 1 dollar.
(4) When the bubble burst, the fellow with cash is the winner. The fellows having the land or extending loan to others are the loser. The asset could shrink or in worst case, they go bankrupt.
(5) If there is another citizen D either holding a dollar or another piece of land but refrain to take part in the game. At the end of the day, he will neither win nor lose. But he will see the value of his money or land go up and down like a see saw.
(6) When the bubble was in the growing phase, everybody made money.
(7) If you are smart and know that you are living in a growing bubble, it is worthwhile to borrow money (like A ) and take part in the game. But you must know when you should change everything back to cash.
(8) Instead of land, the above applies to stocks as well.
(9) The actual worth of land or stocks depend largely on psychology.
Do forward it to your friends wherever you can to spread the knowledge. You will surely be remembered for Good.
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