Speculation-based economic expansion
Monday, 24 November 2008
Ahmed Showkat Masud
THE world has been witnessing a difficult economic recession. The USA and the European Union (EU) are in the centre of world economic system. In an economy like ours, banks play a role of intermediaries.
But in the USA, the EU and Japan, the centralisation and concentration of banking industry have resulted in their wielding tremendous power over the entire economy. Since competition has become intense among banks and other lending institutions, they have invested their funds in activities that are of speculative nature. More investments in home equity-backed securities have resulted in fall of some world famous financial institutions. Life insurance companies enjoy relatively stable inflows of investment funds from policy holders. This, thus, enables life insurance companies to plan their mortgage investment programmes on a long terms basis. AIG, the group to which belongs American Life Insurance Company (ALICO) has been affected the worst because of its investing fund in mortgage-based securities.
At one stage of expansion of activities, the financial institutions merely depend on depositors' fund and also funds collected from capital market by floating shares. Thereafter, when competition becomes intense, the financial institutions collect fund by converting their receivables against loans, into securities. Already-invested fund as loan, thus, creates new source of fund. It has happened in the case of the USA, the EU and Japan. When the expected cash flow has not been generated, the financial crisis has become intense. In the advanced market-oriented economies, governments have come with rescue packages.
Our financial institutions are yet to enter into the process of securitisation. During an economic recession, the society's requirements do not fall. But, the purchasing power drops sharply. If purchasing power drops in the EU, the USA and other developed economies, then it would certainly affect our export sector. To what extent this will occur, is difficult to project at this stage. This will, however, largely depend on sensitivity of the export items to such reduced purchasing power. Earnings of people working abroad will also be affected if unemployment rate increases in the USA and the EU. All these are dependent on how long the recession will last.
The capitalistic economies of the developed world have been expanding beyond their capacity to lay down the rules of the game and enforce the same. The abundance of resources based on speculation has, thus, become one of the main causes for their economic recession.
(The writer is Assistant Vice President, AB Bank Ltd., Anderkilla Branch, Chittagong)
THE world has been witnessing a difficult economic recession. The USA and the European Union (EU) are in the centre of world economic system. In an economy like ours, banks play a role of intermediaries.
But in the USA, the EU and Japan, the centralisation and concentration of banking industry have resulted in their wielding tremendous power over the entire economy. Since competition has become intense among banks and other lending institutions, they have invested their funds in activities that are of speculative nature. More investments in home equity-backed securities have resulted in fall of some world famous financial institutions. Life insurance companies enjoy relatively stable inflows of investment funds from policy holders. This, thus, enables life insurance companies to plan their mortgage investment programmes on a long terms basis. AIG, the group to which belongs American Life Insurance Company (ALICO) has been affected the worst because of its investing fund in mortgage-based securities.
At one stage of expansion of activities, the financial institutions merely depend on depositors' fund and also funds collected from capital market by floating shares. Thereafter, when competition becomes intense, the financial institutions collect fund by converting their receivables against loans, into securities. Already-invested fund as loan, thus, creates new source of fund. It has happened in the case of the USA, the EU and Japan. When the expected cash flow has not been generated, the financial crisis has become intense. In the advanced market-oriented economies, governments have come with rescue packages.
Our financial institutions are yet to enter into the process of securitisation. During an economic recession, the society's requirements do not fall. But, the purchasing power drops sharply. If purchasing power drops in the EU, the USA and other developed economies, then it would certainly affect our export sector. To what extent this will occur, is difficult to project at this stage. This will, however, largely depend on sensitivity of the export items to such reduced purchasing power. Earnings of people working abroad will also be affected if unemployment rate increases in the USA and the EU. All these are dependent on how long the recession will last.
The capitalistic economies of the developed world have been expanding beyond their capacity to lay down the rules of the game and enforce the same. The abundance of resources based on speculation has, thus, become one of the main causes for their economic recession.
(The writer is Assistant Vice President, AB Bank Ltd., Anderkilla Branch, Chittagong)