Prof. Jay Mishra
Date: 23rd December, 2008
REST IN PEACE - GOOD TIMES
Can a country go bankrupt?
Prof. Jay Mishra highlighted the causes for the global recession and touched upon the macro economic theory behind it. He discussed the examples of bankruptcy in USA, Europe and Iceland. He touched upon the importance of liquidity holdings of the bank. Traditionally banks hold only 5% of the savings in liquid and the rest in form of investment. So if the banks fail the economy will spiral down. He discussed the pattern of growth rate since 1960's and reasons for its sudden rise in early 2000's.
This accelerated growth was a result of increased consumer spending. In 2007, out of $13.8 trillion GDP of their GDP, US consumers spent $10.1 trillion, that is, they spent 73% of their income and saved very less. The level of savings fell further in the subsequent months and the credit crunch hit the world economy starting from the USA.
He talked about the importance of savings in the economy and the need for productive spending expenditure, rather than reckless distribution of bills.
The subprime crisis and the problem of adverse selection by the banks for issuing loans were also discussed. How the artificially controlled lower interest rates led to crisis was very informative and made the session really interactive.
The process of "off balance sheet financing" where the banks take and lend loans without showing it on the balance sheet was a real eye opener for the students. It explained intricate details as to how firms can manipulate details to portray a glossy picture. The transformation from the 'virtuous circle' to 'vicious circle' traced the events the led to the global crisis.
He also discussed the European and Indian markets and their role in aiding the revival of global economy.
He ended the discussion highlighting that " the good times will 'Rest in Peace' - if the world government do not take steps to be directive and productive in making their investment and spending decisions.
By -T. Priyadarshini