Friday, June 26, 2009

The world should have paid heed then...Prediction of recession

Lot of us in this world are facing the brunt of recession in some way or the other.But little did we know that it was predicted by Peter Schiff, an American Economic Commentator way back in 2006.The more interesting fact is that the accuracy with which he predicted things.

The link to his prediction is this video:

http://www.youtube.com/watch?v=2I0QN-FYkpw

Few interesting things he mentioned in the video are:

2006 comment : The basic problem of the US Economy, is that we have too much consumption and borrowing, and not enough production and saving. We should not resist the recession, but embrace it, because the disease is all this debt finance consumption. The cure is, that we stop consuming, and start saving, and producing again, and that’s a recession. And sometimes, medicine tastes bad, but you have to swallow it!

2007 comment : The sub prime type crisis is going to unfold in other places such as bonds backed by auto loans, credit card debt, and that’s going to pull the rug out from under the consumer. Not only can he not borrow money to buy a house, he can’t borrow money to buy a car, he can’t use his credit card

Critics said during that time:

"The Central Banks have not yet fired their big guns, they will fire them when necessary, the worst is over."

Now the critic comments seems humorous..isn't it

1 comment:

Kaushambi said...

Not only the economist you mentioned knew it but all the players knew the crisis is going to arrive. They just underestimated the risks by closing their eyes from the universal truths and planning a dream world of safe and peacefully retired life. I put forward the words of a renowned professor who defines the root cause of sub prime. No technicality mentioned just simple truths if you have the apettite for it!!

Charles Calomiris, professor of financial institutions at Columbia University Graduate School of Business, said the crisis is only the worst episode of what he described as "the most destructive 30 years of finance in world history". He further said: "As soon as prices flattened — long before they declined — the game was up. If you understood the securities you knew this . . . I don't think I was the only one who recognized this" in 2006, when the housing bubble imploded, he said.

Compounding the problem was a lack of corporate governance in the major bank holding companies in the U.S., where managers purposely underestimated the risk of the financial instruments they were buying, thereby ignoring shareholders' interests, Calomiris said.

Pension funds, mutual funds, insurance companies and the like were barred from owning more than 1 or 2 percent of any single public company, allowing bank holding companies to fragment and weaken their ownership structure by regulatory design.

"There were no retail investors . . . They were all sophisticated institutional investors who were buying these securitized instruments," he said. "You have to be honest — there was a problem here on the buy side. People were consciously doing what they were doing to underestimate the risk and pretend that the risks were less than they were."