Tuesday, December 30, 2008

Japanease Slump and its Implications

Japanease stock index Nikkie touched 39,000 mark in late 1980s, today it is struggling around 9,000. Virtually there was zero growth for last two decades in the Asia's largest and world's second largest economy. Fiscal measures, monetary measures all failed one after another in bringing back the normalcy.  When one look into the reasons (Irrational credit expansion and reality boom) that caused the downfall of the Japnease economy, one certainly get scared of their future prospects from the current juncture.  

Here i would like to initiate for a year end debate on the possible causes for the continued slump in the Japnease economy. Particularly i invite the arguments on the following issues:

  • Reasons for the failure of fiscal and monetary measures in Japan
  • Why an average Japanease citizen save so high? (even after realising that their savings and investments have gone for a vain)
  • Possible measures to be adapted to cure the Japanease truma
  • Implications of prolonged Japanease slump to the current debacle of the global financial system
As i mentioned it is the year end debate, i request your valuable arguments and comments by the end of the current year.  I also hereby promise that your contribution will be duly recongized in my forth coming blog post on the same issue.

Saturday, December 6, 2008

ILA PATNAIK on FIIs (Financial Express)

Why did stock prices drop even though massive net sales by FIIs, or an en masse flight by FIIs from the country, did not happen? Stock prices are determined by the beliefs of lakhs of market participants across the country. These are the people who are watching industries, individual companies and making forecasts about the future performance of the companies. Some foreign investors participate in this kind of active stock speculation, but the bulk of it is done by domestic individuals. When global business cycle conditions became worse, these speculators started downgrading their optimism about the growth of profits and dividends on the part of Indian companies. This gave lower stock prices. The channel runs from news to forecasts to (primarily domstic and individual) speculators to stock prices.

Why does the media talk so much about FIIs even though their influence on stock prices is small? From the viewpoint of brokerage firms, what matters most is trading volume, because their fees are proportional to volume. Whether FIIs buy or sell, they generate fees for brokerage firms. FIIs tend to do business with a few large brokerage firms located in South Bombay who are focused on institutional investors. For these firms, FIIs are important customers. Journalists and television commentators tend to talk with a few big brokerage firms, and tend to think that FIIs are very important. They miss out on the thousands of stock brokers spread across the country, doing mostly retail business, who account for the bulk of activity on the stock market. The belief of the big institutionally oriented brokerage firms in Bombay, that FIIs are very important for their business, has got rubbed off into a broadly held belief in the media that FIIs are the most important participants in Indian financial markets.

Curtsey of Financial Express

Friday, December 5, 2008

IMF Guidelines!!?

The confidence in the financial markets across the world has been badly shaken. Almost all the countries are embarking on adapting possible measures to mitigate the damage. IMF in its recent Global Financial Stability Report (GFSR) came up with few principles that could form the basis for designing the measures for a restoration of confidence in these exceptional circumstances (i dislike to admit it as "crisis"). They are:

1. Measures should be comprehensive, clear and operational procedures have to be transparent. 

2. Measures taken by the countries across the globe should be consistent in order to maximize their impact while avoiding the adverse effects on other countries. (such as competitive devaluation of the respective currencies should be avoided)

3. Ensuring rapid response on the basis of early detection of strains.  This requires a high degree of coordination within each country among the different set of authorities and in many cases across borders.  (The acomplishment of this principle would have saved the edifice of the Northern Rock as it has been effectively done by the rare coordination of authorities in India in avoiding the possible Run on its second largest bank)

4. Measures adapted by the governments across the world should assure that the current interventions are temporary and taxpayers interests are protected. Governments should be accountable to all its stakeholders and conditions for the support (by way of bailouts) should include private participation in downside risks and taxpayers participation in upside benefits. Intervention machanisms should minimize possible moral hazard problem.

Additions and constructive comments are encouraged!!