Before the 1992 Presidential campaign began President George H.W. Bush was considered almost unbeatable. Successful foreign policy developments such as the end of the Cold War and the Persian Gulf War had given him an approval rating of almost 80%. Then James Carville, Clinton's campaign manager, in a moment of inspiration came up with the slogan,'The economy, stupid.' Within a short span of time the attention of the voters was successfully turned towards the economic recession gripping the US at that time, and Bush lost the election.
This time round the outgoing President, the son of George H.W. Bush faces an uphill task to put another Republican in the White House when he leaves.Unfortunately for him the US seems to be stuck in two wars, in Afghanistan and in Iraq, which it is nowhere near winning, although things seem to be improving.Added to this he has an approval rating of 32%.The attention of the American people is once again focussed on one major headline grabbing issue, that is the sub prime crisis and its likely impact on the economy.The government has belatedly woken up to the hard realization that it has allowed matters to drift for too long and that the crisis is going to cast its shadow on the coming elections.
Lawmakers have been facing political pressure to take action.But in September this year the Fed Chairman Ben Bernanke and the Treasury secretary Henry Paulson warned that some solutions could end up perpetuating unhealthy lending practices that created the whole mess in the first place.However some initiatives were taken, such as making more money available in the system to ease the credit crunch,giving borrowers greater protection against predatory lenders and encouraging homeowners to call their banks in order to discuss their problems and find a solution so that they could retain their homes.It was also announced that while the government will try to ensure that people got to keep their homes it would do nothing to bail out speculators or those who were plain greedy.This stand of the government was probably prompted by the assumption that the crisis was nearing an end.But things have simply got worse and there is no immediate end to the crisis in sight. It is now expected that the meltdown will continue well into next year at the very least.
The government had also assumed that the crisis will remain remain confined to the housing sector which accounts for just 5% of GDP and any slowdown there would by itself not affect the economy as a whole.But economics has never been an exact science, although it is good at offering explanations in hindsight. Declining home values seems to be having a wealth effect and Americans seem to be cutting other expenses in order to both make up their losses and also in order to be able to make higher mortgage payments. This is reflected in declining auto sales and even in manufacturing. Consumer expenditure accounts for 72% of US GDP and a slowdown here could tip the economy into a recession.
The Bush administration and the mortgage industry are finally hammering out a proposal to temporarily freeze interest rates on certain stressed sub prime mortgages. If it goes through it will be the biggest action to handle the worsening crisis. The proposals could be in place as early as next week. Talks have involved all the federal banking regulators and major players in the mortgage industry such as Citigroup, Wells Fargo and others. The attempt is to extend for several years the introductory 'teaser' rates that were offered on sub prime mortgages. Such a scheme would however mean losses for investors who have purchased mortgage backed securities as it would reduce the rate of return on their investments. Companies apprehend shareholder lawsuits if they permit modifications in original agreements which are not in the best interest of the shareholders.
Government intervention in times of crisis is not new.People would do well to remember that in 1998, in the aftermath of the Asian flu, when Long Term Capital Management was in danger of going under, it was Alan Greenspan who organized a bail out for it.The economy has grown at a surprisingly strong 3.9% in the 3rd quarter although it is expected to slow in future. Food and fuel prices are at record highs and inflationary pressures are clearly visible.Although interest rate cuts are probably round the corner there are clearly limits to how low Bernanke can go without raising inflation to unacceptably high levels.Moreover he cannot allow the dollar to fall much further else foreign investors may start bailing out of US stocks and treasuries, triggering off a deflationary spiral in the economy.A widespread collapse in asset prices would have a disastrous impact on the economy.These considerations will have to be borne in mind by the mortgage companies and their shareholders alike while considering the proposals put forward by the government.
What Is Forcing Citigroup To Cut Jobs?
CNBC reports that massive layoffs are being planned by Citigroup Inc., America's largest bank. Faced with huge fourth quarter losses the bank is under pressure to cut costs and another round of job cuts may be the only way out(Citi has already cut jobs once earlier this year).
What really ails Citi? Citi has been growing a bit too fast for some time now.It has been picking up foreign banks and brokerage firms wherever it can, without giving too much thought to managing what it already has. The Nikko Cordial bid, picking up a stake in a brokerage firm in India, the Grupo Financiero buyout in Central America and continuous investments in China reinforce the image of a company that is growing by acquisitions rather than focusing on organic growth.The global sphere of its operations ( it is present in over 100 countries) has naturally led to a huge increase in expenses.In fact this increase had become significant enough for Prince Alwaleed bin Talal to remark to the effect that 'draconian measures need to be taken to curb expenses.' Incidentally the Prince is perhaps the largest single shareholder in the bank.
The tipping point has been the sub prime crisis.Citi has unveiled losses of $6.8 billion for the third quarter and it may lose a further $8 to $11 billion loss in the fourth quarter.Analysts expect the pain to continue into 2008 with expected losses of $4 billion.Citi has a direct sub prime exposure of $55 billion of which $43 billion is in CDO's. It has $135 billion in 'level three' assets.These include those assets which are not heavily traded, such as mortgage backed securities which are difficult to value, more so after the sub prime shakeout. According to Goldman Sachs Citi would need to write off $8 to$11 billion this quarter on account of sub prime losses and have placed it on' America's Sell List.'
Prince Talal acted swiftly and Charles Prince put in his papers Nov. 4th after an emergency board meting.But to say that Prince lost his job solely because of the sub prime investments would not be entirely correct.It had been rumored for several months that Prince's job was on the line unless he could show either impressive revenue growth or noticeable operating improvement. Shareholders were getting restless as the company's stock had not been going anywhere for several years. The only saving grace being the dividend of over 4%. The economy was clearly not in a position to allow the first option, so it had to be the second. After the sub prime loses came in it was unlikely that he could have continued.
It has been suggested that given its large workforce of almost 300,000 Citi can cut its workforce simply by reducing hiring and letting attrition do the work for them.But this strategy has the drawback that it affects all divisions uniformly and takes a bit too long to work out. The company needs to show decisive action and that it means business before the stock market will take notice and reward the decision taken. It is not too difficult for financial firms to find surplus workforce which can be laid off. There are always back offices and IT activities that can be hived off or outsourced. Fortunately for Citi, given its brand name it will be easy for it to find buyers for any such division if it ever decides to do so.The costs of cutting the workforce would be substantial, but small change for a company like Citi. But Citi has to ensure that its actions do not appear to be an act of desperation. Too large a cut and it may scare away potential investors in the short term due to the uncertainties surrounding the impact of such an action on its operations.
Meanwhile Citigroup shares were quoted at $30.47 in early morning trade Tuesday after the Abu Dhabi Investment Authority said it will invest $7.5 billion in Citigroup Inc. Sheikh Ahmed Bin Zayed Al Nahyan called Citi 'a premier brand and with tremendous opportunities for growth.' After this investment is converted into equity shares it will outrank the holding of Prince Alwaleed bin Talal. This investment is significant and it is likely to signal that the free fall in US financial stocks is coming to an end.
What really ails Citi? Citi has been growing a bit too fast for some time now.It has been picking up foreign banks and brokerage firms wherever it can, without giving too much thought to managing what it already has. The Nikko Cordial bid, picking up a stake in a brokerage firm in India, the Grupo Financiero buyout in Central America and continuous investments in China reinforce the image of a company that is growing by acquisitions rather than focusing on organic growth.The global sphere of its operations ( it is present in over 100 countries) has naturally led to a huge increase in expenses.In fact this increase had become significant enough for Prince Alwaleed bin Talal to remark to the effect that 'draconian measures need to be taken to curb expenses.' Incidentally the Prince is perhaps the largest single shareholder in the bank.
The tipping point has been the sub prime crisis.Citi has unveiled losses of $6.8 billion for the third quarter and it may lose a further $8 to $11 billion loss in the fourth quarter.Analysts expect the pain to continue into 2008 with expected losses of $4 billion.Citi has a direct sub prime exposure of $55 billion of which $43 billion is in CDO's. It has $135 billion in 'level three' assets.These include those assets which are not heavily traded, such as mortgage backed securities which are difficult to value, more so after the sub prime shakeout. According to Goldman Sachs Citi would need to write off $8 to$11 billion this quarter on account of sub prime losses and have placed it on' America's Sell List.'
Prince Talal acted swiftly and Charles Prince put in his papers Nov. 4th after an emergency board meting.But to say that Prince lost his job solely because of the sub prime investments would not be entirely correct.It had been rumored for several months that Prince's job was on the line unless he could show either impressive revenue growth or noticeable operating improvement. Shareholders were getting restless as the company's stock had not been going anywhere for several years. The only saving grace being the dividend of over 4%. The economy was clearly not in a position to allow the first option, so it had to be the second. After the sub prime loses came in it was unlikely that he could have continued.
It has been suggested that given its large workforce of almost 300,000 Citi can cut its workforce simply by reducing hiring and letting attrition do the work for them.But this strategy has the drawback that it affects all divisions uniformly and takes a bit too long to work out. The company needs to show decisive action and that it means business before the stock market will take notice and reward the decision taken. It is not too difficult for financial firms to find surplus workforce which can be laid off. There are always back offices and IT activities that can be hived off or outsourced. Fortunately for Citi, given its brand name it will be easy for it to find buyers for any such division if it ever decides to do so.The costs of cutting the workforce would be substantial, but small change for a company like Citi. But Citi has to ensure that its actions do not appear to be an act of desperation. Too large a cut and it may scare away potential investors in the short term due to the uncertainties surrounding the impact of such an action on its operations.
Meanwhile Citigroup shares were quoted at $30.47 in early morning trade Tuesday after the Abu Dhabi Investment Authority said it will invest $7.5 billion in Citigroup Inc. Sheikh Ahmed Bin Zayed Al Nahyan called Citi 'a premier brand and with tremendous opportunities for growth.' After this investment is converted into equity shares it will outrank the holding of Prince Alwaleed bin Talal. This investment is significant and it is likely to signal that the free fall in US financial stocks is coming to an end.
The Falling U.S. Dollar And The Sub Prime Crisis
The year 2007 will be remembered for a long time as the year in which the US dollar fell sharply in value and the US economy faced a crash in the housing sector.The dollar hit a new low of 1.4966 to the euro Friday and everybody is asking how much further it will fall and what is the Fed going to do about it. The worst affected by the fall are China, Saudi Arabia and Japan as these countries have the largest dollar holdings.The value of their huge dollar denominated assets has already shrunk dramatically this year.China and Japan are export driven economies and the falling dollar is hurting exports. Talking of exports even the EU nations are affected by a weak dollar.The US on its part seems to be content to let the dollar decline in value as long as the fall is orderly.In fact its exports have benefited immensely from the dollar weakness, rising 15% in the last 12 months, while prices of imports,except oil, have not risen in proportion as the exporting nations have been reluctant to increase prices in order to protect market share.The only section of the population to have been adversely affected are those traveling abroad for whom a decline in the value of the dollar translates into a decline in purchasing power.
At the recent OPEC summit in Riyadh, Iran And Venezuela called the dollar a worthless currency and floated the idea of an alternative currency.Although their remarks were certainly to spite the US, other nations like China,Japan and those in the Middle East seem to be quietly diversifying their holdings, although there is no large scale sell off of dollar denominated assets as yet.
Bob Shiller in his book 'Irrational Exuberance' (2nd edition) has analyzed home prices in the US for the last 120 years. For 100 years they were almost flat with spikes of 10 to 20% on either side. Then starting in 1997 home prices shot up by 93% in real terms.Part of the rise can be explained by demography, rising incomes and low real interest rates.. But they basically went up because loose credit and easy money created a bubble.The problem with bubbles is that you don't realize you are in one till it bursts.Suddenly prices started falling last summer and the trend is getting worse by the day.Although the supply of new houses has fallen the demand has fallen even more creating excess supply. Add to it about 2.2 million homes the banks will be saddled with due to foreclosures and there will be further downward pressure on prices.Slowing credit to the sub prime sector contributes to further slackening of demand and fall in prices. About $ 1 trillion in ARM's is expected to reset next year. Many people will not be able to afford the higher interest rates and will be forced to sell at depressed rates. It has to be remembered that a large part of the demand was driven by the 'condo flippers,' that is people who were simply buying houses with the intention of selling them later at a profit. Now these people are stampeding to get out to save as much of their down payment as they can.
Goldman Sachs estimates home prices will fall by a further 15%. Shiller thinks it could be as high as 50%.This decline will have a wealth effect and people will reduce spending on other goods.Signs are visible in the fall in auto sales and even in manufacturing.This is worrisome because private consumption accounts for 72% of US GDP. The housing sector is only 5% of GDP and a slowdown there is not enough to trigger a recession but a slow down in consumer spending is dangerous.So to prevent a spillover of the housing crisis to the other sectors of the economy, which may cause the US economy to go into recession, the Fed will have to cut interest rates even at the cost of higher inflation. It is this certainty of a cut in interest rates which is behind the slump in the dollar.
The Fed also has to cut interest rates in order to protect the financial system. We neither know the exact extent of the losses on account of this sub prime mess nor who has lost money. Banks and other financial institutions have admitted significant losses but it is feared that they will report further losses in future. Other losers are the investors in the CDO's and other similar instruments.It is speculated that China and other West Asian nations flush with petro dollars had made large investments in such instruments. For an orderly winding down of these investments cuts in interest rates may be the only way out.
But in the end we all have to remember that the dollar can only fall this much and no more.Not only is the US the largest economy in the world , it also has the necessary policies and financial institutions in place which allows both the entry and exit of hundreds of billions of dollars that other nations wish to invest.So once this crisis plays out the and the US economy strengthens again the dollar is expected to regain its position as the most important currency in the world.
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At the recent OPEC summit in Riyadh, Iran And Venezuela called the dollar a worthless currency and floated the idea of an alternative currency.Although their remarks were certainly to spite the US, other nations like China,Japan and those in the Middle East seem to be quietly diversifying their holdings, although there is no large scale sell off of dollar denominated assets as yet.
Bob Shiller in his book 'Irrational Exuberance' (2nd edition) has analyzed home prices in the US for the last 120 years. For 100 years they were almost flat with spikes of 10 to 20% on either side. Then starting in 1997 home prices shot up by 93% in real terms.Part of the rise can be explained by demography, rising incomes and low real interest rates.. But they basically went up because loose credit and easy money created a bubble.The problem with bubbles is that you don't realize you are in one till it bursts.Suddenly prices started falling last summer and the trend is getting worse by the day.Although the supply of new houses has fallen the demand has fallen even more creating excess supply. Add to it about 2.2 million homes the banks will be saddled with due to foreclosures and there will be further downward pressure on prices.Slowing credit to the sub prime sector contributes to further slackening of demand and fall in prices. About $ 1 trillion in ARM's is expected to reset next year. Many people will not be able to afford the higher interest rates and will be forced to sell at depressed rates. It has to be remembered that a large part of the demand was driven by the 'condo flippers,' that is people who were simply buying houses with the intention of selling them later at a profit. Now these people are stampeding to get out to save as much of their down payment as they can.
Goldman Sachs estimates home prices will fall by a further 15%. Shiller thinks it could be as high as 50%.This decline will have a wealth effect and people will reduce spending on other goods.Signs are visible in the fall in auto sales and even in manufacturing.This is worrisome because private consumption accounts for 72% of US GDP. The housing sector is only 5% of GDP and a slowdown there is not enough to trigger a recession but a slow down in consumer spending is dangerous.So to prevent a spillover of the housing crisis to the other sectors of the economy, which may cause the US economy to go into recession, the Fed will have to cut interest rates even at the cost of higher inflation. It is this certainty of a cut in interest rates which is behind the slump in the dollar.
The Fed also has to cut interest rates in order to protect the financial system. We neither know the exact extent of the losses on account of this sub prime mess nor who has lost money. Banks and other financial institutions have admitted significant losses but it is feared that they will report further losses in future. Other losers are the investors in the CDO's and other similar instruments.It is speculated that China and other West Asian nations flush with petro dollars had made large investments in such instruments. For an orderly winding down of these investments cuts in interest rates may be the only way out.
But in the end we all have to remember that the dollar can only fall this much and no more.Not only is the US the largest economy in the world , it also has the necessary policies and financial institutions in place which allows both the entry and exit of hundreds of billions of dollars that other nations wish to invest.So once this crisis plays out the and the US economy strengthens again the dollar is expected to regain its position as the most important currency in the world.
More on Interesting Life
US Exports Hit Record High In August
After months of crises the latest piece of economic news, which is quite encouraging is that the US trade deficit for the month of August has fallen 2.4 percent to $57.6 billion from $59 billion in July.This is the smallest since January according to the Commerce Department.
US exporters benefited from a weak dollar and strong overseas growth to notch up record exports of $138.3 billion.The decline in the deficit would have been larger but for the increase in oil prices.Significantly the deficit with China has dropped 5.3 percent to $22.5 billion.It seems that the efforts of the government in this direction are finally having some effect.This decrease has also been aided by the various recalls of Chinese made goods which affected their demand to some extent.
To appreciate the significance of this development it is necessary to understand why consistently rising deficits threaten to disrupt the US economy.A deficit as everybody knows arises when the value of goods and services exported is less than the value of the goods and services imported.In such a situation foreign countries and corporations are left holding dollars. Increasing deficits year after year imply that the supply of dollars with them also goes on increasing.The fear that is uppermost in everyone's mind is that a point will come when they may decide that it is no longer worthwhile to hold dollars, and they may decide to sell some of those dollars causing it to lose value sharply. This will lead to a spike in the prices of vital imports like oil for instance and place pressure on the US economy.In order to preserve the value of the dollar the US would have to increase interest rates which would affect economic growth, lead to unemployment and the entire vicious cycle would follow.
So far the US has been spared these consequences for some very simple reasons.The US economy was the only one which was large enough to absorb the huge surpluses generated by the oil exporting countries and countries like China and Japan.The US needed these dollars to finance its development needs as in recent times it has become a nation which saves less than it needs.So these trade surpluses have flown back to the US.Finally the US dollar has been a safe haven currency in an age of international turmoil.But now with the growth of the Eurozone economy and the rapid pace of development of the BRIC nations, coupled with a slowing of the US economy there is a real danger of the US dollar falling too far and too fast as people seek to shift to nations offering prospects of higher returns.
It is in this background that the decline in the US trade deficit assumes significance. Further declines coupled with a growing economy will result in a drastic reduction of the trade deficit as a percentage of GDP which will be desirable for the health of both the US as well as the global financial system.
US exporters benefited from a weak dollar and strong overseas growth to notch up record exports of $138.3 billion.The decline in the deficit would have been larger but for the increase in oil prices.Significantly the deficit with China has dropped 5.3 percent to $22.5 billion.It seems that the efforts of the government in this direction are finally having some effect.This decrease has also been aided by the various recalls of Chinese made goods which affected their demand to some extent.
To appreciate the significance of this development it is necessary to understand why consistently rising deficits threaten to disrupt the US economy.A deficit as everybody knows arises when the value of goods and services exported is less than the value of the goods and services imported.In such a situation foreign countries and corporations are left holding dollars. Increasing deficits year after year imply that the supply of dollars with them also goes on increasing.The fear that is uppermost in everyone's mind is that a point will come when they may decide that it is no longer worthwhile to hold dollars, and they may decide to sell some of those dollars causing it to lose value sharply. This will lead to a spike in the prices of vital imports like oil for instance and place pressure on the US economy.In order to preserve the value of the dollar the US would have to increase interest rates which would affect economic growth, lead to unemployment and the entire vicious cycle would follow.
So far the US has been spared these consequences for some very simple reasons.The US economy was the only one which was large enough to absorb the huge surpluses generated by the oil exporting countries and countries like China and Japan.The US needed these dollars to finance its development needs as in recent times it has become a nation which saves less than it needs.So these trade surpluses have flown back to the US.Finally the US dollar has been a safe haven currency in an age of international turmoil.But now with the growth of the Eurozone economy and the rapid pace of development of the BRIC nations, coupled with a slowing of the US economy there is a real danger of the US dollar falling too far and too fast as people seek to shift to nations offering prospects of higher returns.
It is in this background that the decline in the US trade deficit assumes significance. Further declines coupled with a growing economy will result in a drastic reduction of the trade deficit as a percentage of GDP which will be desirable for the health of both the US as well as the global financial system.
Simple Steps To Prevent Foreclosure
The housing boom which lasted till last year saw prices moving up rapidly.As a result home buyers not only had to put in that little bit extra to buy a home, but some also overextended themselves by buying homes they really couldn't afford. In order to buy homes people used innovative and risky schemes of financing such as no down-payment, interest only, negative amortization and piggyback loans which put the borrowers in a precarious position. The most popular was the Adjustable Rate Mortgage or ARM in which the borrower paid very low rates of interest for the first two years and the rates automatically reset thereafter at much higher levels.Such loans usually carry a pre-payment penalty to discourage premature repayment.
Things were OK as long as prices were going up rapidly, often on a monthly basis.People were confident that should the need arise they could sell their house, pay off the loan, and still be left with a profit.But with prices falling the homeowners are staring at losses and high interest borrowings which need to be repaid. Unfortunately the future is also quite bleak. many of the loans that will automatically reset after two years were issued in 2005 and 2006. It is feared another wave of foreclosures will hit the market in late 2007 and early 2008 further depressing property prices. According to Realty Trac Inc. foreclosure filings in August this year were 243,947 a rise of a whopping 115 percent over the same month a year ago. This figure is also up by almost 35 percent over the figure of 179,599 in July this year. Desperate sellers are unable to find buyers, and with realty developers offering steep discounts they find that the value of their houses has fallen further.
But there are some simple things you can do to prevent foreclosure.
The very first thing to do is to call your mortgage lender. Remember they are not in the business to foreclose on property. They will work with you and help you find a way to keep your house.Discuss your problem with them honestly and in detail. They can help you in many ways. Each case is usually considered on an individual basis. The lender usually starts with debt counseling He looks at all your outstanding debts to see if they can be restructured or consolidated. He can then help you prepare a budget to structure a repayment plan. He may also agree to extend the period of your mortgage which will reduce your monthly payment. Overdue payments can be added to the new loans. If you are working with your lender he may grant you extra time to get your problems under control. He may allow you to sell off your home and repay the entire loan. Alternatively you may sign the house over to the lender. This is a kind of voluntary foreclosure but you avoid the public notice of a foreclosure sale.Also if the house sells below the debt amount you may not be liable for the loss.As a last resort you may file for bankruptcy. Although this will severely damage your credit record for seven years, foreclosure proceedings are usually stopped till bankruptcy is resolved.
You can also tighten your belt, go in for strict budgeting and dig into various savings here and there to come up with that bit of extra cash which will see you through this bad patch and let you keep your home.Contact an HUD approved counseling agency only. Beware of scamsters who promise to get foreclosure proceedings stopped if you sign documents appointing them as your agent.You may be signing over the title of your property.
Act promptly and you may continue to enjoy the home you have bought.
Things were OK as long as prices were going up rapidly, often on a monthly basis.People were confident that should the need arise they could sell their house, pay off the loan, and still be left with a profit.But with prices falling the homeowners are staring at losses and high interest borrowings which need to be repaid. Unfortunately the future is also quite bleak. many of the loans that will automatically reset after two years were issued in 2005 and 2006. It is feared another wave of foreclosures will hit the market in late 2007 and early 2008 further depressing property prices. According to Realty Trac Inc. foreclosure filings in August this year were 243,947 a rise of a whopping 115 percent over the same month a year ago. This figure is also up by almost 35 percent over the figure of 179,599 in July this year. Desperate sellers are unable to find buyers, and with realty developers offering steep discounts they find that the value of their houses has fallen further.
But there are some simple things you can do to prevent foreclosure.
The very first thing to do is to call your mortgage lender. Remember they are not in the business to foreclose on property. They will work with you and help you find a way to keep your house.Discuss your problem with them honestly and in detail. They can help you in many ways. Each case is usually considered on an individual basis. The lender usually starts with debt counseling He looks at all your outstanding debts to see if they can be restructured or consolidated. He can then help you prepare a budget to structure a repayment plan. He may also agree to extend the period of your mortgage which will reduce your monthly payment. Overdue payments can be added to the new loans. If you are working with your lender he may grant you extra time to get your problems under control. He may allow you to sell off your home and repay the entire loan. Alternatively you may sign the house over to the lender. This is a kind of voluntary foreclosure but you avoid the public notice of a foreclosure sale.Also if the house sells below the debt amount you may not be liable for the loss.As a last resort you may file for bankruptcy. Although this will severely damage your credit record for seven years, foreclosure proceedings are usually stopped till bankruptcy is resolved.
You can also tighten your belt, go in for strict budgeting and dig into various savings here and there to come up with that bit of extra cash which will see you through this bad patch and let you keep your home.Contact an HUD approved counseling agency only. Beware of scamsters who promise to get foreclosure proceedings stopped if you sign documents appointing them as your agent.You may be signing over the title of your property.
Act promptly and you may continue to enjoy the home you have bought.
Dilemmas Facing Islamic Banking Today
One of the most interesting developments in the field of international finance over the last couple of decades has been the development of Islamic banking.Although this form of banking has been followed for centuries it is only recently that it has caught the attention of the world, when flush with petro -dollars many Islamic countries in the Middle East started to promote Islamic banking in their respective countries.This move was prompted by the desire to run their nations according to the principles of 'Sharia.'
Contrary to popular perception, Islamic banking is not against the idea of a profitable return on an investment. It is just opposed to the idea of interest paid on deposits or any other form of pre- determined return, which is considered to be 'Riba' or usury.Additionally these banks seek to channelize investments into desirable business activities and investments in forbidden businesses such as alcohol, gambling and pork etc. are banned.
Islamic scholars have long accepted the idea of profit sharing for Islamic bank depositors and borrowers as a proper method of compensation.Today Islamic banking is already managing funds in excess of $200 billion and it is growing rapidly.
Amongst the dilemmas that Islamic banks face in an increasingly globalised economy with fewer and fewer controls on cross border foreign exchange movements is that in order to attract depositors they must be able to assure a certain minimum return over a given time period. Too low a rate of interest on long term investments in an inflationary environment may just not be acceptable to most people. More importantly they need to be viewed as independent financial institutions and not as extensions of their respective governments which may require them to finance their welfare programs at the expense of their depositors.
All interest free banks agree on the basic principles but individual banks differ greatly from each other.These differences are due to the differences in the laws of their respective countries, the objectives of the individual banks and also the degree of their interaction with other interest based banks. These factors have inhibited the growth of a truly international bank which is so important these days.These banks also seem to be lagging behind in providing several modern banking and financial products and services which are in demand.
Finally there is increasing criticism, often in the countries' of their origin itself,that the financial charges they receive from their borrowers is nothing but interest called by a different name.
In spite of these problems the size of this industry, fed with an unending supply of petro-dollars, is simply too large to be ignored.In fact it needs to be studied carefully and suitably strengthened to meet the challenges posed by modern banking methods so that it is able to discharge effectively the role assigned to it.
Contrary to popular perception, Islamic banking is not against the idea of a profitable return on an investment. It is just opposed to the idea of interest paid on deposits or any other form of pre- determined return, which is considered to be 'Riba' or usury.Additionally these banks seek to channelize investments into desirable business activities and investments in forbidden businesses such as alcohol, gambling and pork etc. are banned.
Islamic scholars have long accepted the idea of profit sharing for Islamic bank depositors and borrowers as a proper method of compensation.Today Islamic banking is already managing funds in excess of $200 billion and it is growing rapidly.
Amongst the dilemmas that Islamic banks face in an increasingly globalised economy with fewer and fewer controls on cross border foreign exchange movements is that in order to attract depositors they must be able to assure a certain minimum return over a given time period. Too low a rate of interest on long term investments in an inflationary environment may just not be acceptable to most people. More importantly they need to be viewed as independent financial institutions and not as extensions of their respective governments which may require them to finance their welfare programs at the expense of their depositors.
All interest free banks agree on the basic principles but individual banks differ greatly from each other.These differences are due to the differences in the laws of their respective countries, the objectives of the individual banks and also the degree of their interaction with other interest based banks. These factors have inhibited the growth of a truly international bank which is so important these days.These banks also seem to be lagging behind in providing several modern banking and financial products and services which are in demand.
Finally there is increasing criticism, often in the countries' of their origin itself,that the financial charges they receive from their borrowers is nothing but interest called by a different name.
In spite of these problems the size of this industry, fed with an unending supply of petro-dollars, is simply too large to be ignored.In fact it needs to be studied carefully and suitably strengthened to meet the challenges posed by modern banking methods so that it is able to discharge effectively the role assigned to it.
Understanding Recent Stock Market Moves
The US housing market was a bubble that has well and truly burst.It is estimated that we are heading for 2 million foreclosures this year a figure not heard of since the Great Depression. What's more, the Fed's half point rate cut is not expected to stem the slide.Then there has been the sub-prime crisis.The top financial institutions of the nation have disclosed losses of billions of dollars on loans made to borrowers with poor credit histories. Retail sales are slowing and so is industrial output. To make matters worse energy prices are at record levels.
Yet the stock markets have proved everybody wrong with the Dow rising from about 12800 in mid August to 14066 on Friday, a gain of about 1200 points in a month and a half.
So what is behind this huge rally.Conventional wisdom would have had us believe that the housing crisis was bound to affect the other sectors of the economy causing stock prices to fall. At least that's what always happened in the past. But not this time round. So far the housing market crisis appears to have been contained in as much as it has not noticeably affected other sectors of the economy. The sub-prime crisis at one time threatened to get out of hand. But the Fed's rate cut indicated that it was willing to step in to inject liquidity into the system as and when required.This reassurance seems to have been all that the stock market needed.
The weaker dollar has also helped a lot.While the domestic economy has slowed, world economic growth has remained robust.The weak dollar has enabled top US corporations to increase overseas sales and reap bumper profits.It is these large corporations which have the largest weightage in the stock market indices.Record energy prices have ensured windfall gains for the giant oil companies.These too have a significant weightage in the indices. If these companies do well the stock market will continue to do well.
The disclosure of losses by the financial companies has been seen as a welcome sign of transparency and there is a belief that the worst is over.The latest jobs report shows that more jobs were created in September than expected and the August report was also revised upwards showing a rise instead of a decline.These figures indicate that far from a recession the US economy will continue to grow at a moderate pace.
Experts however warn that we are not out of the woods as yet and that the sub-prime crisis may come back to haunt us later in the year.Also interest rates are not likely to fall much further, meaning that easy availability of cash is a thing of the past.High interest rates also discourage merger and acquisition activity, which reduces premiums which are offered for companies' stocks. With less cash to spare buybacks by companies also get reduced and this depresses share prices.
Experts are clearly divided on where the markets are heading.Morgan Stanley says that its indicators are showing a 'full house' in terms of sell triggers.Many others predict that even if there is no collapse the markets have topped off. Some feel that the markets will be higher in December from where they are today.
Investors would therefore do well to closely watch events unfold over the next few months and take necessary steps to protect their investments rather than have things blow up in their faces.
Yet the stock markets have proved everybody wrong with the Dow rising from about 12800 in mid August to 14066 on Friday, a gain of about 1200 points in a month and a half.
So what is behind this huge rally.Conventional wisdom would have had us believe that the housing crisis was bound to affect the other sectors of the economy causing stock prices to fall. At least that's what always happened in the past. But not this time round. So far the housing market crisis appears to have been contained in as much as it has not noticeably affected other sectors of the economy. The sub-prime crisis at one time threatened to get out of hand. But the Fed's rate cut indicated that it was willing to step in to inject liquidity into the system as and when required.This reassurance seems to have been all that the stock market needed.
The weaker dollar has also helped a lot.While the domestic economy has slowed, world economic growth has remained robust.The weak dollar has enabled top US corporations to increase overseas sales and reap bumper profits.It is these large corporations which have the largest weightage in the stock market indices.Record energy prices have ensured windfall gains for the giant oil companies.These too have a significant weightage in the indices. If these companies do well the stock market will continue to do well.
The disclosure of losses by the financial companies has been seen as a welcome sign of transparency and there is a belief that the worst is over.The latest jobs report shows that more jobs were created in September than expected and the August report was also revised upwards showing a rise instead of a decline.These figures indicate that far from a recession the US economy will continue to grow at a moderate pace.
Experts however warn that we are not out of the woods as yet and that the sub-prime crisis may come back to haunt us later in the year.Also interest rates are not likely to fall much further, meaning that easy availability of cash is a thing of the past.High interest rates also discourage merger and acquisition activity, which reduces premiums which are offered for companies' stocks. With less cash to spare buybacks by companies also get reduced and this depresses share prices.
Experts are clearly divided on where the markets are heading.Morgan Stanley says that its indicators are showing a 'full house' in terms of sell triggers.Many others predict that even if there is no collapse the markets have topped off. Some feel that the markets will be higher in December from where they are today.
Investors would therefore do well to closely watch events unfold over the next few months and take necessary steps to protect their investments rather than have things blow up in their faces.
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