Socialistic syrup! Will it cure capitalism?

The playgrounds of capitalism are under deep recessionary pressure and they blamed by the world to
spread their pain across the globe. America the place where the capitalism nourished and flourished is
now became the epicenter of the entire crisis that spreads their wings in all sector of world economy.
The processes of rapid leveraging that picked its pace in the beginning of the current decade, which
pushed the US financial system into overleveraged territory. The US subprime model is the centre of the
economic turbulence. Earlier the US subprime model got their appreciation worldwide and they
mothered all the financial Tsunami globally. It led to overheating of Mortgage backed bond market
which was backed by rocketing real state value due to high demand of asset and easy availability of the
loans, send the US financial system in risky zone. The high profile ex-federal governor Allen Greenspan
who is known as architect of modern capitalistic structure of US .This model is based on risk sharing
system and this structure were well appreciated by majority of the economist and remarked by them,
that it is a full proof system. When deleveraging started the first crashed reality price, followed by
mortgage backed Bond , then Wall Street and then pain extended to the Main Street where all the
economy activity occurs and entire structure were started crumbling. Allan Greenspan commented on
the problem by saying that I haven’t anticipated that the system working properly from many decade
can collapse like this.
Fig: structure of subprime model.

With all the doom and gloom surrounding the banking industry from the toxic assets to the nasty
recession .When the overleveraged financial institutions started writing off their toxic assets the
balance sheets of the companies started deteriorating quarter after quarter since July 2008 when it
surfaced first. First big prey was Bear Stern, who requested the Federal Reserve for fund to manage their
day to day business. This was a shocking news who shook the financial world, Bear stern was the
respected name who lost in the credit crunch, once their share was at 167$ was smelling 1$ per share.
The company was on sale but nobody ready to buy their toxic asset ,finally the intervention of fed JP
Morgan bought the company on rare valuation of 2$ per share who revised the price latter on. In the
mean time many smaller banks like Meridian Bank , Amribank , silver state Bank, Integrity Bank, The
Columbian Bank and Trust, First Priority Bank ,First Heritage Bank and Bank of Aveda ,Douglas National
bank, Hume Bank, Main street Bank, ANB Financial, Indymac Bank, Washington Mutual started falling
like pack of card . Since the recession began in January 2008, the FDIC has closed just 39 banks—
25 in 2008 and 14 thus far in 2009.

And now it was the turns of big financial mammoth to fall that were facing the effect of turmoil. Initially
they thought that they can observe the shock but this was their wrong conception they found
themselves enveloped by the crisis that was nowhere near to an end .The Lehman Brother Pre
Bankruptcy Assets $691 billion filed the chapter 11 on 15th of september2008 this was the pivotal event
for the economy post Lehman Most of the investment banks lost their luster .JP Morgan, Morgan Stanly,
Bank of America and Citi Bank were downgraded and the share price of citi pulled below1$. Wall
Street's financial model has collapsed, and the business model of investment banks has threatened they
converted themselves into bank.

Credit crunch in financial system and deteriorating sales pressurized the Detroit and big names of Ford,
GM, Chrisler, Toyota, and Nisan became the falling storey and finally Christler the parents of renowned
jeep became case of chapter 11 protections after the Lehman brother who earlier lost in the financial
storm.

Heavy inventory were piled up, consumer expanding came down significantly, unemployment rate
started shooting up, and credit were dried from the system LIBOR at record high, aggressive write-off
were seen from the companies. Economy war in complete panic mode at that particular time.

Same show was on screen in the Euro zone first victim was BNP Paribas largest bank of France disclosed
that they have subprime exposure and this disclosure shocked the Euro zone and then many banks
including RBS of UK.

What is the socialistic syrup?

Falling financials soaring unemployment above 8% credit fridge and problem in real economy due to
free market policy forced the government to offer support of dialysis to the economy first central banks
across the globe started pumping the money in the system which was followed by following initiatives.
Socialistic syrup is all about the government support to the financial institutions and other companies to
save them from fall, the support was given by the Washington and other members of euro zone in the
form of massive bailouts and a special TARP (Trouble Asset Relief Program) of US government .The
taxpayers money has used by the governments to support the main culprits of the crisis. The
government has taken common share in the company and so it looks like the partial nationalization of
the mammoth like AIG, Citi, JP Morgan, and many more. TARP was designed to spur lending, but banks
now consider it a burden because it imposes too many restrictions, including on pay, and suggests that
recipients are weak. Bank of America took $45 billion from TARP, U.S. Bancorp $6.6 billion, BB&T $3.1
billion and Bank of New York Mellon $3 billion. Similar case happens in Europe where British
government has done with RBS and other troubled institutions. The nations who are great believer in
the free markets economy are using the socialistic tools to support the economy.

Dose number one: Fed landed up to $85 billion to AIG, and the U.S. government will effectively get a
79.9% equity stake in the insurer in the form of warrants called equity participation notes.

Dose number two: Aggressive policy rate cut near to zero to .25 by American fed reserve.

Dose number three: Massive bailout package of more than 850billion$ was fabricated by hennery
Paulson previous treasury secretary and passed by the Capitol Hill in second attempt despite of people
protest on main street .The taxpayer money were parked to toxic assets.

Dose Number Four: Tax incentive for the company and even the home buyers by the US government.

Dose number five: TARP plan of Timothy Gethner the new treasury secretary to help the banks followed
by the tax breaks for the home buyers and industries from Obama administration.

Dose Number six: The new buzzword is PPP i.e. public private partnership a typical term close to
socialistic world to save the collapsing system.

OUTCOMES:

The effects of the socialistic doses was quite helpful to arrest the fall .the first indicator came from the
credit market LIBOR rate who went at record high has started coming down significantly this was the
first indicator of thawing of credit system and at least some credit flows were started in the system
earlier which was dried up . Dowjones is significantly rallied up to 8600 close to 200DMA.Finencial share
performed well they rallied 200% to even more city was quoting .90$ is now more than3$more than
300% rise from low, almost similar move shown by the Bank of America,JP Morgan and other, the move
of US equity markets are followed by the global market .After aggressive write-down of losses the
balance sheet has shown some green shoots, but shoots are not the solution we need a proper tree to
bring the economy out of wood and it will take long time to convert into the tree.

Initially it looks that recovery is there and Capitalistic world escaped from demise and its credit should
be given to the socialistic syrup but how long it will help the economy to recover and what happened
when this oxygen will be removed only time will tell .Still the employment rate is getting higher and
higher and analyst predict 10% rate of unemployment very soon, Stress test results suggest that 10
banks from the 19 whose stress test conducted needed more capital in spite of the previous support
from the government. Many experts holding the opinion, that it is the short term solution of the long
term problems if it won’t work then what next? The government deficits are all time high inflation risk is
there in the system. A sustainable recovery will occur only when the corporate system will be cleaned of
losses and capitalism risks collapsing if this does not happen, Marc Faber, the author of "The Gloom,
Boom & Doom Report.

Pankaj Kumar