Saturday, 4 October 2008

Man Must Be Crazy

The two events that shocked the world. Big banks collapsing and tainted milk.

Both events have caused chain reaction. I didn't think such a great effect that the issue of sub-prime market will have on the financial industry. But after thinking a little deeper, I've seen some light to it. Due to the property boom time in US, banks are lending out to people and many were not checked for their credibility. As the values of the properties go up, property started changing hands and loans keep getting bigger. When it comes to a point where the borrowers are unable to pay back the mortgage, the crisis starts.

What goes up must come down. The property value starts to drop and many people are unable to fork out the difference (amount borrowed and lower actual value of property). Defaults starts to come in, banks are unable to provide interest payment to lenders and thus investors and depositors are affected.

The financial industry works like this. There must be people to lend and to borrow. There are banks, investors, etc who have the money and will invest on such investment packages. Such packages derived from banks packaging a whole lot of mortgages into investment products for investors to put their money in. Just like the Lehman Notes that DBS issued. When defaults occur, the banks holding such products are unable to fulfill their obligations to investors and incur debts (either interest payment or principal payment). Thus investors are affected with all their investments wiped out.

Banks borrow from other banks to finance mortgage loans and thus this domino effect that banks start crumbling as defaults rack the high notes, banks can't pay other banks. Debts will incur and thus the situation is similar to investors. The investments were wiped out and banks start to crumble.

The root of the problem is actually the greed of man. Individuals want to earn the extras through buying and selling, in the process loans are obtained from banks. Banks seeing such huge interest will definitely ride on the bandwagon and accept loans as their target is to earn the interest that individuals promise to pay (i suppose irregardless of credibility). And thus everywhere people are jittery about the financial outlook.

The tainted milk is also another case of greed. Low costs, high output equals huge profit will have drive many unscrupulous merchants to mix melamine with milk to produce high protein milk powder and products to earn the profits. People use efficiency in the wrong way. For the same amount of milk can produce more milk powder with the combination of melamine. There is no ethics in these merchants.

The victims are actually the cow farmers and consumers. From here we can see that the rotting part is actually the "in-between" of this whole process. To earn the difference, such acts to improve protein count by adding melamine is being used. We can foresee other "creative ideas" coming up and causing further damage to mankind. Man is truly crazy.

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