USA FINANCIAL CRISIS AND INDIA Gouher Ahmed

gouher@usa.net International Management & Project Consultant

Syed Abdul Malik

sa_malik_gec@yahoo.com Faculty, College of Business Administration, King Saud University, Al-Kharaj, KSA Abstract The world of finance has been in a crisis are for the last one year or so, commencing with the USA and spreading to the economies of the world like the EU, Japan, Russia and even, China. In the USA, the crisis is marked by age old failure or near failure of age old financial institutions like Lehman Brothers, within just in 2007 claimed very good topic and its CEO had a bonus of $ 40 million. In the states, the banking failure is attributed to what is known as Sub-Prime Loan for housing to all and sundry. The result is bad loan and lack of adequate and drying up of credit. The financial crisis has spread to the real economy in the form of a recession which is fear to termed into depression of the magnitude of the great depression of the 1930s. The major governments of the world are trying to tackle the situation through bailouts and stimulus packages. According to the Indian establishments, India is not going to be much touched by the crisis if growth rate of some 8 to 9 percent is going to hold good. But according to the first or preliminary symptoms, the Indian Economy is also going to be hit by the crisis , as already there is a crisis of liquidity in the economy and the estimates of the growth rates are also being lowered. India is also ready with some minor stimulus dosages, notwithstanding the All-Is Well stands of Ministry of Finance and the Planning Commission, MF, PC. A fair amount of freedom of action and market forces are believed to regulate the economy fairly well as it is an age of liberalization, privatization and globalization, where private hands are given. It stands for Adam Smith the father of economics, dictum that private enterprise is the best of the world and that the capitalists working for their own profits contribute to social good and maximization of production and human welfare, This, Smiths place of unbridled compeltion is said to be facing financial crisis which would spell doom across the countries and continents, say, as during the Great Depression, of 1929-34. It was also a fair world of competition and deregulation. But, prudence is the first principle of a free economy, particularly in respect of banks which deal with public money. The great depression was marked by banking crisis, unemployment rate soared past 20 per cent, and 89 per cent decline in stock prices (Taylor, 2009), about 660 banks collapse with public and public money or deposits worth 200 million USD (Samuelson, 1980).As then, now also top companies, blue chip, shares are going a begging at bottom-line prices, as that Citi group, after a 60 per cent fall, at 3.77(The Hindu, 2008a). Many companies shares have become just Junks. The financial institutions and banks being crucial, their failure and bankruptcies spell into the economic system. Banking is a very balancing act between liquidity and profitability. The act of good banking is lending as well as retaining, or lending and non-lending, lending to the true and non-lending to the false. A bank borrower may be more enticing then the good one. Hence, it is incumbent on the part of the regulatory authorities, and a good to for-ever monitor the financial flows, out and in. But, what happened this time? The story, say, as usual, begins with the giant economy and financial situations of the United States of America. Any American crisis appears to spell a crisis to the world economy at large and its various components, countries, because of the sheer size of the US economy and its world-wide sanctions. The path of the current financial crisis, as shown in Table-1 meaning crisis in the financial system marked by the failure or near failure of banks and other financial institutions, is the USAEUAsiaLatin AmericaAfrica.

The US Economy Any world economic survey begins with that of the major economy of US. It is an economy of great business icons (Business Standard, 2008a). TABLE 1 Structure of US Economy S.No Unit Value 1 Population (millions) (July, 2008 est.) 303.82 2 Population growth (annual %) (2008 est.) 0.883 3 Surface Area (Sq Km) (thousands) (2008) 9,632.0 4 Life Expectancy (% in years) (2008 est.) 78.14 5 GDP (billions) (2007) 13,811.20 6 GDP growth (%) (2007) 2.2 7 Agriculture (% GDP) (2008 est.) 1.2 8 Industry (% GDP) (2008 est.) 19.6 9 Services (% GDP) (2008 est.) 79.2 10 Export of goods & Services (% of GDP) (2007) 11 11 Import of goods & Services (% of GDP) (2007) 16 12 GDP per Capita (2008 est.) 48,000 13 Labor Force (millions) (2008 est.) 155.2 (includes unemployed) 14 Exports (trillion) (2008 est.) 1.377 15 Imports (trillion) (2008 est.) 2.19 16 Share in world trade (%) (2007) 12 17 Trade per capita (2007) 13,077 Source: World Development Indicators Data Base, World Bank, September 2008; Government of USA, CIA World Fact book, February 2009. In all the indicators, the economy stands out. The rate of growth of economy (3 %) is thrice the growth of population of 1 per cent, leading to some 2 per cent average incomes in per capita GDP. In trade, with its imports greater then exports, the US market offers good trade opportunities to the emerging economies like that of India, it is a fact. On the whole, the picture is that of a constantly expanding economy as a destination for many world exports. India has very close trade and economic relations with the US, so the US economy and its health is of vital interest to the country in which circumstances it is doubtful whether India can remain unmoved by any financial and economic crisis in the US, followed by EU, Japan, and others. The IMF, in 2007 itself, appears to have felt something amiss in the US economy and also of the world. In fact, the trouble appears to have started with the tragic event of the 911 attack on the WTC, World Trade Center, New York, which appears to have felt a great scar on the nation, starting the down-side. There is nothing to exult in the American financial and the resultant economic crisis, as some people may. By its sheer size, it rules the world economy. Hence, the immediate task is to put the American economy in order by rendering whatever one can do for it. Its no time to give lecture to the US how the US should have managed or should managed its economic affairs as some arm-chair people seem to indulge in. The great nation, it needs to be cleared, is capable of managing its affairs well. A new President Barak Obama, who became the President of the USA in January 2009, has signed a 787 billion USD package into law in February 2009 to rescue the economy from the throes of the crisis and one hopes that the good economy would be soon out of the crisis, particularly of confidence after the devastation of 9/11, and the skyrocketing expenses over Iraq and Afghanistan wars. What the great nation, which has stood by India in moments of its great crisis as the Indo-China war and the recent Mumbai terrorist attack of 26/11, is to regain, of all, its self-confidence to stride the world economic stage as a top player. Any downturn in the American economy is expected to have considerable impact on the Indian economy.

According to Ben S. Bernanke If actions taken by administration, the congress and the Federal Reserve are successful in restoring some measures of financial stability and only if that is the case , in any view there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery (Bernanke, 2009). A slowing US economy can exert spillovers in growth in both advanced and developing countries, affecting in particular countries with which trade and financial linkages are strong (IMF, 2007a). In the context, India has strong economic and trade relations with the USA (Ahmed, Gouher, 2008). If not anything, it is expected to hit the export target of 200 billion USD in 2008-09, with the country laying great store by exports and the consequent foreign exchange earnings and reserves. A healthy US financial and economic system of the US and a healthy economy of India appear to go together. According to official US trade statistics, bilateral merchandise-trade with India has grown from under $ 10 Billion in 1996 to nearly $ 31 Billion in 2006, a trebling in a decade. In 1996, India was the 32nd largest market or US exports and the 25th largest source for imports. By 2006, India had risen to be 21 st biggest export market for the United States and the 18th biggest supplier of imports. The United States total trade with India in 2006 exceeded that with Israel, Nigeria and Thailand (CRS, 2007a). Table-2 Indias Direction of Trade with USA ( million USD, Calendar Year) 2003 2004 2005 2006 2007 11364 4890 16254 12839 5981 18820 16363 7591 23954 20903 11100 32003 22831 19352 42183

2001 Exports Imports Total Trade 9355 4141 13496

2002 10308 4129 14437

Source: Asian Development Bank, Key Indicators of Asia and Pacific 2008, p.7 Thus the importance of the USA for India in the matter of trade is advancing. The US is No. 1 destination for Indian exports and almost an equal source of importance for imports, which can be seen from table-2. The importance of the USA for India in terms of FDI- Foreign Direct Investment- cannot also be overstressed. Although current levels of US foreign direct investment (FDI) are relatively low when compared to China, there is strong private interest in the Indian market for US companies in certain industries. Annual FDI to India from all countries rose from about $ 100 million in 1990 to nearly $ 6 billion for 2005, and then nearly doubled in one year to more than $ 11 billion in 2006. About one-third of these investments were made by U.S. firms in recent years, the major U.S. based companies Microsoft, Dell, Oracle, and IBM announced plans for multi-billion dollar investments in India. However, current India law restricts foreign ownership in many industries to varying degrees, making FDI less attractive to many US companies (CRS, 2007b). Thus, the grouse of the USA about India appears to be less liberalization but ultra-liberalization i.e. said to be behind the present financial and economic plight of the USA. The US economic system has stood the test of more than two centuries, as a booming economy, and has also been a model for others, following which the legendary central banker Alan Greenspan., even amidst the looming crisis, appears to have made a forceful plea for no knee-jerk reaction to contain the competitive markets (Greenspan, 2008)). Perhaps, though in a different context, George Soros, famous investor and philanthropist, is right in dubbing the present US crisis at the root of the global financial crisis and economic meltdown, American Mortgage Debacle(Soros, 2008). The crisis, in other words , need to be understood in proportions and perspective instead of either maximizing or minimizing it unintended, Soros appear to give hope for American and the world economy to come out of the woods as soon as possible with as little damage and human suffering as possible. The economy and its institutions are for just fault. For, there is a change of guard and a new president taking over amid the financial and economic storm. Though the storm is expected to be long all over the earth (Chithelen, 2008). The new President Barak Obama may turn out to another Roosevelt, who steered the economy out of the Great Depression, and take to the economy,

American and with it the global, out of the storm by the middle or the end of 2009. The economy, for the time being, is all the new presidential agenda. Unfortunately, former President George W Bush had all the time terrorism his agenda, and strong reservations about an intervention state. President Obama has no such historical baggage. He has a great vision of an American free from terrorism, stagnation and difference. One thing is a great Fed failure, not to have happened. The RBI seems a better one. In a globalized economy, any breakdown in a dominant economy as that of the USA, following the Dominic Effect (DE), is sure to cause repercussion in the rest of the economies, including that of India, first, psychological and then financial and real. Hence, seems to be the adage acceded to even by the IMF: If the United States sneezes, the rest of the world catches cold (IMF, 2007b). And, the impact, the cold, is expected to be of varying degrees, whether in high growth or low growth, from Mexico-Canada to Africa. Where does India stand in this? Is it also a distress point, a great nation of many distresses but seemingly mismanagement and Indias poor governance and a nation of millions of poor souls. Indias Emerging Economy India is an emerging economy with nearly two decades history of economic reforms of liberalization, privatization and globalization and global integration, but with yet planning, public sector, socialist goals and an interventionist state, because of a massive population and mass poverty (World Bank, 2007) .Yet, it is noted to be yet faithful to economic liberalization, which is a credit to the internationalism of the country. The country stands for world development. It is best with any and all development problems of education, heal infrastructure, democratic growth, unemployment, over population , poverty trade deficit, fiscal deficit and the like, notwithstanding of which it is forging ahead with a commendable growth rate of 8.0 per cent. For such a country, any setback to world trade and economic development is a setback to its own trade and development. Indias All is-well stand, if any, does not stand amidst the world turmoil and downturn. TABLE 3 Structure of Indian Economy S.No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Unit Value Population (billion) (July 2008 est.) 1.148 Population Growth (%) (2008 est.) 1.578 Areas (Sq. Kms, thousands) (2007) 3,287.3 Poverty Ratio (%) (2000) 28.6 Life Expectancy (2008 est.) 69.25 GDP (trillion USD) (2008 est.) 1.237 GDP Growth Rate (%) (2007) 9.0 Agriculture GDP (%) (2007) 18 Industry GDP (%) (2007) 29 Services GDP (%) (2007) 53 Exports/GDP (%) (2007) 21 Imports/GDP (%) (2007) 24 Exports (billion USD) (2008 est.) 175.7 Imports (billion USD) (2008 est.) 287.5 Capital formation (% of GDP) (2007) 38 FDI (million USD) (2007) 17453 Foreign Remittances (million USD) (2007) 27,000 Per Capita GDP (USD) (2007) 1018 Share in world trade (%) (2007) 1.66 Per capita trade (USD) (2007) 1018 Foreign debt (million USD) 153,075 Debt Servicing (% of exports) 7.7 Source: World Development Indicators Data Base, World Bank, September 2008; Government of USA, CIA Fact book, February 2009.

Indian economy is an developing economy on the worlds, economic stage, which would sail together with the rest in the good and bad waters. It is getting increasingly export and service oriented. The external sector of the economy is expanding, and it is closely linked with the USA and other developed and developing countries. Yet, poverty remains the most important problem of the economy, and agriculture is the main stay of the country, population-wise. And, above all, is the population in the neighborhood of 1.1billion, who on average are not afforded even a 3 USD per capita in one meal a day against the new poverty-line of 2 USD a day (Chen & Ravallion, 2008). The problem, therefore of India is how different sectors and sections of the populations are going to be affected by any downturn in the economy of the country as a result of global financial crisis and economic downturn. The world Banks view if India is that of a developing economy, quite fast in recent years following economic reforms,, which is well joined to world economy and its major economies like that of the USA, EU and others which can be seen from the following table-3 structure of the Indian economy. Items 11-22, broadly bring out the world links of the Indian economy. It is marked by trade imbalance following which exports are a major concern of the economy, for which the latest but very controversial innovation is the Special Economic Zones (GOI, 2008a). Following China, FDI is also an anchor of the economic development of the country, as amidst the present economic crisis, the Government of India has increased foreign capital formation in the insurance sector from 26 per cent to 49 per cent (Financial Express, 2008a). The country gets substantial foreign remittances which lend considerable support to the economy. The huge foreign debt to be serviced through export earnings. The economy is already 1 trillion USD economy which need to be boosted further through among other things the external sector. Poverty still remains the principal characteristic of the Indian economy, the poor forming a continental 30 or so Crore. Today, a higher rate of the economic growth is expected to bring down poverty in not very distant future. So, the poor too have great stake in proper functioning of the economy at a higher pace of 9-10 per cent, and it is to be seen whether this grow will come under any cloud in the present state of an upset world economy. The last five years or so are said to have been good in terms of the rate of growth for the country and India very much desires to maintain this momentum. Over the last five years, India has been one of Asias fastest growing economies. In nominal terms, Indias GDP grew from 24.5 trillion rupees in 2002 to 40.3 trillion rupees in 2006 an increase of 64 per cent in four years and is projected to reach 45.6 trillion rupees in 2007. When converted into real GDP using a purchasing power parity conversion, Indias GDP rose from $ 3.2 trillion in 2002 to 4.4 trillion in 2006, and is projected to increase to 4.7 trillion in 2007(CRS, 2007c). Now the question is whether this growth story would continue in the said global financial and economic crisis. For the situation is expected to worsen from recession into depression in 2009, which is expected to run into 2010 at least according to the present reckoning (Ghosh,2008a). The situation, in other words, is expected to be now a Great Depression, expected to give a new turn to the world as the Indian economy under liberal spell about which there are great reservations, as being not beneficial to the common people (Sen, 2007). It is a crisis of such huge dimension that it raises many theoretical and practical issues. Does it call for world super bodies? What for is central banks the FED, RBI, BOE, BOJ and others then? The Meltdown The financial and economic or real crisis, appears to travel from the USA, still the economic major of the world in spite of its multiple problems, to EU, Japan, and other parts of the world. The crisis of the present times either engulfing or likely to engulf the whole world is said to be of the dimension of the Great Depression of the 1930s, the epicenter of which was also the United States of America then also the worlds economic major, notwithstanding the glittering the sun-unsetting British Empire encompassing the Jewel of the Indian Subcontinent and other parts of the world. What a difference between the world of the 1930s and the world of the 2000s. There is no British empire now in the USA stands out as the worlds lone super power but is struck by a fall of its financial giants or empires- a tragedy which should not have occurred, causing so much of sorrow and suffering. More, and tragic, it represents a loss of face for America, as a nation not capable of managing its financial as so

many financial legends or affairs with prudence, as so many financial legends or giants or institutions are involved in the crash, like AIG, Bear Sterns, Merrill Lynch, Countrywide Financial, Fannie Mae, Freddie Mac, Wachovia, Washington Mutual, & Lehman Brothers, spanning three centuries, and standing out in the world financial system. The fall of these institutions is to be bemoaned as lose not just of the USA but of the world financial system. Does it call for a different world financial architecture? It is too large a question to be answered on the spur of a moment. The passage of time itself would show a solution to the problem, the present concern being whether it would slide into a depression of the sort of the 1930s Great Depression II, GD II, and whether it is going to be a long winter of 3-4 years . But having had the experience of the GD I, GDII, it is hoped, may not be that long in the interest of economic development of the world in general and countries like India in particular with the great problem of poverty on hand. India, however, alone, cannot do much either for itself or the world in general. The signals of recovery and restoration ought to come from the USA to be followed by the rest.. This time, a young and determined President of the USA may accomplish of recovery, restoration and the onward march of the economy sooner than later. After all, GD II may not happen and the tide stemmed soon. The Japan Prime Minister, Taro Aso unveiled a giant package of US$ 255 billion stimulus package to vowing that the Asias largest economy would be the first to beat a once -in-a-century financial tsunami, and said, This is a great global recession which comes once in 100 years. Japan alone cannot stay out of this tsunami (The Economic Times, 2008a). Whatever may be, the financial crisis and the consequent world-wide recession appears to be taken seriously and felt acutely. An example of it is Japans top Automaker, the revered Toyota Corporation, experiencing its first ever operating loss of 150 billion Yen or 1.66 billion USD for the operational year 2008-09 and the company appears to expect a troubled 2009-10 due to the trouble in the American economy wherein Toyotas cars appear to be good selling brands TMC Nagayoya, Japan is an example of good management for the others to emulate whether auto or non-auto, and is a Japans national symbol and a worldwide good auto brand. If this is the case of the never back-stepping company like Toyota, what of the rest. In 2007-08, Toyota had an operating profit of 2.27 trillion yen, when it sold 9.37 million Toyotas world -wide. Incidentally, but famously Toyota Motor Corporation President Katsuaki Watanabe has noted the present troubled economic times as the one that comes on once in hundred years!. The change that has hit the world economy is of a critical scale that comes once in a hundred years (Washington Post, 2008). Against Toyota, General Motors, Ford, Daimler-Chrysler, in Detroit, United States not just world-famous motor brands but also among the top symbols of America and celebrated management case studies. They had made, among others, the US a nation of wheels. But, the Big 3 have been on the verge of bankruptcy for some time and been requesting for help from the government and the government has bestowed a recovery and reconstruction package of 17.4 billion USD but on the condition that the big - 3 should come with their plans to reconstruction and recover, including of executive salaries, within 3 month by March 2009. Former President Bush felt the Big-3 to be too important to be allowed to go on into bankruptcy and liquidation , which would be quite devastating for the nation as a whole (McKinnon & Stoll, 2008). For, GM and Ford are the symbols of the auto industry anywhere. What of Indias Maruthi? But, with the case of the Big-3, there appears to be something wrong, fundamentally, with the American economy. There seems to be a fundamental disequilibrium of the US economy. Is the American spirit of innovation and entrepreneurship on the wane? Is the nations pioneering spirit on the decline? Thus, nation economic symbols after symbols are involved in the present economic crisis which cannot be estimated to be of any small magnitude. To continue with the auto industry, the symbol of 20th and 21st centuries economies, the Tatas or a big Industrial and automobile company and are a by word for steel and are also pioneers of the hospitality industry in India. Their landmark and historic Mumbai Taj hotel was devastated by foreign terrorists on the 26 November 2008 and the following two days, but the chairman of the Tata Group Ratan Tata brought it back into operation in less than of a month. That is the undying spirit of Tatas, the like of which make great entrepreneur and great industries which become their national symbol, and the JLR being in financial trouble once again the British government is said to have assured the Tata chairman Ratan Tata all necessary help to uphold one of the English national icons (Leahy, 2008a). Murmurs were a float in September 2008 about the

impending collapse of the ICICI Bank, the second largest commercial bank of all banks and the first among the private banks in India. The RBI Reserve bank of India as well as the Finance Ministry had stepped into assure the availability and the sound fundamentals of the bank, needless to say the depositors in the nationalized banks of India like the giant SBI-State Bank of India, No. 1 in the banking industry, have no cause to lose their sleep on account of sound RBI governance and the GOIs monitoring of Banks nationalization in India, some 40 years, back by the Late Madam Indra Gandhi as Prime Minister of India, is one of the independent great task of India, which has brought banking, hitherto a preserve of the haves, into the lives of the have-nots. In the present crisis situation also, the RBI is constantly monitoring the credit and liquidity situation by means of the monetary instruments of CRR, Bank Rate, SLR, etc., following which there is no danger of any financial collapses, banking and non-banking, in the country for the present. The financial intervention or state interventionism of the type of India is also held as an ideal or model for the non-interventionist states like that of the USA who exult in, against interventionism, marketism (EPW, 2008). Though banking and other financial institutions of note are intact, India cannot be said to escape from the world-wide financial breakdowns, economic slowdown and slide and churning, there being nothing special or isolationist about the Indian Economy. Origin of the present turmoil is in the financial breakdown of the USA, and other major economies, the epicenter being the USA. Financial Breakdown and Falls The path, it is needless to say, to economic development, growth, employment and income and consumption lies through finance, investment, entrepreneurship and good management or husbanding of resources or inputs to yield the maximum benefits. Finance is the economic life-blood, and the financial scene all over is marked by many institutions, banking and non-banking, major and minor, etc., and any fall or crisis in these institutions, particularly in the major ones, would have wide repercussions, national and international, big financial institutions have world-wide operations. Financial failures falls strike at the root of an economic system via credit, investment, employment and growth and consumption, and final economic meltdown or a long economic winter called Depression, an offspring of recession. In the first place this should not have happened in the USA, the land of management science, and top management schools and fat managerial pays particularly CEOs remunerations running into millions of dollars per annum, stock options, perks, privileges and whatnot . The CEOs are management royals, who appear to have failed in the sacred trust of safeguarding their monies? Then, why blame the entire system. Its, above all human/management failure and a reflection on the quality of corporate governance in the USA, the Mecca of management science and the world of education, MBA and all that, at the management temples of Harvard and other business schools (BSs). It is most unfortunate for the great American economy and society that its human or management factor is so getting lowered. Sorrowfully, the pre-eminent FED also appears to have failed in monitoring the financial system and calling it for discipline and duty. It has been famously noted by Paul Volker an eminent former US central banker. Simply stated, the bright new financial system-for all its talented participants. For all its rich rewards-has failed the test of the market place (Wolf, 2008). Only one wonders has the only management or human factor in the USA, said to be a place of discipline capitalism and free market economy reached such a low, as the one recent American corporate history scandal-ridden, makes one to wonder? It is a place of Warren Buffet like stalwarts, who standout all over not to say of talent like that of Bill Gates of Microsoft Corporation. Incidentally, Warren Buffets Hathaway is also reported to be in meltdown mode. Not that scandal is any American specialty. Near home India is no exception to them. For, while all this downturn is going all over, including India, when it is the time to put the things in order, Satyam, a major Indian IT firm, is caught in the web of unauthorized acquisition of companies at considerable cost, and the pointer is towards the management (Leahy, 2008b). In India, many lapses are attributed to bad governance in general and bad economic management in particular. For example, a good price inflation of around 10 percent, portending ill for the massive population of the poor country does not appear to be cared much(The Economic Times, 2008a). An example of this is rice price rocketing by more than 100 per cent, with prospect of another 100 per cent rise in 2009, in Andhra Pradesh the rice state of India, in 2008, breaking even the middle class family budgets, not to say of the poor household for whom rise is the heart and soul of their lean family budgets (Ahmed, Gouher), agriculture is struck by the shortage of fertilizers and seeds indicating enough meltdown of the farming sector. Food shortages and high food prices loom large on the Indian economy, greatly distressing the populace, to which the global meltdown may add the fire. President Bush is attributed with poor financial and macro-economic management, so

also GOI. That the American financial meltdown is largely its own making has been well noted by D.N. Ghosh, driving home some truth to the giant US financial bodies-failed, failing and wobbling-as well as the financial regulators, the eminent FED included. What is the game that has landed us in the present crisis? Everyone seems to know the answer, subprime crisis is the phrase on every lip. It is as if a kind of meteor from outside has of all of a sudden hit the banking system. Nothing of that sought! In plain language, what underlies the term subprime is irresponsible lending, lending to borrowers who do not full-fill conventional or standard credit criteria. Any first year student in a commerce school knows that the basic principle of banking requires that the quality of collateral be evaluated before public funds, of which the banks are custodians, are committed. It is the textbook principle that the major banks have been merrily violating for several years now. Massive house mortgage loans have been extended to non-creditworthy persons, those who do not have the inherent capabilities to honor the repayment commitments they have taken upon themselves. Why should poor borrowers, hungry for loans and eager to own a house, bother at when the normally reluctant lenders are so obliging? The lenders are happy to lend; they have the innovative genius to back up the loan with collateral that is, the hope that the property prices would always ride a rising curve it is this highly unrealistic assumption that makes the loans sub initio risky. Having knowingly created these risky assets, the banks then do the smart thing by moving fast to shake these off from their balance sheets. And lo, these risky assets, which none would have normally touched with a bargepole, are magically transformed into marketable assets in neat and attractive securitized packages. They dynamic and innovative investment bankers now step in and market these securitized packages with their stamp on it to investors across the globe. A brilliant piece of innovative banking, a win-win for all the banks are spared the requirement having to set aside additional capital for these risky assets while the investment banks make a killing from the distribution and sale of these packaged products, sanctified by the global rating agencies (Ghosh, 2008). Table -4 Government Bail-Outs in United States U.S. Government Bail Outs Name of U.S. Bank Recapitalization S.No. Bank $ US Billion Story 1 Fannie Mae & Freddie Mac 200 U.S. takes control of Fannie and Freddie 2 Wachovia 12 Citi Rescues Wachovia in $2.2 billion Takeover 3 Citigroup 45 U.S. Injection Lifts Confidence 4 JP Morgan Chase 25 5 Bank of America 20 6 Merrill Lynch 5 7 Wells Fargo 25 8 Goldman Sachs 10 9 Morgan Stanly 10 10 Bank of New York Mellon Up to 3 11 State Street Up to 3 Total $358 billions Source: Compiled from various issues of Financial Times. Perhaps, things, would not have turned out to be so bad if the fuel of oil prices, touching some $150 USD a barrel, thanks to the OPEC believing in making the hay when the sun shines, and inflation was not added to doddering financial system, particularly the big institutions of it, weighed down by bad loans and worthless securities/derivatives joined by a slowing economy, ending the housing boom which resulted in crashing house prices ending the dream of forever securitization(Shiller, 2008). Why the USA had hurt itself like this is too difficult to say. The full story, the financial crash, recession and depression if any can only be told after the end of

the tragedy by stalwarts. When the economy are back to normal. A second FDR is expected to come, to rescue the American economy and there by the major economies. (The Hindu, 2008a). Barak Obama? A Nobel Laureate (2008), the peoples economist, Paul Krugman, is for a second Keynes. The companies which have either fallen or come to the edge reads like the Who and Whose of the US corporate world, following which there is a shortage of credit liquidity and the consequent economic results of fallen investment, employment income and consumption, etc. Particularly, consumer spending is noted to have come down for the first time in three decades by Paul Krugman (Krugman, 2008). The giants which are fallen or down had impacted the economy quit adversely throwing it into a recession mode, thought though the FED has cut out interest rate to a no- more low of 0.5 per cent (The Economic Times, 2008b). Citigroup had misfortune or indignity of getting its name stripped off from Citigroup centre in Manhattan after 30 years of glittering sojourn there (Business Standard, 2008b). Citigroup to give 36 per cent stake to US government (Los Angeles Times, 2009).The Government have had two bailout packages, against its moral hazard principle, two bailouts packages of $ 700 bn and $200 bn, and more of them may come out, as the economy continues in a bad shape with a record level of unemployment of about 7 per cent, with every month Lakhs of jobs losses (Financial Express, 2008b), Under the circumstances, whether the projected growth rate of 2 percent in 2008 would be realized is quite uncertain. It had all happened in the course of a year, say, with Bear Stearns shares selling at more than $100 in August 2007 but the BS gone by August 2008 (March), and housing boom to housing bust (Kaiser, 2008). Also crude prices shooting from around $70 to nearly $120. It is a different matter that it has come down to below $40, much to the dismay of the ultra economic OPEC which however wants a push up by cutting down daily production. The price down is beneficial to India, which is greatly dependent on oil imports and its trade disequilibrium would not be as at $ 150 barrel. The vibration across the world of the US financial breakdown can be well imagined. According to the G-20 conference on 15 November, 2008 at Washington, it is no longer just an American Crisis and world cooperation is needed to meet it (The Hindu, 2008b). EU has launched a 200 billion stimulus package (The Economic Times, 2008c), following Paul Krugman and his Keynesianism and Depression Economics for the troubled times it is stimulus packages which are held as the remedy for including India (Editor-EPW, 2008). Meanwhile, there is any number of reformists, out to reform the national and world financial systems and their regulatory mechanism in their own mould (Jones, 2008), and expected Britton Woods II advocates. If the Nobel Laureate Joseph Stieglitz is to be believed, none is too big to be reorganized, and of course, too big to be regulated. In the circumstances the doubt is whether the FED had failed in seeing the coming storm. Indias Case The case of India in the crisis is different, even from the rest of the Asia, which does not mean that India is in best of its economic or financial and economic health and stands apart from the rest. The banking system of India is of a different genre, thanks to the late Madam Indra Gandhis nationalization of a major part of banking in two stages in 1969 and 1980, for whatever reasons, whether altruistic or selfish. Indias is mixed banking, a combination of public, private, foreign and cooperative banks, in which the public sector ones stand out preeminent. The beauty of the Indian banking system is the Reserve Bank of India (RBI), the countrys central Bank, which has steady eye on the banking system and its credit flows and functioning. Not that, there are no now and then, failure, mostly private and cooperative, of banks but not any national impacting failures. In the present also, there was a day or two fears about the collapse of the new private banks of ICICI, first among the private banks and the second bank in the country, but fears are any doubts, in the concept of global financial crisis and giant bank failures, for clear to be unfounded by the RBI (The Economic Times, 2008d). The Government of India, represented by the Prime Minister Dr. Manmohan Singh, an outstanding economist and the father of economic reforms. The country in the first half of the 1990s as an outstanding finance minister for the countrys economic take-off amidst a dire forex crisis, still recently finance minister and now Home Minister P. Chidambaram, an Harvard Graduate, had gone an assuring the soundness of the countrys banking system and the sound fundamentals of the economy (Singh, 2008). It was also said that the growth rate

of 8-9 per cent would be maintained at any cost, notwithstanding the rate of inflation touching a maximum of about 13 per cent, in more than a decade. Now the rate has comedown to about 7 per cent and is expected and assured to fall further, but as it is the rate is quite threatening to the poor, notwithstanding the GOIs declaration of its allegiance to the aam-admi-the proverbial street man The All is Well was a wrong stance to take. Even without the current global financial crisis, the economic management of the country is far from efficiency, economy, equity, concern for the common man, with the neglect of agriculture, forcible acquisition of golden harvest lands for hundreds of SEZs, greatly uncalled for and are akin to new zamindaris, rocketing food prices, steel, cement etc. (Ahmed, Gouher, 2009a), prices on a merry upward unbridled rise, single minded devotion to a Chinese type of growth model and rate, fiscal elitism of ill-timed pay-hikes, and not the least lack of internal and external security. The GOI, from the aam admi or common mans angle, appears to have the single point program of withholding and upholding 8-9 per cent growth rate, marks by the elitism of SEZs, FDI all over, conspicuous consumption, poor housing fast cars, privatization and neglect of public bodies of colleges, hospitals, etc. The coming year of 2009, by all indications promises to be far bitter year for the common man. It is an economy of farmers and weavers suicides. It is the falls reading of the situation to think that the Indian economy because of its sound fundamentals would remain unaffected by the global financial turbulence. Inflation, the GOIs own handy-work was not taken seriously even when it was running above 10 percent, and was viewed something like a handicap to the grand growth story, while the RBI was upping rates-CRR, rep. SLR-the GOIs concern had been with liquidity and growth, while the Raghuram Rajan Committee (GOI, 2008b) is believed to have suggested inflation targeting by the RBI. Hence, the RBI has been travelling up and down its rate curve as per the rise and fall in the rate of inflation. Meanwhile, the plea of Prime Minister to the Companies has been not to cut jobs. The Government is for the liquidity remedy, and also tax waivers and concessions to maintain the rate of growth at least at 7.5per cent, through not at the previous height of 9 per cent. Thus, the sound fundamentals of the economy appears to have been quite breached. There appears to be admittance of this breach and initiation of monetary, fiscal and stimulus measures with the intention of increasing liquidity, investment and growth. Following the RBIs substantial cut in repo rate from 7.5 per cent to 6.5 per cent and reverse repo rate 6.5 per cent to 5 per cent provision of some Rs. 40, 000 crore refinance facility for housing finance, etc, bringing liquidity released into the banking system to some Rs. 3 lakh crore on 6 November 2008, the Government had followed it on 7 November 2008 (Financial Express, 2008c) with a stimulus package of Rs. 20,000 crore and ceavat cut of 4 per cent, etc. (Business Standard, 2008c), of course, the stimulus package does not compare well with the Chinese package of $750 bn, representing some 7 per cent of Chinas GDP for the purchase of infrastructure and welfare (The Hindu, 2008c), but more of the RBI and GOI action is assured. It however, does not seem to be the end of the matter of a shaken up economy to be brought to order. There are many symptoms of the downed economy prominent is the crash of Sensex from >20,000 plus points, January 2008 to <10,000 points. The fall of the Rupee from 3.5 to 12.91 hit the US $ 200 billion export target, rising interest rates, to above 10 per cent, and credit and liquidity crunch. Fallen land values, dampening of construction and housing markets. Failed IPOs and IPOs share values some 13 million dollars FDI outsource. Some 40 million hit FOREX reserves, hit hospitality & tourism sectors, hit public finances, central and state and then on recruitments and company retrenchments, postponement of corporate expansion plans. About 50 per cent fall in market capitalization. Not the least is the loss of business confidence and unfavorable view of business climate (Ahmed, Gouher, 2009c). The condition, in more or less measure, are expected to lost till the end of the world crisis even though the Government and some financial experts feel that the end of the crisis may come sooner than later by about either the first or second quarter of the 2009. The full story of the crisis can come out only after its end. Conclusions The world or major part of it, is hit by a financial crisis of many trillion of USDs of dimensions, resulting in liquidity and credit crunch fallen investment, employment and consumption, which is likened to the Great Depression of 1930s. It is marked by fall of many financial giant Like Lehman Brothers which spanned three centuries of American life. It is attributed to sub-prime housing loans running into trillions of dollars and defaulted.

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To some, larger question of the system of free market unregulated financial and economic system is involved. It is a clear case of management failure-lack of prudence, foresight and responsibility. The US economy appears to be losing competitive edge. For the present, a state marked by recession which may fall into depression, the situation is being met with bailouts, monetary measures and stimulus packages. How long the winter of crisis is to lose is uncertain. Some optimist guesses are till the end of 2009, pinning hopes of president of America and his Rooseveltism or Keynesianism. India already in economic bad shape, had initial confidence of warding of the crisis due to its sound banking system and sound sound economic fundamentals, but had to succumb to the threat and is in recession, which it is attempting to meet with monetary measures and stimulus packages. It is confident of coming out of the crisis in a year at the most, but is likely to contribute with problem till the end of it in the USA, EU, etc., of which it has strong psychological and economic links. References 1 Ahmed, Gouher. 2008. New Trade Regime, India and America Trade In forthcoming Proceedings Volume of the International Conference on WTO, India & Trade Strategy, World Trade Organization Research Center, Indian Institute of Management-Kozhikode, Calicut, Kerala, India, December 26-27. Ahmed, Gouher. Forthcoming. 2009a. The Prospects of Poverty and the Poor. The Asian Economic Review. Ahmed, Gouher. Forthcoming 2009b. The SEZs Model of Development -A View. International Journal of Indian Development Review. Ahmed, Gouher. 2009c. India Inc. Response to the Global Economic Slowdown in the forthcoming Proceedings of the (Diamond Jubilee Celebrations) International Conference on Global Meltdown Opportunities and Challenges, University of Pune, Pune, Maharashtra, India, March 20-21, 2009 Allen, Franklin and Douglas Gale. 2007. Understanding Financial Crisis. Oxford University Press. New York. USA Bernanke, S. Ben. 2009. New York Times, 25 February. Bernanke, S. Ben. 2008. Essays on the Great Depression. Princeton University Press, New Jersey.USA (Orig. Pub. 2004). Business Standard. 2008a.b. December 15. Business Standard. 2008c. December 8. Chen, Shaohua and Martin Ravallion.2008. The Developing World is Poorer than We Thought Less Successful in Fight against Poverty. Policy Research Working Paper World Bank, Washington, D.C. August, 01. Chithelen, Ignatious. 2008. Global Financial Crisis: A long way from Recovery. Economic & Political Weekly, Volume XLIII, No. 36, September 6. Pp. 16-19. Congressional Research Service (CRS). 2007a. India-US Economic and Trade Relations, Washington, August, p.1. Congressional Research Service (CRS) .2007b. India-US Economic and Trade Relations, Washington, August, p.53.

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Soros, George.2008. A Danish Fix for Americas Mortgage Debacle, The Financial Times, August 11. Taylor, Nick. 2009. The Great Depression New York Times, February 29 . The Economic Times. 2008a. December 12. The Economic Times. 2008b. December 15. P. 8. The Economic Times. 2008c. November 2006. P.7. The Economic Times. 2008d. December 26. The Hindu. 2008a. November 11. P.26 The Hindu. 2008b. November 27. (Editorial). The Hindu. 2008c. November 11. P.13 Washington Post. 2008. December 22. Wolf, Martin. 2008a. Fixing Global Finance. The John Hopkins University Press. Baltimore, Maryland, USA Wolf, Martin. 2008. Seven Habits That Financial Regulators Must Acquire. Financial Times, May 8. World Bank.2007. India: Country Overview, Washington, DC

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