Water - The Elixir of Life

Water, the very word gives a feel of freshness and also apprehensions to all. Water is one of the most important natural resources that helps sustain life on earth. It is one resource that is unique and essential that makes life possible.  The fact that it is god of life has been taken lightly and ignored over time as we started moving towards commercialization and in pursuit of materialism. This vital natural resource is facing all forms of threats ever since the Industrial revolution. Water is prone to exploitation ever since the world has taken the path of globalization. This essential commodity, as it has become one in the modern era is fast depleting. It is high time that we start to act now in saving the most essential resource of the world, for as the consequences are serious in the long run that is even possible to take many lives and stop any form of life to exist in future. Water has become so scarce today and we have no time to save it as we already lost enough time and the fact is that it has serious implications both in short and long term.  We have to at least conserve it for our future generations to live life peacefully on earth and enjoy the gift of nature.

Food and water go hand in hand. From my very own experience I realized that one can live without food for a day but not without water. The sense of warmth one feels when seeing water, dying thirsty, has no words to express.  Water bears the feature of tasteless and odorless but no food in this world can be accepted and claimed to be as better as water when a person is in dire need of it. Water is the reason for life to exist on earth but the very resource that is essential for life is becoming scarce. The reasons are many. This problem cannot be looked upon from only one perspective as it is a resource that is widely used by everyone in the society for various purposes and is in great demand of all the other resources. Water covers 71 percent of the earth’s surface out of which 96%  of the planets water is found in oceans, 1.7% in groundwater, 1.7% in ice caps and glaciers and the remaining in large water bodies like lakes and ponds. Water is one of the most unique forms of nature as the resource undergoes a wonderful cycle to get accumulated in our planet known as the water cycle. The process involves four most important phase namely evaporation from water bodies on earth into the air, transpiration from plants and animals into the air, precipitation from water vapor condensing from the air and falling to earth through rains and finally runoff from the land usually reaching the sea.

Water is one resource that has got many uses and is used for various purposes. Water is known to be vital for any form of life on earth. Water can be classified into many types based on their use. One serious problem that we face today is water scarcity. This problem requires immediate attention, the ignorance of which has lead us to this problem and if we continue to do so the consequences are severe mostly life threatening. The issue of water crisis cannot be solved immediately as the exploitation and scarcity situation that we face today took a very long time to happen. This issue cannot be neither solved by one individual nor left to the politicians to be taken care of as the use of water by one person affects the other. This shows us how interdependent we are in using water. Hence a collective measure and attention is needed to address the issue. Though knowing the fact that it is vital for life to exist, why have we allowed ourselves to face this situation? How have we been contributing to make water scarce? This may sound ridiculous but that is what we have been doing, we have been contributing for this crisis to happen over the years. Who suffers?  All of us.  Water is essential not only for life but also for various purposes like  generating electricity, manufacture of certain goods, preparing drugs and medicines, cooking etc. The reason for water crisis is many. One of the common reasons in the developing nations like India is the increasing population and urbanization. Industrial revolution is the major reason for water stress in the western world. As demand supply gap widens in the emerging nations, more groundwater is being exploited. The estimate global population in 2050 is 9 billion, all of which will depend upon finite water resource. Global leaders talk about sustainable development but I don’t see this happening. We are only in the pursuit of economic growth affecting the environment and economic stability. Access to safe drinking water was once very easy, affordable and readily available but now people all over the world especially in the third world countries face acute water shortage. However, this problem is severe in developing countries it doesn’t mean that the developed countries have access to pure water. They have polluted the water resource and as I mentioned earlier water use is wide and interdependent, this issue has thus become a global concern.

Water being the most widely used natural resource in the world has got serious implications and impact on various sectors. The lack of water is also going to affect the GDP in the long run which is the primary concern of the government. So if the politicians are not going to find ways to conserve it I think they are going to miss on their goal. Many industries and service sector in our country depend upon water. The scarcity of water is bound to affect the growth and production in the long run. Today, nearly one billion people in the developing world alone don’t have access to safe drinking water. Water is very much related to health. The first and foremost problem that comes along with water scarcity is health issues. Worldwide, 1 out of every 5 deaths of children under five are water related diseases. Access to clean drinking water is essential for healthy living. Research and reports claim that about eighty percent of illness in the developing countries is linked to poor water and sanitation conditions. So not only water scarcity is a problem but the crisis comes along with another sub problem of access to clean and safe drinking water. Drinking poor water which contains killer worms and bacteria can pose serious threat to our health. The developed countries do not face this problem as they have sophisticated water systems but however they have contributed to wide amount of water pollution. Young children and infants are the one most affected by this problem as their immune system is weak during those initial years. Malnutrition and hunger is another severe problem in the developing nations. Lack of water is one of the major reasons for rise in hunger levels. Poor health directly impacts productivity in the economy.  Poor health also leads to poverty. Lack of education, awareness about safe drinking water, hunger and poor health are all correlated and cause the vicious cycle of poverty. Poverty is a big concern in the developing nations and a systematic approach to eradicate poverty includes access to safe water. Development be it infrastructure or social is feasible only when enough water is available. The villages in India face more problem in access to drinking water as they have to go a long mile to get water which is a very tedious process. Many dams and lakes in India have become dry. The Srirangaraya and cauvery, what was once a river has become a long stretch of dry ground. This is attributed to the lack of rain and good monsoon in our country. This affects the agricultural production as many lands in India require a large amount of water for irrigation. This has resulted in supply constraints in food and other essential commodities that depend on water as their primary raw material. This has contributed to various other problems like high inflation in food prices and reduced consumption demand.  Water scarcity also comes with economic scarcity and economic cost. Lack of water also affects education. Many schools in developing countries lack proper water facilities and sanitation. This affects students health and consequently academic performance. Water scarcity and lack of water leads to inequality. So now you can realize that we have been destroying water resource by exploitation and accumulating it with industrial effluents forgetting the fact that at the end it is we who are directly affected and going to face the deadly consequences.

As I said earlier that the water use is interdependent and everyone’s water use affects the other in more than one way. So what can be done to solve this growing issue? The most efficient solution and the one that has got importance in recent times is water cooperation. Cooperation is essential for water access, poverty alleviation and environmentally sustainable development. Over the years we have been running behind growth at the cost of environment and this has mainly lead us not only to a situation of water scarcity but also getting access to clean and safe water. The water bodies in India and the western world are intoxicated by industrial waste. So an environmental friendly and efficient waste disposal system is required to stop the damages caused to water resource. Cooperation also helps to a great extent in this regard. Water cooperation helps in achieving efficient water allocation to all by protecting social harmony and increasing human welfare. It can help in better management of water resource. With increasing privatization water cooperation can stimulate resource mobilization. Water cooperation requires multilevel inclusive and innovative approach. Cooperation is said to be effective but however in a country like India with huge population it is an extremely great challenge. Water is a public good and no one can be denied to get access to this natural resource. But it is really disheartening to see increasing discrimination in allocating and getting access to water today. Hence not only water cooperation is necessary, further, the government’s development policies should be consistent and in accordance with the water policy. The United Nations has declared 2013 as ‘International Year for Water Cooperation’ and it also dedicated the World Water Day (March 22) to water cooperation. The need of water will be truly realized in summer and as we are heading towards the hottest month of summer let us consider saving water. Being a chennaite I know the importance of water as summer is coming to its peak. This year we the people all over the world who are responsible for the present situation regarding water scarcity take an oath to join hands to conserve water and stop exploiting the resource. Let us minimize the damages caused to water and at the same time stick to economic growth by encouraging all the living beings in the world. Towards this let each of us be much more tolerant and sacrificial rather than adopting a competing strategy. Lets not forget the saying "Every drop makes an ocean"

The Indian Healthcare Industry - Past, Present And The Future

India has witnessed dramatic changes in various sectors since independence particularly after the post liberalization period. The economic reform and the government policies have been helping the economy and certain industries on various segments. The health sector is no exception to this. A good health is the primary concern of every individual and also for any government. A country’s economy can grow and be healthy only if its people are healthy. Providing and safeguarding the health of people should be one of the primary concern of a government. How has India achieved on this front? Its no doubt that the Indian healthcare sector has grown robustly in terms of technology and more number of hospitals. Privatization has helped to achieve this. Both these factors are vital and very much essential for a developing nation like India. Fortunately, India managed to achieve on this. But still as it is common in all the other sectors we face constraints and leakages in this sector too. Why? This cannot be taken lightly as it is the most important sector compared to others. Let us see how we have been progressing on various points concerning health.

India has always given importance to health since early ages as many medical practices have its root here which is growing popular even in the western world. Even during the pre independence period our emperors always had a health physician in their empire. India is known to cure many illnesses with its easily available natural ingredients like neem, turmeric, honey, aloe vera etc. This natural way of treating illness has gained attention among the western countries as it has been effective and cheap. Many form of physical exercises like yoga and kalary (the Indian martial art) is followed and learned by many foreigners now. India is known for its increasing huge population. Hence it is really important to take care of this growing population. The main driver of this sector is the growing population. The country has more number of young people. There is a wide gap between younger generation and older generation as the former dominate the mass of the population. This makes India a powerful and dynamic economy with more number of people being under the productive age. This stresses the fact that it is important to provide improved health facilities. When it comes to health facility we seriously lack in providing good access to health. The primary reason for this is we have very poor R&D which is not encouraging innovative and quality products and services. The reason for more number of hospitals is the new economic policy that encouraged private players and India’s obsession with infrastructural development in the recent years. We rank way behind in Human Development Index (HDI). Surprisingly, we have gone ahead in this ranking last year because of improvement in the life expectancy. Thanks to increased health care and other factors like changing lifestyle, our life expectancy has increased.  Healthcare has always been India’s one of the largest sector in terms of revenue.  India being an emerging nation constitutes more number of middle class people. Though India took the path of industrialization it is still considered as an agrarian country with the rural population being nearly three quarters of the entire population. And almost 27% of the people live below the national poverty line. Considering this, India’s health policy is targeted towards these people to get access to medical facilities and medicines at affordable price.

By considering all the factors surrounding the development of the Indian health sector we have come a long way in achieving the desired results. However, there are still some loopholes and problems that we need to sort out for the welfare of the people.  Development and growth as in all cases comes with exploitation. The bad part here is that it is the people’s health and money that is at stake with such exploitation. The growth of the Indian health sector reached its high since the new economic policy. The increased privatization and liberalization policy contributed to this high growth which encouraged commercialization of the Indian healthcare sector. This aspect of commercialization of health service has come with bad economic cost. We the people are the one worst affected by this process. As we are an emerging nation with huge population we are prone to hereditary disease and every day we hear some new disease and medicines to cure those diseases which are mainly because of the change in lifestyle and external factors. There is increasing level of deaths and diseases among men around the age of 30 to 40. Women also face huge health risk because of the increased work pressure and stress. Today both men and women go to work leaving their children at home who with no parental guidance and less time to be spent with their parents tend to indulge in bad habits that causes serious threat to their health like obesity and psychological disorder. Many diseases today manifest into multiple diseases finally affecting all the organs of the body. For example high blood pressure increases the risk of heart attacks, strokes and kidney failure. Because of this not only the patient but also their family members undergo a great trauma. The average expenditure of an Indian to buy medicines and get health services have increased manifold. This puts a huge financial burden on an individual that eventually affects savings and the real income.

The truth is that most of the diseases in India are preventable and curable. But still we see high mortality rate particularly among infants. As we know the diverse nature of our economy, India has the potential to address many of its challenges with its unique home grown resources. Considering this, it is really hard to accept that India loses 4000 children under the age of five everyday. This figure is really hard to digest for a developing country. India accounts for the largest number of deaths of infants primarily because it has failed to provide them and their mother’s access to critical health care. The vulnerable sections of our economy find it difficult to meet the expensive sophisticated medical treatment. Though the government hospitals provide services at affordable prices they lack in providing efficient and immediate treatment because of which we lose more number of people. India has the attitude not to talk about healthy practices publicly since the age of our great ancestors. This has reduced the awareness of many heath related issues and is considered to be the main reason for this huge mortality rate. However, the situation is now different.  People especially the next generation are being increasingly health conscious. The internet and newspapers regularly throw light on health related issues helping in creating awareness among the public. Thanks to globalization and the internet era all information is within reach. As our country is vast, the states have shown wide variations in some of the key health indicators. Tamil Nadu, Maharashtra, Karnataka and Andhra Pradesh have reduced their infant mortality rate by 7.25% of the national average. Haryana and Bihar with a decline of just over seven percent, manage to touch about the national average. Jharkhand, Rajasthan, Madhya Pradesh, Punjab, West Bengal and Uttar Pradesh are just below the national average. The Maternal Mortality Rate (MMR) has decreased steeply in the last five years. This variation in heath indicators is because of the wide disparities in healthcare services within the states. Its high time both the Centre and states address these disparities in order to achieve its 12^th plan goals.

Globalization has helped our healthcare sector in more than just one way. The information technology sector has transformed the country’s economy and is currently helping expand access to a wide range of quality services for some of the poorest in India. To what extent we have benefited from this technological advancement? A country like ours with such a huge population and disparities among different class of groups cannot be totally acquainted with such rapid technological development unless we formulate our health policy targeting the vulnerable section of the society. There is a lack of transparency in our healthcare sector. Many people from the rural areas who come to city in search of treatments that they don’t have there are prone to fallacies and medical marketing here. People from the poorest group with no awareness and primary education sometimes fall victim for the advanced medical treatments. The technological advancement has sure brought good infrastructure but not those feasible medical treatments to all. All families in India deserve equal access to health innovations that could help and protect children. It is unacceptable that children in India die of preventable and treatable illnesses. Some diseases that affect children are life threatening for example children who suffer from malnutrition are more vulnerable to the causes of diarrohoea which in turn perpetuates malnutrition and leaves children prone to infections. Its really unimaginable to see children dying of malnutrition in this 21^st century.

How has the pharmaceutical industry helping our healthcare sector in providing access to important drugs and medicines?  The pharma industry is the little brother of the healthcare industry. The Indian pharmaceutical industry is very small as the industry is dominated by the foreign players and there is little scope to the domestic players. However, the situation is changing over time by effective policy reform that is encouraging domestic players. Having taken global strides in the past, the domestic pharmaceutical industry now finds itself in the thick of history in the making. Many prominent domestic companies like Ranbaxy, Anji Reddy and Biocon have been benefitted and making marks in recent years since India amended its patent act in 2005. The pharma industry in India finds itself at the base of steep climb. They are finding it difficult with increasing cost of research and enforcement of Intellectual Property (IP) rights. IP protection is the key factor in the global arena as companies protect data in the course of their research and innovation. There are covert moves in the global pharmaceutical industry involving IP. And a constant worry for the local drug makers is whether such property is being secretly brought into the trade framework. The recent move of Supreme Court by rejecting the patent plea by Novartis is welcoming and appreciated by many in the industry that allows to produce generic version of expensive drugs made by foreign companies. Its really nice to hear that India encourages local drug makers to manufacture generic drugs that are cheap and affordable. India is also the world’s biggest provider of cheap medicines. Though this fact is all that encouraging, it does not bring joy to some people. The TV show Satyamev Jayate hosted by actor Aamir Khan threw some light on the dark side of the Indian health sector. People in some states were forced to buy costly drugs prescribed by the doctors. Though the government has been motivating the domestic manufacturers, big hospitals are running behind reaping profits by not prescribing generic version of the same expensive drugs. The global drug prices are heading upwards as a result of increasing demand in the global market. In such a scenario producing generic medicines help in a long way. The Indian companies like Natco, Glenmark, Cipla and others are constantly fighting over the patent related battles by the foreign MNCs. Considering the fact that our country is still an emerging nation with great challenges generic drugs do more good than anything.

There is tremendous scope for the healthcare industry in the near future. The industry is bound to see developments on various fronts as a result of the ever increasing population, medical tourism and unconventional thinking of the domestic players for better operations. Good health policy and the government opening up its arms to Public Private Partnership (PPP) will be the key factors which would drive the future of healthcare in India. The insurance companies play a key role in the development of the healthcare industry by providing good health insurance for the wider audience. If this happens then there will be immense opportunity for new and existing hospitals across the country to reorganize their structure and lure their customer base as the competition is likely to get headed up soon. This means, the patients have a lot to choose from, being insured. The senior citizens will be provided space and access to advanced medical treatments once they get hold of a good health insurance that provide them with good benefits. According to a report by Mc Kinsey, Indian healthcare industry will be worth $125 billion in the next five years. Considering the move of the government towards fiscal consolidation the healthcare is no way a victim to the target of controlling the high fiscal deficit of our country. Public spending is likely to increase beyond 20%.  With the personal disposable income of the younger people in India increasing as they have started to work early, the demand for better quality healthcare services is bound to rise. To meet this growing demand reinventing business models that suits the new challenges and the changing generation would be better. The international organizations like WHO and UNICEF has also extended their hands in helping the industry to solve some of the growing health issues. Keeping aside the development and the negative aspects in the healthcare industry it is always wise and good to stick to healthy practices that alone will help us in long way and enjoy the fruits of this beautiful life.

It’s not economics

It’s not economics - Business Line

The Euro Crisis

The European Sovereign debt crisis is yet another serious crisis after the financial crisis that is threatening the European Union countries and the whole world. The euro crisis like the US crisis actually started long time before but the European Union countries felt the pinch soon after the global financial crisis. The euro crisis is a result of various factors not a single factor as is the case with the US financial crisis. The Europe is a large continent that has been in power for a long time since the World War II. The Eurozone consists of twenty seven member states. The crisis started at a time when the world was entering into the timeframe of globalization. As is the case with the US crisis, the euro crisis started from the beginning of the 21^st century. The primary reason for the current Eurozone crisis is mismanagement in government fiscal policies. The whole world is facing the dose of the crisis as the world now has become even more global and complex. So no country be it advanced or emerging is spared from the Euro crisis which is now paving way for a next serious economic crisis of all time.

The European sovereign debt crisis is simply the inability of the government of European Union countries to pay off or refinance their public debt. It all started when the member states of EU forgot the treaty they once signed and agreed in 1992. According to the treaty the member states in Euro area agreed to limit their deficit spending and debt levels. Some countries in the euro area experienced high growth post the world war. Countries like Germany and France faced hyperinflation in 1970s. These were some of the important indicators in EU history that urged their governments to go for a drastic government spending to boost growth. This policy suit over the years has resulted in huge debt levels. The essence of which is now growing like an epidemic in Eurozone area where country after country is following the line of serious breakdown.  The first country to feel the crisis was Portugal later joined Greece, Italy, Ireland and Spain what came to be known as PIIGS. This crisis is something new to the advanced countries as they never really experienced such a serious debt crisis since the industrial revolution in 1760. The degree of risks associated with the crisis varies to each country but all are travelling on the same boat that is about to sink. Although these five countries were seen as being the countries in immediate danger of default, the crisis has serious consequences that extended beyond their borders.

The most surprising part to be noted here is that this huge level of debts was because of high government spending and subsidies with not an equal amount of increase in government revenue that resulted in high economic growth in the last decade. Then why aren’t they able to repay their debt? The answer is very simple they created alarming levels of debt but not that high growth to repay the debt. The debt to GDP ratio was continuously increasing. The European Union countries did not generate enough economic growth to pay their loans. So to what the government happily spent actually did not help but later only resulted in slower economic growth causing a serious economic collapse. This how surprising economic policy is all about. You just cant predict the exact outcome of an event. But with careful analysis you can formulate right policies that can be fruitful. When growth slows as is the current situation not only in EU but in almost all countries so does tax revenues resulting in high budget deficit becoming unsustainable.  The countries like Greece first initially tried to act as if there was no problem with their economy and hide the debt situation for a very long time but in late 2008 the debts was so large that they actually exceeded the size of the nation’s entire economy so that they could no longer hide the problem. As a result of which people started to protest on streets demanding rights. Investors in Greece demanded higher yields on government bonds which raised the country’s burden and necessitated a series of bailout packages by European Central Bank (ECB) and also IMF. In late 2009 the fear of sovereign debt crisis developed among investors as a result of rising private and government debt levels together with a wave of downgrading of government debt in European states by the credit rating agencies.

The European crisis is a result of a combination of complex factors. But all these factors resulted in one single problem, that is huge debt. So now keeping other factors that contributed to the crisis such as globalization of finance, easy credit availability, high levels of private debts, troubled banking system etc aside lets look at the outcome that we face out of all these factors. Debt level is generally related to Current Account Deficit (CAD) and Current Account Surplus (CAS). CAD is where imports are more than exports and the CAS is just the opposite where exports of a country are more than the imports. Apparently the CAD results in less foreign cash inflows and CAS attracts large cash inflows to finance their debt. Government spending is categorized into discretionary that involves defense and others and non-discretionary spending that involves medicare and social security. Government expenditure is also met through debt services like principal and interest payments by the borrowers. One of the primary insights discovered after the euro crisis is that EU countries faced a huge mismatch between their government revenue and spending. To keep this imbalance in track the government not only raises the tax to generate revenue but also sells bonds and treasury bills which are bought by large financial institutions. This is associated with a concept called the Fractional Reserve System according to which more money comes into the financial system that in turn creates new money in circulation in the market which causes an inflationary pressure on the long run. The money in the banking system affects the financial market and credit system. When the money is more and the banking system in general is healthy it amasses huge amount of money and has stronger ability to give loans but on the other hand when the money is low and the system is unhealthy the ability to make loans becomes less. This is the reason why the banking system and the financial market together are so volatile. The inability of the banks to make loans to business affects economic growth on the broader economy. The banks sometime borrow money from the central bank when they have less credit to keep their business going. They keep their government bonds and other assets as collateral and get money from the central bank out of thin air. A small move in the interest rate can cause a crisis. The increase in the interest rates can make the government bonds costlier and worthless. A slight increase in the interest rate causes a great mismatch between government spending and revenue. As this situation arises the banks are in big trouble. The process goes like this, the banks as a lack of credit borrows money from the central bank. This results more money in circulation in the economy. The money borrowed is used to buy more bonds from the government and thus making the open market and the stock market weaker. The ECB is restricted to print more money but then why they have resulted in high debt level. It is because the banks in the EU that caused the dirty picture.  They kept the loans they borrowed from central banks as collateral in buying more government bonds and showed those bonds as collateral to the banks. This over the time resulted in bad debts and investors walked away from investing in the financial instruments of these banks. This is reason the banks went insolvent in 2009 and required large bailout packages to stay in the market.

The government bonds are no longer risk free and became worthless with huge government debt level. Now since the financial market has broken down and people lost confidence in bank deposits and interest in government bonds the EU countries like United Kingdom followed the concept of quantitative easing which is nothing but creating or printing mere money out of thin air. The central bank then bought bond from government which is an indirect way of financing the deficit and spending. Now it is all known that increased attachment to one single policy or activity for a very long time causes a crisis. This is what called as bubble burst. It was housing bubble in the case of US financial crisis and increased spending of European Union government that raised huge debt level. Both the action proved to be working out well for sometime but the lesson one had learned from the ongoing global economic crisis is that all the policies work well and reap benefits in the short run and the politicians and policymakers have to find alternative policies from time to time and implement them to have a sustainable growth. Sticking to the same policy for a long time poses a serious threat in the long run which cannot be mended as easily as is the current situation the Eurozone countries are facing. The latest to join the crisis is the small country of EU, Cyprus.  The banks were shut down for more than a week following the crisis. Its really hard to imagine the banks in Cyprus went bankrupt because this is a country with very small population and the one that once financed the government debts of other European Union countries. The EU has definitely taken action since the crisis reached its peak but is slow as it requires the consent of all other nations. The major course of action so far have been providing a series of bailout packages to save the banks from going bankrupt and troubled economies. The Eurozone member states have created the European Financial Stability Facility (EFSF) to provide financial assistance and emergency lending to countries facing financial difficulty.  The crisis has affected the economic growth as industrial production is getting weaker and many industries like auto sector and shipping have been hit hard by the crisis. This resulted in weak stock market and low investor confidence. The unemployment rates are increasing and people are on streets protesting and moving to other countries outside EU looking forward for better career prospects. The banks also on their part forced the European Union governments to introduce austerity measures. This resulted uproar among the public leading to a change in political parties and political turmoil. The austerity is not the real answer to solve the crisis as it only affects the economic growth which means lower tax revenues for countries to pay their bills in the long run.

Now its clear that whatever maybe the situation, the reason for the huge level of debts is because we are in the pursuit of economic growth ignoring all other factors like financial and environmental stability. People and government all over the world are interested in perpetual growth since the industrial revolution.The continuous urge of the people to improve their standard of living at any cost is called as Hedonic adaptation. The motive of the people or government for that matter, to improve their standard of living is not wrong but what they fail to understand is that the economic and personal growth should be in accordance with the current debt. One of the most important concepts in economics is the opportunity cost. It is the value of the best alternative foregone. Every decisions that we make today have an opportunity cost. If we want to pursue only growth and personal well being then we tend to affect the economic and environmental stability in the process which in future have a cost to pay. And that is mostly serious. Economic downturns following economic crisis are deep and persistent.It is because the global economy is complex and dynamic as everything is interdependent due to globalization. So weighing down between the different situations at hand is essential in making wise decisions that can avoid many problems in the future. The euro crisis that we witness today is just the beginning of a modern debt tragedy.The present situation in Eurozone seems to be gloomy and thus the global economy is heading towards another serious economic disaster perhaps even worse than the one that hit the world in 2008. Its high time that the world leaders work out together to solve the immediate crisis, if not, we have to pay badly as the consequences are very serious. The clock is ticking faster! Leaders please wake up!

The Global Financial Crisis

The global crisis that struck the world in 2008 starting with the USA and soon to the rest of the world is still in the air making both the developed and developing nations suffer a series of serious consequences. At a time when we were thinking all is going well and people are enjoying the fruits of policies laid down by their government a sudden destruction changed everything and proved what we perceived to be wrong. What exactly is the cause of this serious destruction? Why is it hammering the whole world? This is considered to be the greatest recession since the great depression of 1930. A simple failure of few major banks has turned the whole economy leading to recession followed by a serious financial crisis.

The financial crisis also known as the credit crisis is an outcome of the breakdown of the financial institutions of the USA. The financial market is generally a risky and fragile market that has a potential to destruct the whole economy not to mention the whole world as it is the market that deals with money and all its transactions. The entire economy with industrial sector, manufacturing sector and service sector depends upon the financial institutions like banks and insurance companies to run and maintain their business. Any business organization can get funds to run or expand their business by two sources.  One that is well known is from banks known to be an indirect source and the other by issuing bonds and stocks the direct source. Let us concentrate on the indirect source, banks as it is the central theme of our discussion here. By now we all know that the failure of big investment banks like Lehman Brothers and Merrill lynch caused the US financial market to break down leading to crisis. A few banks were already going bankrupt. So what is the reason for these big banks to lose control and go bankrupt?

One of the fascinating truths about the market is that it gives us all the clues and signals about the economy doing well or bad. But the sad part and hard fact here is we fail to notice and interpret those signals then and there. But this is simple said than done. As it is with our life the whole world and all the economies is faced with uncertainty and this factor cannot be ignored while making predictions. Anyone who does so is at his own peril. This is where some great economists and policy makers have failed. Economics is a field that is confronted with uncertainty, little speculation and huge risk. Hence running an economy is an uphill task and no single group can be rightly blamed as it is the role of the politicians, policymakers and economists together to drive the economy in line with their own objectives. So in such a place where there are groups of people involved in decision making and where lives of millions of people are at stake, conflicts among the different groups are inevitable. The government’s primary objective is to drive growth and that of policymakers is to control macroeconomic instability like inflation and unemployment and that of an economist is to observe the past data and accordingly suggest policies for future course of actions keeping in mind about the welfare of the people and economy as a whole. Economists call such conflicting behavior and interests among the different class of groups as “principal agent problem.”

If you had observed the past data of the USA you will know that there exists a pattern in all the key indicators like inflation rate and money growth. The US data way back from 1860s tell us that there is a strong relation between the rate of inflation, long run cycle of money growth and more importantly government regulation. If you had read the book the great depression of 1990 by Dr. Ravi Batra you will know all these facts. Since the three most important indicators in analyzing the performance of a country have been following a set pattern it is obvious to think that the recession and depression also tend to follow a similar pattern. If you again look in the data you will see that the US economy has followed recession and depression in a periodic cycle. The recession occurred every 30 years and depression every 60 decades. This cycle in economics is known as the business cycle with periods of boom, recession, depression and recovery. If you observe you will understand that most of these depressions are caused because of a bubble burst. A bubble is something that is created by the economic agents in the market thinking that it is good and will bring better prospects to the people. Hence with this kind of an intention the agents along with the government create more such bubbles by aggravating it. Eventually as in any case these bubbles tend to burst leading to crisis of varying degree.

One such bubble that caused the recent financial crisis in the late 2007 is the housing bubble in the USA. The very beginning of the 21^st century came with this financial crisis. The crisis that we are experiencing now started in 2001 from the attack of the world trade Centre. America, at that time was already suffering and was into a recession because of the dot com burst. Stock market had crashed and investors were losing a lot of money. Businesses were on the brink of shutting down. The Federal Reserve the central bank of the United States of America soon started reacting to the slowdown and save the economy from a severe crisis. But what they actually did was creating more trouble on the wake of a crisis. The Federal Reserve started with lowering the interest rates from 6.5% to as low as 1% in 2001. The Americans are known for their extravagant spending and leading a luxurious life. By lowering the interest rate to an all time low they encouraged people to spend more. But few economists already warned that keeping a very low interest rate for a very long time will create a bubble burst. The financial crisis triggered when people thought that owning a home is the best investment option on the long run. Hence the Bush administration believed in this “American Dream” of owning a home and announced policies on 17 June 2002. People believed that the house prices tend to increase and the low interest rate caused the housing bubble. The Federal Reserve with its low interest rate introduced cheap loan that made borrowers to buy big homes. The housing price increased by ten percent in a year. This urged rich Americans to buy second mortgage.  The banks introduced home equity loans. It started to give away loans to almost everyone who wished to buy a home.  Home loans or home mortgage were also given to borrowers who are not fit to repay the loans. But the banks and the government encouraged these sub -prime borrowers. The government also encouraged this by deduction, subsidy and insurance on home ownership. So they introduced two mortgage financing company namely Freddie Mac & Fannie Mac. The primary job of this government sponsored enterprise was to insure home for those who could not get one in the open market. They made sure that these mortgages were backed by the government and the transaction were carried away by the congress and thus providing the borrowers confidence.

The congress announced that there is no down payment on home loans. This encouraged the sub prime borrowers. This then posed a serious threat to the banks that were offering them.  The house prices tend to increase to higher levels because of the cheap money and thus people started to buy more homes and resell it at higher prices. This then caused an inflationary pressure in real estate sector. With the continuing increase in prices banks targeted for a better investment strategy. The big investment banks on Wall Street bought all these mortgages loans and rearranged it as securities. These mortgage backed securities were then sold to investors in different countries like china, Norway, Germany and others. This is when the essence of the crisis turned to become global. This move became viral as investors across the globe considered this to be the best investment strategy as all started to believe that the house price will only increase and never come down. The rating agencies also on their part encouraged all these investors by rating these securities with AAA rating. Investors knew that higher the rating higher the return thus they all started to enjoy by investing all their money in these securities. Soon everybody started to make money out of this boom.

It was not very long time for the government and the investors to realize that the spell is broken in 2006. The house price suddenly started to come down and the interest rates came to normal levels. This is when people found it difficult to repay their home loans and the sub prime borrowers were denied new loans to repay their old ones. The house price substantially became lower making those mortgage backed securities worthless. This is when big banks like Lehman Brothers couldn’t get loans to stay in the market. Now you can see how the bush administration inflated a new bubble to come out of the old one. With the gloomy situation prevailing and the economy slowing down because of the financial crisis in 2008 the government all over the world started inflating another bubble called the Bailout Bubble. The government across the globe started providing stimulas packages to get the economy up. Soon in 2008 companies like AIG and Lehman Brothers went bankrupt because of their monumental debt in real estate. But true to the politics the banks were guaranteed with huge stimulas by the government to stay in the business. In course of time the money was also given to companies like General Motors and Crisil from the bailout packages that were only meant to save the financial institutions of the USA. In 2008 the US economy was on the brink of a serious collapse. The Federal Reserve again in the late 2008 reduced its key interest rate to zero percent to increase investor confidence and boost consumer spending who were already facing huge debts. This is the grave mistake they did as the US economy was already in crisis. The Obama administration introduced another huge fiscal stimulas package in 2009 to get the economy going. Now, at this time the total stimulas package stood at $1 trillion. This money from the bailout package was used for all purposes to help the sick companies and development projects. But only a part of this package was actually stimulas the rest was just waste money that deepened the crisis. The unemployment rate was increasing, jobs were unsecured and stock markets felt the crisis.

This is how the financial crisis took place and the consequences are now serious and are threatening the whole world. One would even wonder how the world’s superpower economy landed on such a serious economic collapse. The rating agency was rating the US economy on a positive side when the country was actually facing a catastrophe.  This is where the market signal comes into play. The rating agency should have warned the US economy on the verge of downgrading if they don’t take necessary and effective steps. The basic problem behind this financial crisis is the lack of incisive criteria and defined objectives. The first is the very low interest rates implemented when the economy is already going towards a recession. Second, the government and banks gave money to all borrowers without any conditions. Third, there was no idea of how to spend this money and what to do with the cheap money and end up in creating the housing bubble. In the first place, we could have avoided this housing bubble if the home loans were offered by the private companies because they don’t inflate bubble and would have moved along with the market price. It is evident from the crisis that the government intervention by manipulating the interest rate has bought the US economy to face a serious crisis of all time. Now it is clear that in order to avoid a burst we should stop creating bubbles in the first place. A lesson learnt the hard way!