Saturday, December 13, 2008

Fall of Three Auto major's, US

The fall of the Detroit’s Three Auto major’s General Motors, Ford and Chrysler could well be interpreted by fall of industrial base in US. That’s not necessarily the case.
First, we will head out our search for the reasons behind this failure.

During the recession time, companies customarily try to give discounts to draw customers. As per US National Bureau of Economic Research recession starts from Dec, 2007 in US. These three auto majors don’t have much option, other than slowdown their production or sell higher margin vehicles like SUV’s which carry 20 to 30 percent margin. But where are the Buyers?

First cause we found out is that, auto major’s annual spending on health insurance. Every business small and large has struggled with paying the health insurance costs of their employees. A mega-corporation like General Motors sees those problems amplified. GM spends $5 billion annually on health care for 1.2 million people of which only 150,000 of whom work for the company. GM, Ford, and Chrysler have a combined unfunded retiree health care obligation of more than $90 billion. Health care adds $1,500 to the cost of each vehicle. This facts shows us that successful economic models for these three auto major’s is virtually impossible and it is not something they can fix.

As it apparent from sub crime crisis, stock market fumbled to its lowest possible values, and Three Auto major’s stock price has ceased up to 70%.
The second major cause of the current auto industry crisis is the crash of the credit markets. It has made getting auto loan a difficult task, results in substantial drop in automobile purchase. The U.S. auto market fell 15% through the first 10 months of 2008 and sales in October plunged 32%. Why? The lack of available credit for potential car buyers and on the other end, the industry cannot get loans to cover the dramatic loss in car sales, Second cause.

These three auto majors concentrated more on lucrative cars rather than building cost effective and environmental friendly cars. Even though, there is no hard rule to do so, they failed miserably to predict the Future communal needs. The foreign players like Toyota utilized this opportunity and confined the market.

The above mentioned facts have the same source: corporate controlled government. The health insurance industry did not want the more efficient single payer national health insurance. The finance industry wanted to be free to treat the stock market like a casino and did not want to be regulated. And, the auto industry did not want to be told to build more efficient cars. Corporate-government is the root of the problems we face today.

Wednesday, December 10, 2008

Recession? Depression? What's the difference?

How do we know if we're in one?

There is an old joke among economists that states:

A recession is when your neighbor loses his job.
A depression is when you lose your job.

The difference between the two terms is not very well understood for one simple reason: There is not a universally agreed upon definition. If you ask 100 different economists to define the terms recession and depression, you would get at least 100 different answers. We have tried to summarize both terms and explain the differences between them in a way that everyone could agree with.

Recession: The Newspaper Definition

The standard newspaper definition of a recession is a decline in the Gross Domestic Product (GDP) for two or more consecutive quarters.

This definition is unpopular for two main reasons. First, this definition does not take into consideration changes in other variables. For example this definition ignores any changes in the unemployment rate or consumer confidence. Second, by using quarterly data this definition makes it difficult to pinpoint when a recession begins or ends. This means that a recession that lasts ten months or less may go undetected.

Recession: The BCDC Definition

The Business Cycle Dating Committee at the National Bureau of Economic Research (NBER) provides a better way to find out if there is a recession is taking place. This committee determines the amount of business activity in the economy by looking at things like employment, industrial production, real income, and wholesale-retail sales. In addition, the NBER also considers the gross domestic product, which is the reading, most typically associated with a recession in the general public. They define a recession as the time when business activity has reached its peak and starts to fall until the time when business activity bottoms out. When the business activity starts to rise again it is called an expansionary period. By this definition, the average recession lasts about a year.


Before the Great Depression of the 1930s any downturn in economic activity was referred to as a depression. The term recession was developed in this period to differentiate periods like the 1930s from smaller economic declines that occurred in 1910 and 1913. This leads to the simple definition of a depression as a recession that lasts longer and has a larger decline in business activity.

Difference between Recession and Depression

So how can we tell the difference between a recession and a depression? A good rule of thumb for determining the difference between a recession and a depression is to look at the changes in GNP. A depression is any economic downturn where real GDP declines by more than 10 percent. A recession is an economic downturn that is less severe.

Does US is in Recession or Depression?

The National Bureau of Economic Research(NBER) said Monday that the U.S. has been in a recession since December 2007, NBER did not give any reasons or causes of the recession. But it is widely accepted that the housing downturn, which started in 2006, is a primary cause of the broader economic malaise. The current recession is one of the longest downturns since the Great Depression of the 1930's.
The last two recessions (1990-1991 and 2001) lasted eight months each, and only two of the 10 previous post-Depression downturns lasted as long as a full year, according to the NBER.

Now we would be able to determine the difference between a recession and a depression without resorting to the poor humor of the dismal scientists.

Thursday, December 4, 2008

What's So Funny About economist?

The back cover of "Journal of Political Economy" has published amusing stories about economist for a number of years now. Here is a random collection of a few jokes about economist.

An economist is someone who, when he finds something that works in practice, tries to make it work in theory.
If you laid all the economists in the world end to end, they still wouldn't reach a conclusion.


Everyone has heard the old joke about the physicist, the architect, and the economist marooned on a desert island with a can of beans. The question was how to open the can. The physicist observed that the can could be placed on the fire. Eventually the heating of the can would create so much pressure that the can would explode and the beans could be retrieved. The architect thought that this would be a rather messy solution to the problem and suggested building a small enclosure around the fire. Then, when the can exploded, the beans would splatter on the walls of the enclosure, from which they could then be scraped. The economist had a better solution. First, he said, "Assume that we have a can opener ..."


Back in the bad old days of the centrally-planned economy, people in the Soviet Union had long, long, waits to get all kinds of goods and services. For instance, there was the fellow who went to see the electrician to make arrangements for some repairs to an electrical appliance. The surly electrician pulled out a calendar and said, "I can't schedule you any time soon. In fact, my next open appointment is three years from today." The guy said, "Three years from today, eh? Well, can we make that in the afternoon?" The electrician, somewhat taken aback, said "Yes. But why in the afternoon?" Came the reply, "Well, you see, the plumber is coming in the morning."


The First Law of Economists: For every economist, there exists an equal and opposite economist.
The Second Law of Economists: They're both wrong.


Harry Truman, American President is alleged to have complained that he could never find a one-handed economist. Whenever he would pose a question for an economist, the response would be, "Well, Mr. President, on the one hand ... And then again, on the other hand ..."


Wednesday, December 3, 2008

Mumbai terror attack and Indian Insurance Industry

They can rip us apart, they can blow everything to bits, they can pump bullets into our businesses but we — our core undefeated and intact — pick up the pieces fast and restore ourselves. They can gut our hotels but they can’t destroy our guts.
INDIA FIGHTS BACK - Economic times.

First, our deep condolence to the people, who are victims of Mumbai Terror attack. As citizens of India, we have insights, creativity, and positive energy to spare; our entrepreneurs possess a rare indomitable spirit.

Let us start our first discussion topic.

How does Mumbai terror attack affects the Insurance Industry? Which insurers will bear the impact of Taj, Oberoi damage bills?

Mumbai saw its iconic structures being burnt and damaged in the terror attacks. But experts believe, while the trauma will weigh heavily, both properties are sufficiently insured.

The insurance industry is bound to feel a ripple effect. There will be loss on account of, the loss of life that has happened and also on account of the loss of assets in act of terrorism.

In case of life-insurance companies, there would be a direct impact on the companies who would have covered the lives of the individuals.

It will take a while to ascertain the total damage the terror attack has caused to the premier properties, and to the business of both, Oberoi -Trident and Hotel Taj. They have the terrorism cover to shield them with not just property damage, but also the interruption in business till the time they are restored.

Tata AIG, ICICI Lombard and Iffco Tokio are the insurers of Hotel Taj. New India Assurance provides cover for the Oberoi-Trident. Most experts believe that as both Taj - Oberoi - Trident are a part of listed companies, they would reassess regularly the value of their properties and hence, would be sufficiently insured. Therefore even if the cover exceeds the terrorism pool limit, insurance companies would have had additional reinsurance from GIC or international reinsurer.

Meanwhile, we have learnt that Tata AIG has provided the liability cover to both Taj Mahal Hotel and Oberoi-Trident. We also understand that insurance companies have started the process of assessing the damage, but will be able to ascertain it only after two weeks or more. And while the memories of burning Taj Mahal will weigh heavily, at least the financial burden will be eased with the insurance backing.


We as a student of finance are excited to start this blog, to share our passion and zeal for finance. This blog will explore the current issues in finance and economics.