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US auto bailout plan collapses - Views on News from Equitymaster
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  • Dec 12, 2008

    US auto bailout plan collapses

    Asian markets have crashed this morning, led by indices in Hong Kong (down 6%), Japan (4%) and Singapore (4%). This follows the failure of the US automobile industry bailout plan. This has dealt a severe blow to the fortunes of the Big Three auto companies in the US - GM, Ford and Chrysler, who were looking for the bailout plan to pass to help them survive. "Millions of Americans, not only the autoworkers, but people who sell cars, car dealerships, people who work on cars, are going to be directly impacted. It’s going to be a very, very bad Christmas for a lot of people," writes CNN. The industry that defined the US industrial strength is now facing a bleak future, with the Big Three staring at bankruptcy. The failure of the bailout plan is also expected to lead to a surge in US unemployment, which is already at its highest in fifteen years.

    Hedge Funds shrink by US$ 64 bn
    "A pin lies in wait for every bubble and when the two eventually meet, a new wave of investors learns some very old lessons." - Warren Buffett. This time, it was the turn of a tribe whose members call themselves hedge fund managers. As per Bloomberg, the global hedge-fund industry lost US$ 64 bn of assets in November 2008. The market decline contributed to US$ 18 bn in net losses, while investor redemptions accounted for the remaining US$ 46 bn. The hedge fund assets, which had peaked at US$ 1.9 trillion in June 2008, lost most of the corpus due to distress selling and the rollback of debt-funded investments over the past two months. While the global economic crisis continues to erode funds, investors in the poorly ‘hedged’ funds seem to have more to lose as the largest economies in the world such as US, Europe and Japan fall into simultaneous recessions for the first time ever since the Great Depression.

    'NICE' era reared trouble
    The RBI governor Dr. Subbarao in a recent speech on the global credit contagion explained the relation between the crisis and the globalisation of trade and labour. In a very interesting remark in his speech, the governor called the 'NICE' era as the prime culprit for the global recession. Ironically, the 'NICE' era - a term coined by Mervyn King, governor of Bank of England - referred to the period of greed across global economies that ultimately led to the creation of several asset bubbles.

    First, there was the globalisation of labour. Emerging Asia added nearly three billion to the world pool of labour as it integrated the world through the 1990s. What this did was to reduce production costs at the aggregate level and increase Asia's comparative advantage. While the Asian economies (particularly China and to an extent India) piled up trade surpluses, these were mirrored by current account deficits in the US. The resulting imbalances that generated easy liquidity and low interest rates encouraged under-pricing of risk and deterioration in credit quality. Thus the 'non-inflationary consistently expansionary' (NICE) era fooled market participants into believing that the benign economic conditions were here to stay while the underlying value of assets kept getting eroded. Yet another instance of market punishing the ones enamored by greed.



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