How to solve the global financial crisis

Friday, October 10, 2008, 12:47 by Business Editor

How to solve the global financial crisis – time to think a bit out of the box?

The global economic crisis started with the US housing recession. Housing prices crashed after a sustained, major boom. The assets (houses) which supported the securities (mortgage-backed securities) lost value. Banks which held the rotten securities as collateral, or as investment paper, found themselves sitting on crap, which they thought were valuable investment.

Now, the American government and its central bank, in concert with global central banks, is trying to bail out the sick system. Whatever bailout they do will be of no value until housing prices — the root of the problem — pick up. Now, the US houses prices are at rock bottom. Houses available in the US suburbs are cheaper than in India.

Houses bought on subprime loans have been taken over by US banks and are now foreclosed. And now, there are no takers for those houses, though banks want to sell them. Because, Americans have no money to buy houses. The US has one of the lowest savings rates in the world. That is, they live on perpetual credit — the government, as well as the people. Whereas, countries in Asia have high savings rates. Japan has about 40% savings. India has over 30%.

This means Indians and their Asian peers have lots of money they can spare for investing.

That is what one should tap – that is where the solution to the global financial crisis lies. Out there, in Asia.

If the US opens the channels for Asians – and others – to invest in the collapsed US mortgage market, the market will pick up slowly and the housing recession will be over – say in a year or so. Already, it is the Asian funds – those like Temasek, soverign funds from Dubai, UAE and Qatar – which are buying stakes in cash-starved bluechip banks like Citigroup and Fortis. The idea is to channelise the individual wealth of cash-surplus nations to cash-starved America. America can facilitate the process easier by adding incentives — like a green card for someone who invests in US property for 10 years, easier visa norms for property investors, waiver of capital gains taxes for property purchases. The details are best left to experts.

Once wealth starts flowing in on its own, no government-led cash injection will be required. There will be no need to compromise the principles of capitalism, which all governments are doing by nationalisations, recapitalisations, and overregulation. The incoming money will breathe life into the dead American housing market. This will kickstart the dead housing market in US. And the revival will begin from there.

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