Recession

Recession : Loss of Commonsense

You can fool some persons for some time or all the persons for some time but you can not fool all the persons at all the times. Lot has been said and lot has been heard about recession. Recession is the result of loss of commonsense not only of Americans but all the people of the world for some time. Fear and Greed had occupied our minds for some time. We forgot to apply our minds .Money had made the Americans to consume blindly and fear had made the Chines to invest in the treasury of Americans.

Major mistake made by the Financial Sector is that they had given loans against the security of houses.. Houses cannot generate money (unless you give them on rent) rather they consume money if borrower is living in pledged house. Financial sectors had given the money to the consumers to consume on the basis of security of houses in which they were living. Thus value of the security became important rather then purpose of loan which ultimately leads to recession in the economy.

Financial Sector should gives the money to the householders even against the security only when there is a regular source of the income of householder. But it is not the regular income that is important but the source of regular income that is important while lending the money to the household. Financial Sector lost the commonsense that source of the regular income should be permanent. Job in a private sector (even from last 10 years) cannot be said to be the permanent source of income as we are seeing now a days in the form of huge job cuts all over the world.

Financial Sector is there to lend the money to the productive sectors of the economy so that these sectors can add to the GDP of the country by investing that money into income and employments generating assets.

Financial sector should always think about the purpose for which the money is being given. Money is always given by financial sector for investment and not for consumption purpose. Value of the security for loan is not as important as purpose for which loan is being given. When loan is given for the long term it will be the purpose of loan that will return the money of financial sectors. Financial sector is not the taker of assets (Security) of the householders rather it is to get the money back with appreciation.

Financial Sector forgot the basic concept that purpose of giving the loan against security is just to set fear in the minds of the borrowers that in case they did not applied the money for the intended purpose then they will loose something valuable for them. It is this fear that forces a borrower to work hard to apply the loan for intended purpose i.e. to create an asset that will produce money for him and for lenders.

Financial Sector lost commonsense that money is only a piece of paper in the hands of lenders but when it comes in the hands of borrowers then it changes its meaning and form instantly. Same piece of paper can be used to create a bomb or building depending upon the purpose of borrower.



Financial Sector applied technology i.e computers and complex models to calculate earnings and payback periods. Discounted Cash Flow techniques were applied without thinking that commonsense is also required to make decision which cannot be depicted on any paper. Technology cannot do anything except analysis of the data but choice has to be made by humans by applying non-monetary factors, facts, figures, commonsense. There are the models to control the prices of commodities but hardly there are measures to control the price of assets. Financial sector lost the commonsense that it is the Decision Maker that is important rather then technology used by decision maker. Technology can assist but cannot replace humans at any cost.

There is also a failure on the part of international financial institutions to track flow of money between different nations, its utilization and purpose of utilization.

With the lesson learnt from recession, we can say that money is not everything but money can do anything. We have to rebuild our commonsense to avoid recession in future. We have to again learn basics what is money? What is Loan? What is consumption? What is investment? before entering into financial world. Money should be given only for the investment purpose and financial sector has to be very strict about its usage.
I CERTIFY THAT THIS ARTICLE IS MY OWN CREATION.
CA SATBIR SINGH
casatbirgill@gmail.com