Monday, May 4, 2009

(This is the fourth instalment in a series on the trends that led to the present financial crisis)

1. The business done by the hedge funds are more complex. But they too can borrow up to 30 times the investors money they hold. They are therefore able to earn for the investor the profits from 30 times the investors’ money. Even after paying interest to the banks and taking their share or commission, the earnings to the investor from 30 times his money would be very big – certainly far bigger than if the investor were to invest directly himself.

2. It is estimated that the 8000 hedge funds manage a total of 620 trillion dollars. Such is their game that the investors are assured of high profits. How they invest is often shrouded in secrecy. Much use is made of tax haven where they need not submit accounts of their shady business.

3. The poorer countries are not much involved in the shadow businesses and their indices would reflect their economy much more accurately.

4. The present crisis is brought about by the right to create more money by the banks being too great that despite securing their business through insurance etc, their losses could not be covered even by the bank.

5. For example when they invest 30 times more than the money invested with them, the losses too would be 30 times more. They would still have to pay back to the banks the huge loans they had taken. There is no way they can do this. The money invested with them would not be enough. They would therefore drag down the banks with them.

6. Although the poor countries will be less affected, the crisis would still impoverish them.

7. The United States and other rich countries are trying to restore their wealth by trillions of dollars in bailouts. The world must know the trillions are not from taxes and other revenue collected by Governments. They are created.

8. Unfortunately the bailouts with this created money will not succeed in reviving the failed banks and businesses. This is because they cannot redeem themselves through normal legitimate businesses. The earnings would be too small. They can only do so by the same kind of dubious shadowy business they had been doing. But if they do this there would be another crisis, far worse than the present.

9. Because we allowed a group of selfish greedy people to abuse the system, this is the inevitable result.
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