It started in December 07 and quite paradoxically the best that we can hope now is for the worst to occur at the earliest. Only so we can start to see a new rise, a new beginning, out of all the chaos and ruins that this recession has created so far- and will create further. The very thought that the worst is yet to come is intimidating. Billions of dollars wiped out of companies' books, turning them into mere buildings on sale, jobs lost, even countries going bankrupt. Times are challenging, moreso for people in power.

More than anything else, the downturn has shown us through a magnifying lens, the wide-spread roots of globalization. A truck driver in China loses his job because his employer has to sell the truck. The employer has to sell the truck because his technology accessories shop has just had a sharp slump in sales as its regular customers from an Indian tech city stop buying from him. The Indian techies stop buying accessories because they are on a cost cutting spree to compensate for an abrupt shortfall in outsourcing contracts from their German auto making customer. The German auto maker could not redeem it's fire accident losses as it's property insurer in the UK was out of business. The property insurer is out of business as it has significant exposure to an investment bank on the wallstreet, which is the center of the holocaust. And then there are economists framing up the concept of decoupling theory that says the eastern horizon is immune to anything that happens on the other side of the world.

Though recession has been a bitter medicine to the whole of corporate world, its mechanism of making lives miserable is well structured and perfect. Unfortunately so. More than recession itself, its causes offer interesting insights. It may be a great product of innovation that pays investors based on repayment of home loans. Framing such a product may require more than common sense. May be those on the well street have more brain cells than an average person and work 26 hours a day. Today's financial world offers products based on anything as underlying asset, just anything. The idea of most financial products is to hedge against uncertainities- they are risk management devices. You buy a weather derivative not because it offers profits but because it reduces the risk of your loss (and to an extent the loss itself) in case unexpected adverse weather conditions take a toll on your harvest. But who trades in these derivatives ? Farmers ? Hell, no! It's our very own folks on the wall street. Is it because they are expecting a risk to their harvest ? It is because their math tells them that weather derivatives have been making good profits that they trade them. Do they stop at just trading them ? That would make their jobs
less complex and mean fewer zeroes in their pay. They would concoct products based on these derivatives to an extent that those buying will not even know they're weather based. And they use their so called persuasive skills and selling expertise to spread these products across a wide network- viral marketing: building a network of victims to take down with them.

Equally complicated are the mortgage backed securities (MBS) that pay investors based on home loan repayments. These products are so popular and widely spread- even Fed's own companies Fannie Mae and Freddie Mac owe(d) their existence to MBS. Most companies in the US have been having them on their balance sheets since long. No one bothers about how and when these products make profits or losses as long as they are yielding more than expected results. It is only when they start eating up your balance sheets that you realize you are growing snakes in your backyard. Probably our other set of friends in home loan giving banks wanted to revisit basics. Or they wanted to put a roof over the roofless. Their math told them that you could lend money to a pavement dweller so he can build his home and he is going to repay in future. Their math told them that they could put aside their qualms on creditworthiness for a while, something quite unusual in the US, given that they verify your credit background for almost everything. Little did they realize that the pavement dweller's inability to repay the loan is only the initial point in the complicated supply chain of mortgage based products which are spread over across the whole of corporate world.

The results are blatantly evident. For those who think we can go back to the good old days, we must only realize that the difference lies in the non-existence of firms like Lehman brothers.

Capitalism is a great concept- Capital markets are great devices to raise money from common people- money that no government can raise. Any amount of bail-out can never equal the capital raised from investors. And investors' decision to invest and contribute to a company's growth (or the lack of it ?!) depends on one simple thing: trust. During some times trust means huge profits, other times it means no losses. But when trust takes a hit like it happened when the speculation boosted bull market suddenly collapsed, it takes ages to restore. And trust has its own way of spreading- like a deadly contagious disease. Most invest not because their technical/ fundamental analysis reveals a stock is under/ over valued; most invest because many others are investing. Similarily, most stop investing because others do the same. The importance of trust can be illustrated by the best of mathematicians'/ bankers'/astrologers (!)/ anyone-for-that-matter's inability to arrive at a fair value for any asset (stocks). However accurate your cash flow
predictions are, you cannot predict the intrinsic value of an asset/ stock. People's perception cannot be quantified. If there were some means of doing it, there would be no trading in this world, no exchange and no secondary market. It is quite amusing at this point to think whether it would have been good or bad if it were so !


With the kind of sudden losses incurred, investors are as far from capital markets as they can be. They are hanging on to their money stronger than ever. With consumers' money out of the market, nothing can move forward. Any government measures like a bail out or printing money or buying treasuries to inject liquidity into the market will only be a temporary solution. The need of the time is to make sure investor confidence is restored. It is a real test to governments. Governments' act of cutting interest rates may prompt lenders to withdraw money from banks but cannot guarantee that they will spend more. You can take a horse to the water, but you cannot make him drink !

So the answer to the question- "When will things be normal again?" is, when investors start investing again. There are those who play the market intelligently to book profits. They made speculations that made stocks appreciate and they profited. Now they are shorting to realize profits in the downhill. It was a bunch of jokers who introduced us to recession and another bunch of jokers taking us deeper into it. We need a white knight to fight these jokers and instill trust in capital markets so people can start investing again when things are not widely over-valued or under-valued. And to prevent these things from happening, we need to realize that common sense - which is unfortunately uncommon - prevails where the most advanced of math fails.