Subprime crisis for dummies

A really funny comic presentation about how we ended up having the financial crisis as a result of the sub-prime fiasco, care of Pinoy Money Talk

Predictions on How the Philippine Economy will Suffer along with the rest of the World

It's a good thing the Philippines wasn't so advanced in the first place in terms of investment because if we had been, then the Philippines would also be in a pretty bad shape now.

The only reason the Philippine economy is still afloat is because the Philippines was too poor to invest its finances in the riskier financial institutions. Unfortunately the smarter more advanced economies thought that taking smaller more secure investments and reinvesting them into riskier investments made them a lot more money. Unfortunately, that didn't work out the way they planned it.

The Philippines will feel the ripple effect of the US economic slowdown. The impact will be felt first of course in the stock market as well as direct exposure. The latter is minimal while the stock market will hurt PSE among other things. And then in terms of incoming investments. The export industry will suffer - particularly those that service the US and Europe. Yes Europe is also in trouble as a result of the sub prime catastrophe. Iceland has already declared bankruptcy and I'm pretty sure that country was much better off than the Philippines. Both the US and the UK have put in place bailouts as sponsored by their governments. Let's hope they make it through this as well. Because we are all interconnected financially, the Philippines owing money to other countries, make it susceptible to these changes although not on our shores.

Nevertheless the living conditions won't be as bad as it has always been - prices will continue to be high, gasoline prices have at least has gone down because there is less demand for oil now as a result. Business that are dependent on tourism and incoming remuneration from abroad will be hit specifically.

If OFWs abroad will have a difficult time, the Philippine economy will be hit pretty bad although I doubt the the extent to which overseas Filipino income will be threatened any worse than an American or European.

The newspapers these days are just peppered with images of the stock market and how it has just crashed amidst the US economic trouble. The bail-out will take a few months or even years to take effect - as the primary issues now are that people are no longer comfortable with spending money, banks are no longer free to give as much credit as they used to. There is a lack of predictability as to what might happen to the stock market, everything being red now.

Some people are buying stocks while their dirt cheap while most are just unloading what seems like lost causes.

The world will be a lot wiser after this economic slum... if it will survive it

Will The US Bail-out Work?

I have been too busy at work to notice recent international news - particularly about the US economy, given that I've just moved to a new office and am still trying to learn the ropes of the business so to speak. I thought that now that I no longer work for a foreign company, I could get away with not knowing what was going on there.

But the Lehman Brothers bit me in the a*s. A global perspective was required in order to complete a Board of Directors' presentation. I went along with it because it was the right thing to do. Of course there will be local and global impact to what will happen to the US economy.

So now I'm forced to pay attention. Here's what happened for the hapless such as myself.

The subprime crisis already began years ago. The US decided to buy bad assets from developing nations and provide a lending service to not exactly "credit worthy" applicants. This was not a suicidal effort, but in fact at that time a seemingly brilliant initiative.

The idea was even if these financial institutions lent money to people who can only repay a small portion up front; considering that the working conditions will improve in the next 3 years and their assets will appreciate, these firms "ballooned" the repayment over a delayed period (about 3 years or so). That way the lenders will pay a little up front but then have enough money later on to pay for an increase repayment after several years. I bet at the time it seemed like a win-win situation.

This was of course until mid-2007 when the interest rates on housing started to rise and investors were getting shaky. As a result people were forced to sell their investments, impacting the stock market and further damaging the financial institutions that lent money because people were now unable to pay them back when their repayment figures were significantly higher.

So the complex web of financial transactions occur until here we are in a state where "everyone owes everyone." Companies like Bearns Stearns, Meryll Lynch & Lehman Brothers who capitalize on these investments felt the blunt first.

And so Bearns Stearns and to be rescued by the US government while Lehman Brothers ended up filing for bankruptcy last Sept-15. Right now the US government needs to implement their $700 billion bailout plan (if that's what it's going to be or something better up their sleeves really quick) or it will hurt not only for America but for the rest of the world as well as the domino effect will just spread throughout the world.

Now to answer the question: Will the US bailout work? According to Forbes it's too big to fail as it brings together Republicans & Democrats to the table as Congress tries to digest Bush's initiative. They say it's no good but there's not better choice right now. It is a rather dire situation - do or die.

If the rescue plan fails, the economy fails. The rest of the world can only watch and wait.