Thursday, January 29, 2009

From Third- to First-World: Building a Lifestyle

In 1976 Mohammad Yunus, who had raised himself out of the impoverished throngs of Bangladesh to obtain a Fulbright Scholarship and earn a doctorate in economics from Vanderbilt University, was teaching economics at the University of Chittagong in Bangladesh when he embarked on a most intriguing experiment. He wanted to break the traditional cycle embodied in the well known line from the song, "the rich get richer and the poor get children." What did it take, he asked himself, to empower someone to break out of the chains of poverty?

The result was the Grameen Bank, a bank that would make microloans--often less than $100--to impoverished individuals who had no credit history and no collateral. But they needed more than the few dollars. They needed a paradigm shift in the ways they viewed themselves, and in the social support networks in which they lived.

So Mohammad Yunus developed a new, comprehensive personal contract and social context for every microloan participant. Each Grameen borrower had to develop a specific business plan for themselves. Usually this grew out of some activity they were already engaged in--growing vegetables, sewing, husbanding a few chickens or a goat or cow, or the like. They defined a specific small investment that would grow their would-be business--a cart or a sewing machine or a chicken coop, for example. And they had to gather in groups of five individuals who would meet with a banker once a week to discuss their problems and progress and provide one another social and emotional support.

Moreover, each borrower had to agree to a set of precepts called the "Sixteen Decisions"--recited together at the meeting each week. These were:

(1) We shall follow and advance the four principles of Grameen Bank--Discipline, Unity, Courage, and Hard work--in all walks of our lives.

(2) Prosperity we shall bring to our families.

(3) We shall not live in dilapidated houses. We shall repair our houses and work towards constructing new houses at the earliest.

(4) We shall grow vegetables all the year round. We shall eat plenty of them and sell the surplus.

(5) During the plantation seasons, we shall plant as many seedlings as possible.

(6) We shall plan to keep our families small. We shall minimize our expenditures. We shall look after our health.

(7) We shall educate our children and ensure that they can earn to pay for their education.

(8) We shall always keep our children and the environment clean.

(9) We shall build and use pit-latrines.

(10) We shall drink water from tubewells. If it is not available, we shall boil water or use alum.

(11) We shall not take any dowry at our sons' weddings, neither shall we give any dowry at our daughters' weddings. We shall keep our centre free from the curse of dowry. We shall not practice child marriage.

(12) We shall not inflict any injustice on anyone, neither shall we allow anyone to do so.

(13) We shall collectively undertake bigger investments for higher incomes.

(14) We shall always be ready to help each other. If anyone is in difficulty, we shall all help him or her.

(15) If we come to know of any breach of discipline in any centre, we shall all go there and help restore discipline.

(16) We shall take part in all social activities collectively.

The Grameen Bank grew--and learned its business of transforming the lives of the poor--and grew some more. It spawned a new field, "microfinance," which included not only microloans to the poor and developing a set of principles and social practices that enabled them to raise themselves out of poverty, but also making available to them a spectrum of financial services--a safe way to store and save up their money, a reliable way to send payments far afield, and insurance mechanisms. In addition, Grameen Bank sponsored schools, health clinics, other aspects of an entire community fabric, no longer of impoverished but of organized, purposeful, motivated individuals.

The techniques the Grameen Bank developed led to a loan-repayment rate over 85%. Gradually the population the bank served shifted as they discovered that women were much more likely than men to use their financial advancements for the benefit of their families; and they were much more likely than men to repay the loans.

By 2006 some 97% of the clients served by the bank were women.

By 2006 the Grameen Bank had several thousand branches in towns and villages throughout Bangladesh and South-East India; it had loaned out several billion dollars; it had helped raise tens of millions of people from the enslaving cycles, generation after generation, of poverty.

By 2006 the Grameen Bank had developed a self-sustaining banking model that was no longer dependent on philanthropic donations. And it had inspired the founding of more than 700 microfinance institutions in Asia, Africa, and South America.

In 2006 Mohammad Yunus and the Grameen Bank were awarded the Nobel Peace Prize--the first time in history that a proprietary corporation had been awarded a Nobel prize.

Wednesday, January 7, 2009

Financial Crisis of 2008--A Summary

... The Calendar

1980s--Reagonomics lays a groundwork of deregulation and trickle-down economic policies; U.S. borrowing spree (personal and federal) and poor international balance of payments swell

1990s--fiscal belt-tightening and poor oversight let the embers grow

2000-2007--Federal ignorance and complicity let the housing bubble swell adding non-regulated, non-transparent, sub-prime mortgage derivatives; credit default swaps grow to trillions of dollars; and short-term Wall Street profits are linked to excessive management pay incentives

late 2007 into 2008--sub-prime mortgages begin to reset to higher interest rates; housing-loan defaults rise

April-May 2008--Bear Stearns, one of the largest global investment banks and securities trading firms, fails; bought by J. P. Morgan, a huge financial services firm with $2.3 trillion capitalization and deposit base, with Fed guarantee of shakiest assets

July, August 2008--bonds ratings lowered, raising margin requirements; credit default swaps overhang financial markets; credit markets tighten

Sept. 7, 2008--Fannie Mae and Freddie Mac collapse and are nationalized; they were formed in 1968 and 1970 respectively as privately owned GSEs (Government Sponsored Enterprises) to purchase and securitize mortgages to assure availability of home-buyer loans

Sept. 15, 2008--Lehman Brothers, a huge global financial services firm, files chapter 11--largest bankruptcy in U.S. history; disorderly process allowed by Fed frightens Wall Street regarding future willingness of U.S. to protect major institutions

mid-Sept. 2008--credit markets seize up; large and small would-be borrowers face liquidity crises

Sept. 16, 2008--American International Group (AIG), an enormous global insurance company with considerable long-term assets, threatens to fail due to illiquidity from raised capital requirements due to downgrade of AA bond ratings; receives $85 billion government credit for 80% of equity

Sept. 25, 2008--Washington Mutual (WaMu), the largest U.S. savings and loan association, goes into receivership after 10-day run-on-the-bank withdrawals total $16.4 billion

Sept./Oct. 2008--Wachovia, the 4th largest bank-holding company in the U.S., looks weak; potential sale to Citigroup falls through

Sept./Oct. 2008--Congress passes TARP bailout; TARP is a $700-billion "Troubled Assets Relief Program" to purchase "poison" bank assets (mostly securitized, sub-prime and alt-A mortgage defaults); Congress is under tremendous public scrutiny and condemnation

Nov. 2008--TARP funds are diverted by Treasury into purchase of big banks' equity but these funds go into bank reserves, not lending; biggest recipients are:
...Citigroup ($45 billion in bailout funds)
...J.P. Morgan Chase ($25 billion)
...Bank of America ($25 billion)
...Wells Fargo ($25 billion)
...Goldman Sachs ($10 billion)
...Morgan Stanley ($10 billion)
...PNC Financial Services ($7.6 billion)
...U.S. Bancorp ($6.6 billion)
...SunTrust ($4.9 billion)

Nov. & Dec. 2008--international reductions of interest rates

Dec. 31, 2008--Wachovia, continuing weak, is purchased by Wells Fargo; a few days later Moody's downgrades Wells Fargo because of Wachovia acquisition

... The Remedies

(1) let big corporations fail if they must, but in an orderly way--
...nationalize them (to limit the spreading and protect the guts of the systems),
...replace the management,
...sell off valuable assets, and
...hold weak assets for calmer times
...(shareholders lose money; creditors do not)

(2) break up (early) any corporations that are "too big to be allowed to fail"

(3) regulate rating agencies--and forbid bond-issuers from paying for ratings (these should be paid for by the borrowers or the government)

(4) regulate Wall Street more carefully and knowledgeably--
...regulate (and limit) obscure derivative securities and credit default swaps
...impose new capital requirements for banks
...forbid SEC regulators from revolving-door into Wall Street (require delay)
...require SEC to have experienced, Wall-Street-savvy regulators
...require mark-to-market accounting and transparent financial records