Wednesday, October 17, 2012

Book Review - "The U.S. Financial Crisis: Analysis and Interpretation"

Wonder why no posts for the past couple of weeks??... I'm in India for a long vacation :)) Always happy to be here... visiting family and friends after a very long time!

Cutting to the chase.. today's post is a review of the book - "The U.S. Financial Crisis: Analysis and Interpretation" by Cheng Siwei.

About the Author:
Professor Cheng Siwei served as Vice-Chairman of the standing committee of the National People's Congress of the People's Republic of China. He is the Chairman of the International Finance Forum and the International CEO roundtable. (quoted from the book) Read more about author here.


Image from internet

The Book Overview:
As the name of the book suggests, it is about the recession period that traumatized the world from a few years back. You might not have forgotten the panic and frenzy that the financial crisis created. The book gets to the root cause for the crisis and details the impact on the world nations that originated from the U.S. This book is for anyone who wishes to get a in depth knowledge about what happened and how it affected various banks, industries, economies, etc.


Review:
"The Subprime Crisis":
The financial crisis plummeted off one basic reason - "The Subprime Crisis". That is, when the government started relaxing the rules and regulations of mortgage loans in order to encourage low - income group to own houses and encouraging commercial banks to lend large amounts of money - all of this resulted in loan defaults and foreclosure of houses since the people where unable to repay the loan. What started as a small drop transformed into to a hurricane of depression. The first chapter talks about the general impact on the banking sector of the U.S. and the European countries and the Wall Street crisis since the stock prices dropped drastically.

Author introduces the term "Fictitious Capital" which will lead through out the book correlating with "Real Economy".

"Fictitious Capital" is mentioned in Karl Marx'x Das Kapital, in which he wrote that negotiable security and other financial products occurring from loan capital and the bank  credit system could be considered as fictitious capital. (quoted from the book)

Author discusses how the fictitious economy affected the real economy and caused credit crisis that not only affected U.S. but the whole world.

Impact on the Global Economy:
Economic conditions of 36 sample countries summarized into five categories is analyzed:
  • Seven major developed nations
  • Fourteen other developed countries
  • Four emerging Asian economies
  • Six emerging European economies
  • Five other emerging economies
Various factors and variables are used in different statistical analysis to explore the effect and impact of the crisis over different economies. It is concluded that the developing nations like India, Indonesia, etc recovered relatively faster than other developed nations. 

Performance on different countries like Britain, Germany, Australia, Russia is analysed in detail with respect to different industries and measures taken to handle the recession. 

Impact on Economy of China: 
A very detailed documentation on the impact on economy of China is provided. Various channels through which the crisis might have impacted are suggested and the routes provided for information. Impact on China's fictitious economy, exports, fixed assets, consumption, employment, industries, regions, trade is discussed with detail analysis. Casualty analysis and regression analysis is performed to study the impact. China's countermeasures against the financial crisis and their effects are discussed in detail. 

Lessons from the U.S. Financial Crisis:
"The fictitious economy should not develop without real economy". Effects of uncorrelated fictitious economy and real economy are discussed and concluded that the government should be cautious about the housing market. Loan rules and regulations should be followed and the government should not pressurize the commercial banks to relax the mortgage options and rules. A stable financial system should be followed. 

Six Balances:
Author concludes with details of six balances that would help achieve development:
  • Balance between savings and consumption
  • Balance between domestic and foreign demands
  • Balance between financial innovation and regulation
  • Balance between fictitious economy and real economy
  • Balance between economic growth and sustainable development
  • Balance between globalization and regional integration
Overall this book provides you with the real analysis on the Financial Crisis.

Disclaimer: A copy of the book was sent for the review.


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