October 27, 2008
The Global Financial Crisis - Where Did All The Money Go? (Part2)
Here is another article that tries to answer the question I had. It is an article by AFP and the writer is Pierre Pratabuy. I found his article in www.ChinaPost.com.tw. Anyway for my own future reference I reproduced the whole article here.
With stock markets plummeting, where has the money gone?
LONDON –– The chronic global financial crisis has wiped trillions of dollars off world stock markets since it first erupted last year — but where has all the money gone? Nowhere, according to analysts.
From New York to Tokyo, via London, Frankfurt and Paris, investors were gripped by another roller-coaster ride of turbulent trade last week.
Across the globe, equity markets have now slumped by 30-50 percent since the same stage of 2007, as confidence has been ravaged by the collapse of the U.S. subprime housing sector and the subsequent credit crunch.
Economists say markets have suffered massive “paper” losses that do not relate to the disappearance of cash — but instead to a dramatic drop in value.
“When we say that trillions of dollars have been lost, this is a miswording,” said economics professor John Sloman at the University of Bristol.
“What we should say is: trillions of dollars of value have been wiped off from the stock market’s value, which is totally different,” he told AFP.
“It’s not money, it is value, which is basically the price (that) people are ready to pay at one time.”
Robert Shiller, professor of economics at Yale University in the United States, drew a comparison with the drop in the price of a house.
“Suppose one day you ask a real estate agent to estimate the value of your house if it were to be sold,” Shiller told AFP.
“The next day you ask a second real estate agent to estimate the value of your house, and the second agent gives you an estimated value that is 10 percent lower.
“Have you lost any money? Certainly not, the currency notes in your pocket have not changed, nor have any of your bank accounts.
“But you would be poorer, in a very real sense. It is just the same with the stock market. Nobody loses any ‘money’ in the strict definition of that term, but they have lost value.”
However, speculative investors can get their fingers burned when they dabble in fiercely volatile stock markets.
Some traders buy poorly performing stocks when they bet that shares have “bottomed out” or hit their lowest point — in the hope of selling them after a sharp rally in order to make a profit.
But traders can be left nursing losses if the acquired shares fall even further.
“If you need to sell these assets, and the value of your assets has come down … you can lose money compared to the prices you had to pay for these assets,” Sloman said.
He added: “You have got to distinguish assets, like stocks or houses, from cash.
“The cash has not gone but the value of assets — paper (stocks) or physical (houses) — have come down because they depend on supply and demand. It doesn’t mean that money has disappeared.”
http://www.chinapost.com.tw/business/global–markets/2008/10/22/179852/With-stock.htm
What the above article implied is that a lot of the money is loss in paper loss, like the case of the real estate example. However real money is loss by investor when they sell their shares at a price less than the buying price. In my opinion the real cash did not disappear but changed hands and I think someone is hoarding lots of it some where.
Anyway for a little piece of positive news. The word is post crisis, that’s how OECD chief economist sees it. I do hope what he is saying as quote by the news article and the extract below is correct.
The world has been saved from another Great Depression by massive state intervention, the OECD’s chief economist said, but he warned of the “trap” of excessive regulation as the debate about global financial reform heats up.
“This is the worst financial crisis in decades, but a repeat of the 1930s Great Depression is highly unlikely, thanks in large part to those massive rescue plans now in place,” said Klaus Schmidt-Hebbel.
Well if he is right that now is a post crisis, than the world is moving forward to recovery. Klaus Schmidt-Hebbel however said that “Big changes are needed and at the same time had to avoid the trap of over-regulating the market.
Another quote by him closely reflect the “what’s wrong” issue before the crisis and this are:-
Schmidt-Hebbel in his interview with the OECD Observer identified four main types of systemic weakness which nearly brought the global financial system crashing down.
The first was poor company management, combined with huge incentives for top people in finance, lack of information about risks, weak supervision of credit rating agencies, and weak supervisory regulations in many countries.
“Regulatory omissions and failures were rife,” he told the magazine. Also, steps had to be taken to ensure that in future financiers did not “assume bailouts are the norm.”
Secondly, authorities had to review their interest rate, tax and financial policies to counter and reduce the intensity of economic cycles, and thereby prevent a repetition of such a global crisis.
Thirdly, governments had to improve their contingency and crisis management because the current crisis had been managed “in a pretty haphazard way” in the early stages.
And finally, he said there was a need for a “rethinking” of the way the international financial system works, wich is the aim of the Washington summit in November.
http://economictimes.indiatimes.com/rssarticleshow/msid-3642231,flstry-1.cms
It’s a hope here and my hope that things had bottom out, the worst over and recovery is in the pipeline. The year 2009, may be pretty bleak until such time when investors’ confidence are restored back and people are investing again. Thus by then I do hope I can recoup my investment losses.