Category: Your Money

Gold: Why?!

“I don’t gamble. I only invest in gold.”

When I was growing up, nobody had heard of “Akshaya Tritiya.” And then, perhaps borrowing a page from how Hallmark created Valentine’s Day, jewelers have turned it into the most auspicious day to buy gold. Have people actually stepped back and asked themselves why they are partaking in this madness?

Is Gold money? No.

Try paying for your morning coffee with bullion and be prepare to be astounded at the discount you are offered on your gold. Not only is gold not money in a disaster scenario – it is not even wealth! People will hunger for food, water, and fuel – not gold.

Is Gold a good disaster trade? Only if disaster hits you and spares everybody else. From  Dubai’s blow-up to the Grexit that wasn’t to the almost-collapse of the Euro Zone to the Arab Spring to the death of Andy Rooney, gold was the first thing to fall as investors rushed to sell whatever they could.

Back in 2010, The Economist had warned: the traditional markets for gold cannot be expected to pick up the slack if rich-world investors’ appetite should pall. And this is exactly what Indian investors need to keep in mind when they use anecdotal evidence to gloss over the fact that at the end of the day, gold is just like any other commodity. And it maybe the ultimate Greater Fool trade.

Real Estate Bill: Buyer Nirvana?

The Real Estate Bill 2011 is  the strongest attempt so far to regulate the massive real estate market. Since there seems to be rare consensus between political parties on the issue, there’s a good chance the Bill will be passed in Parliament. The Real Estate Bill will not only protect buyers from the unethical practices of unruly builders and developers but also promote transparency and accountability in the real estate sector.

Bangalore Properties - Real Estate India - Whi...

It is often the case that developers do not divulge the nature of a housing project, size and cost accurately. Agreements between buyer and developer typically favor the builder, giving him tremendous leeway to change terms without any compensation to the consumer. Take the case of Springfield Apartments in Bangalore where seven wings were constructed illegally and sold by the builder without the necessary approvals. Almost 1,300 residents faced eviction when the fact came to light.

Housing projects also get delayed or cancelled if builders launch projects without acquiring necessary sanctions. The Real Estate Bill aims to right this skewed balance of power and restore confidence of buyers in the real estate sector.

Key provisions of the Real Estate Bill 2011

The Real Estate (Regulation & Development) Bill 2011 supports regulated and planned real estate development via standardized practices and efficient systems for the sale of immovable properties. Key provisions of the draft Bill include:

  • Establishment of Real Estate Regulatory Authority (RERA) in each state to assure planned and orderly growth.
  • Mandatory registration of developers and builders for accreditation.
  • Mandatory public disclosure norms (allowed only after all approvals are in place) that include developer details, project, land status, statutory approvals, and contractual obligations.
  • Promoters’ obligation to adhere to approved plans and project specifications, with clause to refund buyer satisfactorily in case of default.
  • Allottee’s (Buyer) obligation to furnish payments at agreed interest rate without delay.
  • Directive for developers to allocate 70% of funds collected to that project to avoid misappropriation of consumer’s money and delays.
  • Establishment of Authority (one chairperson and at least two members with experience and knowledge of real estate) to advise government in planning and dispute resolution.
  • Establishment of a Real Estate Appellate Tribunal (REAT) by Central Government for quick resolution of disputes submitted by Authority.
  • Establishment of a Central Advisory Council to counsel government and make recommendations to protect consumers and foster growth of real estate sector.
  • Penal provisions to ensure compliance.
  • Jurisdiction of Civil Courts barred on matters before Authority or REAT.

What’s in it for buyers?

Bangalore Properties - Real Estate India - Sou...

The Real Estate Bill will help to contain the circulation of black money that is rampant in the real estate sector. Public disclosure norms and registration of developers will reduce fraud and possession delays as developers will have to complete all approval processes before launching a project or advertising it.

Developers’ unfair practice of reducing common areas, making arbitrary changes, selling off cordoned open spaces, and modifying terms would be restrained as these actions will be penalized. Fair agreement terms will also help buyers.

What’s in it for developers and promoters?

The Real Estate Bill will create an opportunity for honest developers to differentiate their projects and services from the masses. Since state authorities will be given 30 days to reject or accept an application along with necessary paper work, development of projects will not be delayed over administrative red tape. As allottees are also legally accountable under the Bill, developers will be protected from defaulting buyers and bankruptcy.

If the Real Estate Bill is passed in Parliament, buyers will be the happiest lot. Too many unscrupulous builders have come up, looting people as well as the environment with corruptly gotten sanctions, false promises and unplanned development. However, a Bill is as effective as its implementation. Will the Real Estate Bill lead to the maturation of a quality real estate industry in India? I sure hope so.

 

Bye Bye Austerity?

20110627 Now that is inflation!

In 2010, a pair of Harvard economists published a paper, “Growth in a Time of Debt” that concluded that countries with a debt exceeding 90% of their annual GDP experienced slower growth than their thriftier peers. It was a statistic to which pro-austerity policymakers could cling and Germany, with a “never again” attitude towards Weimar Republic era hyperinflation, got much of Europe to sign-off on austerity to obtain bail-out funds.

However, biggest problem with austerity is that it can potentially kick-off a deflationary spiral that might actually increase indebtedness. And the latest euro-zone stat is proof of that: In the euro area the government debt to GDP ratio increased from 87.3% at the end of 2011 to 90.6% at the end of 2012. Besides, how is growth going to come about if both the public and private sectors contract at the same time?

eurozone pmiThe latest manufacturing PMI numbers are showing that the slow-down has now spread to the “core” Euro-zone economies. “The renewed decline in Germany will also raise fears that the region’s largest growth engine has moved into reverse, thereby acting as a drag on the region at the same time as particularly steep downturns persist in France, Italy and Spain.”

Bill Gross, of PIMCO fame, who had once warned that UK debt levels were too high, leaving gilts “resting on a bed of nitroglycerine” has recently changed his tune: “The UK and almost all of Europe have erred in terms of believing that austerity, fiscal austerity in the short term, is the way to produce real growth. It is not. You’ve got to spend money.”

And last week, Reinhart and Rogoff’s most famous finding has been debunked by a 28-year-old student. Earlier this month, Thomas Herndon, a graduate in the economics department at Amherst College in Massachusetts, found that they had made fundamental mathematical errors in the study – and all because of a flubbed Excel spreadsheet.

Will Europe’s policy makers change their stance and resort to a looser monetary policy and ease up on the austerity principle? Markets in europe (London +1.88%, Germany +2.23%, France +3.14%) started rallying as soon as the dismal PMI numbers came in – at least they seem to believe that the liquidity spigot is soon going to be let loose.

Because secretly, we all want the dole

Atanu Dey has an interesting post where he outlines the three lessons of development economics:

  1. Economic policies matter
  2. The objectives of the policymakers matter in the choice of economic policies
  3. The public determines what policies the politicians choose

He concludes:

The problem is that the general population does not know the basics of good economic policies. That’s the great challenge we face.

 

People need to know because if they did know, the policymakers would know that they cannot fool the public any more of their self-serving policies. That would bring about the conditions for the policymakers to choose good policies.

However, I feel that decades of socialism has corrupted the Indian soul. Deep within us, we know that current policies are setup to enrich those in power. And we also know what is to be done. But we don’t force our policymakers to make those changes because we, as a nation, are morally bankrupt. We are happy fighting between ourselves for the scraps that are thrown at us. And secretly, we all want the dole.

Source: Three Lessons of Development Economics, or Why Utsav Mitra is Mistaken

 

A brief history of Banking

Today we’ll talk a little about the history of banking…how modern banks as we know them came about. We shall also cover the important types of banks and the role of a central banking authority. As with last week, the source of a lot of this information is the book ‘An Introduction to Global Financial Markets’ by Stephen Valdez.

Background

European Central BankIn a lot of ways, modern banking owes its origins to the Italian merchants of the 13th, 14th and 15th centuries. The merchants would sit in open air benches, called ‘banco’ in Italian, to do their money lending business, hence giving us the word ‘bank’. If the business went into liquidation, the bench would be officially broken, giving us the word ‘bancorupto’ or bankrupt! These  bankers were very advanced for their times, they used to do business with traders as far away as London, experimented with marine insurance, had book entry for money instead of physically transporting it and even double entry book keeping systems. Banknotes were invented in the UK by goldsmiths. Goldsmiths has secure vaults of gold and silver coins and would give out receipts for deposits and borrowings backed by gold coins. In fact, for a period of about 150 years goldsmiths were synonymous with bankers in the UK!

Types of banks

Commercial banks

These banks are involved in classic banking activities – taking deposits from investors in return for interest payments and lending money to individuals/businesses. Some commercial banks are into retail banking i.e. catering to the general public and small businesses. Some are into wholesale banking catering to large businesses and institutional investors. Wholesale banking usually involves lesser volumes of transactions than retail banking but the transactions are generally of much higher value.

Merchant and Investment banks

Merchant or Investment banking is the business of ‘helping people raise money’. These banks advice their clients on issues related to merging with or acquiring other companies, issuing new bonds or equity and deciding on the best way to raise capital. If the clients want to raise capital by issuing bonds or equity, these banks help them zero in on the right price, assist in selling the issue to investors and sometimes also underwrite the issue – i.e. buy the securities issued if investors do not.

In the UK, the terms Merchant banking and Investment banking are used interchangeably and mean the same. However, in the US, Merchant banking is used to the practice of applying the banks own capital in takeover/merger activities.

We will talk in more detail about Investment banking activities like Merger and Acquisitions (M&A), Initial Public Offerings (IPO) and underwriting in the coming weeks.

A bank’s balance sheet

English: Detail from Government. Mural by Elih...

A bank’s liabilities would include the shareholders equity plus any retained profits, customer deposits (the largest figure) and other borrowings (for e.g. bonds issued). The liabilities are money borrowed from others that the bank needs to repay at some point. Assets represent how this borrowed money has been utilized. The money may be held as cash reserves, invested in short term securities like money market funds (available at short notice), invested in other securities like Treasury bills, or may be in the form of property or equipment that cannot be easily liquidated. The balance sheet shows what the bank is worth at a particular point in time as the difference between the assets and liabilities will give the profit or loss for that period.

The role of the Central bank

In many countries, though not all, there is a central bank which oversees all the other banks and also serves as the market maker for the country’s economy and manages the government’s money. In some countries there is a separate authority other than the central bank for regulation. In general, the central bank plays the following roles –

  1. Serves as a supervisor of the banking system
  2. Maintains the economic health of the country
  3. Issues bank notes
  4. Serves as a banker to the government
  5. Acts as a ‘lender of last resort’

The Central bank often mandates that all banks report their profit/losses, liquidity and any large exposures to it at regular intervals. It also has rules pertaining to the minimum amount of cash reserves that banks should maintain, called the liquidity ratio. Often, the Central bank requires banks to deposit a ‘balance of reserves’ with it. The idea behind this is that the banks should be able to repay investors even if a certain percentage of borrowers default on their loans. Thus, the banks should maintain a healthy capital ratio i.e. the ratio between its borrowing (capital) and lending.

Central banks maintain the economic health of the country by regulating interest rates. The concept is – as interest rates are raised, loan payments go up and so does the cost of borrowing money. Therefore, people have less money to spend and the price of goods has to be lowered to attract buyers. This leads to a recession like scenario.  Conversely, when interest rates are lowered, loan payments come down and the cost of borrowing is reduced. So, people go out and spend more. This boosts the economy and stimulates growth.

Central banks help governments raise money by handling government issues like bonds. The cumulative sum of money owed by governments by borrowing is called the national debt. Economists compare the national debt to the national income as a ratio to measure the country’s economic situation. For this purpose, the figure for Gross Domestic Product (GDP) is used as equivalent to the national income.

Finally, Central banks also help other banks temporarily when they meet problems with their liquidity. Though, given the current global economic problems, the term ‘lender of last resort’ has come to mean simply, the rescuer of banks in big trouble who are too big to fail!

 

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