Recession: Why this severe?

As per basic of investments, if person A lost x amount of money, person B gained the same x amount. The money stays in economy, and person B might reinvest the money for some other purpose, this is called money rotation (my own lay-man term). What happened now is, people lost money on real estate and no body else gained it, the money just evaporated. Lending institute is the one dodging the bullet by writing down bad loans. One question may arise why lending institute is selling at low price now, and can they wait some more time to sell it higher price? But holding a foreclosed asset is high expense than selling it 20-25% price down.

A rough estimation is, an average lending institute holds 90% of home loan value on foreclosed houses. 1 million houses were already foreclosed and almost 6 million will be foreclose with in next year. On each house for sake of argument say lending institute losing $100k, so that equal to 7,000,000 X 100,000 = 700,000,000,000/-, which itself is $700 Billion. So far government gave about $165 Billion as bail out money, which may not enough to cover even legal fees which lending institute accrued over foreclosed houses. So we can’t expect them to loan more to public right now.

The so called money rotation is just frozen to small industries, car loans, student loans and all kinds of loan, so now we are going through a non money flow time as a result catastrophically job loss and severe recession. This is exactly happen in Japan from 1990 to 1999, they had unrecoverable prolong recession for almost a decade and economy again rebounded after digital, plasma TV inventions. But U.S.A is not a Japan, they are the largest consumers and producers in world, U.S.A’s GDP is 13 Trillion and world can’t afford to prolong recession in U.S.A. 

We have to make smart decisions now, yesterday’s Microsoft’s decision to open a retail shops across America is smart one like wise we need to some top tier companies have to spend some money for wise investments. McDonald already planned to open more stores are the best examples of smart decisions at this recession time. This is good time of making long term investments, many millionaires came out of this kind of market. This with government tax cut, spending make economy flourishes again by this year end.

I end my recession series here…

Happy Valentine’s Day…

Source:

http://en.wikipedia.org/wiki/Japanese_asset_price_bubble

http://en.wikipedia.org/wiki/Foreclosure

http://www.huffingtonpost.com/2009/02/13/microsoft-retail-stores-t_n_166651.html

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