Economics


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By ZamChro

It is very scary to see  Kwacha depreciating at a very fast rate. It is costing almost K6 000/per $1. The Jump from Nov’08 to February is just too enormous. This is what we predicated way back here at Zambian Chronicle, the collapse of the world economy is evidently has a lot of impact on the Zambian economy .

That is what happens when you are so dependent on the outside funding. Something is really wrong. This is what happened to Zimbabwe.

In America the economy is souring twice as much, although unlike Kwacha, the $ is appreciating. People are losing homes like crazy and job losses are sky rocketing.

US bank shares hit 17-year low yesterday on rising fears the government will have to nationalize troubled institutions such as Citigroup and Bank of America wiping out investors’ confidence as they feared government controlling of large portion of the financial sector.

According to the Financial Times report, Bank of America shares slid 14% to $3.93 their lowest point since 1984. Share in Citi were down 13.8%, closing at $2.51, their lowest since 1991.

There some options for the banks being discussed. One option, at least for Citi- would be to convert some or all of the government’s $45bn holding of preferred shares, as well as the $35bn in preferred shares held by sovereign wealth funds and other investors into common stock.

There is some refreshing news though from at least one country.

Canada has shown itself to be a pretty  good manager of the financial system in ways that haven’t always been in the United States. This is due to stricter regulation and their conservative culture, one that depends heavily on a vast and stable retail branch network, and clubby working relationship,.

Canada‘s banks have remained the strongest in the G7 and according to the October report by the world Economic Forum, the soundest in the world.

According to a Finance professor at the University of Toronto,  “… in Canada they do it the old fashioned way, where you need money you go to the bank and they will lend you no more than 75% of the value of your house. Canada is a more conservative place and as much as it limits growth in good times, that approach pays off when others begin a race to the bottom.”

It even gets better to know that there is a country like Canada in this world with reliable banks. Instead of our consulting Nigerians, it may be beneficial if President Banda would surround himself with world leaders like the Prime Minister of Canada.

In Canada, five banks the Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia, Canadian Imperial Bank of Commerce and Bank of Montreal , Largely control the market through thousands of branches across the country, forcing geographic diversification and efficiencies of scale generally not found in US or other countries.

Canadian investment banks, as part of commercial banks, are more tightly regulated and kept in check by main institutions, which would pay a price for unwise investing.

The Financial Times reported that after President Obama’s first visit to Canada, he has decided on taking a path that other presidents have not taken in the past putting banks his agenda and staying open minded to new ideas.

More drama on the souring economy.

On another note, UBS has been sued on account of 52,000 Account holders. The Department of Justice sued the Swiss bank giant for records on thousands of U.S customers. The DOJ says UBS agreed to pay a $780Million fine and reveal information on 250 US customers to avoid prosecution but vowed to fight the broader disclosure. Though some think the end of secret Swiss banking is nigh.

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By Margaret Mangani

DURING his inaugural Press conference on November 14, at which he named his Cabinet, newly-elected President Rupiah Banda kept all who attended the function at State House guessing as to who would be named vice-president.

Only Mr Banda knew who his successor as vice-president would be. For others, it was still a mystery.  There was so much speculation regarding the position in the newly constituted Cabinet.

Some organisations were even suggesting that the position should go to a female for a change as a way of maintaining gender equality in the Government.

Strangely though, others were supporting the idea that the opposition should have been considered in a spirit of power-sharing.

Such was the debate that went on before the veil was lifted.

Alas! All that was never to be; it was just wishful thinking.

The prerogative of appointing members of Cabinet lies solely with the head of State.

He knows what is best for the Government.

Of course, some known names of politicians were on people’s lips as they were being floated around as possible candidates.

But when the moment of reckoning came, when President Banda broke the news of the day, the one who got it was far from those on the people’s lists.

This was evident when George Kunda’s name was announced.

All heads turned and mouths were agape as if in a state of shock.

What! George Kunda for vice president as well as Minister of Justice?

No! Perhaps it was a mistake.

But it was real. President Banda had just conferred Kunda with a dual honour.

And when the cameras zoomed closer on him in the audience where he sat humbly listening to the proceedings, his reaction was as cool as a cucumber.

While other excited members of Cabinet openly expressed their joy on being appointed, Mr Kunda simply nodded his head in approval accompanied with a grin.

It was amazing that the second top most job of the Government had landed on Mr Kunda.

Son of Jackson Kunda and Eginala Mwelwa, Mr Kunda was born on February 26, 1956 in Luanshya,

His parents, who are quite advanced in age, hail from Serenje’s Mashimani Village where they still live.

Mr Kunda is the first born in a family of nine.

It was once a balanced family of 10 – five brothers and five sisters but, unfortunately, one brother died.

Mr Kunda is married to Irene, a fellow lawyer and runs the family’s legal firm, George Kunda and Company in Lusaka.

The couple met at the University of Zambia (Unza) while Mr Kunda was studying law and now have six children.

Howard is a businessman in Ndola married to lawyer Anne Grey.

The second is Georgina, currently studying in Canada, followed by Marion who is married to singer Wilson Lungu, popularly known as Wile.

George Jnr is pursuing accountancy studies.

Godfrey is the only child who has followed the parents’ footsteps- studying law while the last child, Chiluba, is in grade 12.

The Kundas also have seven grand children.

Mr Kunda did his primary school education at Fisansa in Luanshya’s Roan township and then went to Mpatamatu primary school where some of his senior schoolmates were Dr Joseph Temba, Dr Kalombo Mwansa and the late Lagos Nyembere.

He then qualified to Mpatamatu Secondary School where he was influenced to study law after he came into contact with a few lawyers.

He admired their smartness and big briefcase.

In 1975, he went for the mandatory military training offered by the Zambia National Service (ZNS) in Ndola and later Solwezi for the production unit.

After that, he went to Unza to fulfil his dream of studying law.

After being admitted to the bar, he worked for the then Luanshya District Council as a solicitor advocate.

He then joined Niranjan Patel and Company and later worked for Cave Malik before he resigned with a view to establishing his own private firm, George Kunda and Company, in 1991.

It was during that time that he was inspired to join politics to serve the Zambian people as he felt obliged to offer himself and contribute to national development.

It is common that the legal profession is associated with wealth and prestige but Mr Kunda decided to venture into politics with a desire to serving the nation.

Mr Kunda can aptly be described as hard working, honest a perfectionist at his work, and leaving nothing to chance.

Those are his wise words passed on to the upcoming lawyers in the legal fraternity.

Mr Kunda emphasises on mutual respect, punctuality and efficiency as some of the virtues of a good advocate that can lead one to scoring many positive strides in life’s long journey.

Lawyer Eric Silwamba who first met Mr Kunda in Ndola in 1985 while he was working for Ellis and Company had this to say .

“I came to know him as a thorough and conscientious legal practitioner. A stickler for detail. A typical example is the last presidential election petition. He kept a meticulous record of all the court proceedings, which he had personally typed. During our Ndola days, It was always a pleasurable challenge to meet him on the other side in court.

” I remember with fond memories an election petition involving a councillorship in the Kabushi parliamentary constituency. This was during the one party state,” he said.

Mr Kunda describes his new appointment as a big challenge and assures the nation that he has already settled down to work, as that is what is demanded of him.

Why was there a pose at the mention of his name?

The answer is simple.

It is because this is the man who has served Zambia, first as Minister of Legal Affairs. when the late president Levy Mwanawasa appointed him at the age 45 in 2002.

Within the same year he was conferred with the highest honour of the land as state counsel by virtue of his appointment as Legal Affairs minister.

Previously, he held the position of Law Association of Zambia president from 1996 to 2000.

Mr Kunda refers to this period as the best moment of his lifetime as he was elected for two terms consecutively scooping the chairmanship with a landslide victory in a highly competitive race.

“As LAZ president, I was committed to it such that I thought that it was the highest achievement that I had scored in life. I was the longest-serving president, having been unanimously elected consecutively,” he said.

Mr Kunda has also experienced the dark side of his politicial career and he cites the serious accusations levelled against him and the Mwanawasa Government as the most trying time but he could not stand up to defend himself in the midst of all that even when he knew deep down that he was innocent.

“I was bound by the leadership ethics as well as the oath of secrecy not to divulge information that may jeopardise State security. As a lawyer representing the State as my client, my hands were tied I had to protect its interests and that is what we were taught at the law school,” he said.

It is not his first time to handle dual responsibilities in the Government.

He previously held the position minister of Justice as well as that of Attorney-General, an action that triggered a lot of controversy in certain circles.

Mr Kunda recalls that period as the most challenging time of his political career because the Government had to tackle the issue of the Constitutional Review Commission, the presidential petition, the removal of the immunity for former president Frederick Chiluba and the impeachment bid on Dr Mwanawasa.

“I contributed greatly to ensure that there was good governance, peace and order and I rendered the necessary legal advice,” he said.

Nevertheless, he served in the same portfolio diligently while serving in the National Assembly as a nominated member of Parliament until 2006.

That year, Dr Mwanawasa decided that the two portfolios be separated, and that saw him appoint Mr Mumba Mulila as Attorney-General while Mr Kunda retained his position as minister of Justice.

Mr Kunda then stood for parliamentary elections in Muchinga constituency in Serenje and won with a landslide victory.

Again, he was appointed to serve as minister of Justice, this time with added responsibility.

” I wanted to go back to identify myself with my roots where I come from. People were challenging me to stand because as a nominated member of Parliament (MP), I was not representing anybody.

“My interest in politics was growing. So I wanted to have a constituency that I could represent although some people doubted if I would make it. But I won those elections with a landslide victory,” he said.

Contrary to complaints that some MPs did not visit their constituencies regularly in order to acquaint themselves with the problems of the local people as well as monitor on-going developmental projects, Mr Kunda said he devotes time from his busy schedule to visit the constituency.

Sometimes, using his personal resources to be with his people, alleviating poverty levels as he considers Muchinga his second home.

His parents are resident there where he has built them a house.

Mr Kunda says his constituency is vast, making it difficult for him to touch all corners within a short time whenever he is touring because of other pressing national duties.

“I have done so much in my constituency. Schools have been constructed and several other projects. The MPs try their best to visit their constituencies. It’s only that national duties demand that they strike a compromise so that they also attend to other needs for them to maintain a balance,” Mr Kunda says.

Mr Kunda feels that he will accomplish his mission, having reached the peak of his political career as vice-president.

He will discharge his duties diligently without leaving a vacuum in the ministry of Justice as the role of dealing with policy issues will be adequately covered by new Deputy Minister, Todd Chilembo while he will be there to offer guidance.

With Mr Malila and Solicitor-General Dominic Sichinga, alongside Permanent Secretary Getrude Inambwae in place, this makes the ministry of Justice fully established.

He says, unlike in the past when the ministry of Justice lacked a deputy minister, now it has one .

Mr Kunda does not doubt that Mr Chilembo, a senior lawyer, will be able to handle the bulk of the policy work.

In his own words, President Banda said he was appointing Mr Kunda as one of the longest and most experienced Cabinet ministers in the MMD government and was confident that he would deliver to the best of his ability in his new appointment.

Humbly accepting the appointment, Mr Kunda assured the nation that he was ready to discharge his functions to the fullest.

A former soccer player during school days, having played as a member of Buseko Club in Luanshya with former Zambia coach Patrick Phiri, Ghost Mulenga, System Chilongo and Bernard Chanda, he is no longer active in sports.

But Mr Kunda enjoys listening to gospel music, Zambian music from John Chiti, his son-in law, Wile and rhumba.

Being Catholic, he sometimes goes to church on Sundays.

He plans to revert to his private law firm and offer consultancy services after retiring from active politics, of course with a rich curriculum vitae.


 

 

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The stakes are high and oh, yes they are … the world economy is in shambles and there is very little time for the Banda Administration to honey moon. With the Kwacha depreciating against hard currencies, commodities prices going down and our purchasing parity dwindling, the next few years will call for extraordinary paradigm shifts.

 

The Zambian government has already cut this year’s economic growth forecast to 6% from 7% following a 58% drop in copper prices in London in the last six months. For a country whose 63% of all government revenues depend on the exports from copper and cobalt to the outside world, we don’t envy the Banda Administration taking over the Zambian Enterprise at a time such as this.

 

Even though fiscal year 2007 only gave us a 5.4% GDP growth, government was optimistic the projected 7% was feasible but with the global financial crisis, reduction in foreign investment will impact growth forecasts for a country that relays heavily on FDI.

 

Further, the imposition of a 25% profit windfall tax and an increase to 3% from 0.6% on mining royalties is another factor that may be a huge cause for concern in this economic downturn because technically corporations don’t pay taxes they simply pass them on to consumers.

 

Such higher taxes lead to mining companies imposing wage freezes until such a time that they would increase their operating revenues above the taxable threshold, the resultant being less consumer spending coupled with less factory orders due to stagnant income and or liquidity that lead to other effects.

 

On top of that the global financial squeeze has the capacity to force institutional investors to withdraw foreign exchange in government securities. This has already hurt the kwacha and government has to do double time to stabilize the local currency using other fiscal measures that would curb inflation as well.

 

As the local currency depreciates a lower purchasing parity making goods imported into the Zambian Enterprise more expensive than usual kicks in due to balance of payments in our current accounts. The spiral is long winding and thus the call for more focus from us at the Zambian Chronicle.

 

Fortunately for President Rupiah B Banda, he is an economist who would have a good grasp of the economic issues at hand but what will work against him is what we call the “Expectations Game” from the electorate.

 

With Levy having enjoyed relative growth during a time the world economy was growing, the average Jim and Jack will not buy Rupiah’s story of the world undergoing a recession, in fact every Jim and Jack thinks RB should do better … and who on God’s earth would blame them?

 

We don’t even care how good a team RB may assemble, if such a team misses the crux of the matter, there might be very little the Banda Administration may be able to achieve if it does not use the right mix to turn this global economic malaise to its advantage.

 

Different economic theories apply to different scenarios to leverage and mitigate prevailing circumstances. It’s more like different medicines being used for different diseases and what worked there and then may not in the here and now.

 

Having analyzed all scenarios involved we at the Zambian Chronicle see the normative approaches that are great at offering prescriptions and recommendations on what should be done to not only help lower “expectations” but also help reach the targeted growth and forecast.

 

Neo-Keynesianism might be the best route here. This is because this theory looks more at what government involvement would be in terms of the General Theory of Employment. The Japanese used this theory after World War II captioned it and called it “Total or Full Employment”.

 

By mandating that every Japanese be employed they created revenue through taxation of their able-bodied working citizenry. The Japanese government deliberately embarked on construction of airports, highways, bridges and other infra-structures using borrowed money until they had enough reserves of their own.

 

The Zambian Enterprise has enough reserves to start with and can do with what we have on hand to seriously begin applying Neo-Keynesianism. While this economic theory has other variations like effect(s) of interest rates and money supply, the main impetus though is on total employment deliberately commissioned by government and or using government incentives.

 

Upon completion, government can start levying toll charges on these roads, bridges, airports, etc. to recover construction costs and meanwhile as more people enter the work force, consumer spending increases, government revenue goes up with taxation kicking in a multiplier effect and the rest is history.

 

This will not be easy to achieve though because it will require changing the way we think and operate. Every one has to have a sense of urgency and move in the right direction all pulling for mother Zambia knowing our time is now.

 

These are serious times; the Banda Administration is at the bleak of making it or breaking. Levy’s shoes are way too big for any one to fill and times have changed, what worked for us then may not now and we all owe it to ourselves to move the nation forward.

 

We wish the new administration God’s Speed as the honey moon dies down but time is of the essence otherwise there will never be another MMD administration (not that we are rooting for the MMD) if the right economic mix is not adopted, it is now or never.

 

Live Long & Prosper; that’s this week’s memo from us at the Zambian Chronicle … thanks a trillion.

 

Brainwave R Mumba, Sr.

CEO  & President – Zambian Chronicle 

 

Copyrights © 2008 Zambian Chronicle. All rights reserved. Zambian Chronicle content may not be stored except for personal, non-commercial use. Republication and redissemination of Zambian Chronicle content is expressly prohibited without the prior written consent of Zambian Chronicle. Zambian Chronicle shall not be liable for any errors, omissions, interruptions or delays in connection with the Zambian Chronicle content or from any damages arising therefrom. 

Zambian Chronicle is a wholly owned subsidiary of Microplus Holdings International, Inc.

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Meet Hakainde – His Profile

 

Hakainde Thinks Public Service Is A Noble Enterprise – Thus The Decision To Enter Politics

 

Hakainde On The Economy

 

Hakainde On Investments

 

Show Me The Money – Hakainde Excogitates

 

Hakainde On Education

 

Hakainde on Infrastructure Development & Constitution Making

 

Hakainde Talks About Media & Press Freedom

 

Hakainde On Transparency & International Relations

 

Luapula Women Sing – Hakainde Muchele Nowa Mukene Akatobela …

(Hakainde Is Salt Even If You Once Denied It, You Would Dip Into It Nevertheless …)

Disclaimer: Zambian Chronicle looked for clips for other Presidential Candidates but found none, thus the only interview posted is that of Hakainde Hichilema. It is for this reason that we have asked our audience to furnish us with info to the contrary and we are willing to pay for such publication(s) so other candidates would be accorded equal airtime.

 

Copyrights © 2008 Zambian Chronicle. All rights reserved. Zambian Chronicle content may not be stored except for personal, non-commercial use. Republication and redissemination of Zambian Chronicle content is expressly prohibited without the prior written consent of Zambian Chronicle. Zambian Chronicle shall not be liable for any errors, omissions, interruptions or delays in connection with the Zambian Chronicle content or from any damages arising therefrom. 

Zambian Chronicle is a wholly owned subsidiary of Microplus Holdings International, Inc.

Copyrights © 2008 Microplus Holdings Int., Inc.

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NEW YORK — In the end, congressional approval of the government’s $700 billion financial rescue plan Friday did little to lift the financial markets from their growing dejection over the obstacles still facing the economy. Wall Street ended an intensely volatile week with the Dow Jones industrials falling 157 points and the major indexes all suffering big losses.

The credit markets remained stagnant, with no immediate signs of when lending and borrowing would return to levels even approaching normalcy.

Investors dumped stocks late in the session after a big intraday rally, repeating a defensive move seen throughout the yearlong market pullback. As lawmakers voted on the plan, which President Bush quickly signed into law, the Dow advanced more than 300 points. After it passed, the blue chips moved in and out of positive territory.

Investors had been anxious for resolution on the government’s plan to buy up bad assets from banks and other institutions to shore up the financial industry and help resuscitate credit markets. Trading across markets was turbulent throughout the week as investors tried to determine whether the plan would win approval and what effect it might have if implemented. On Monday, the House’s rejection took Wall Street and Capitol Hill by surprise and handed stocks their biggest losses in years.

The Senate subsequently passed a sweetened version of the plan that added tax breaks and raised the limit on federal deposit insurance from $100,000 to $250,000.

But Wall Street has come to realize passage of the plan is not a quick fix.

“We’re three weeks into a severe credit crunch and it’s causing untold economic damage to the country,” said Hank Smith, chief investment officer at Haverford Investments. He said while the bill’s passage will help Wall Street, the broader effects of the paralysis in the credit markets have yet to emerge.

“It’s fairly reasonable to assume that this should help unfreeze the credit markets but what we don’t know is what’s happened so far. How much of a dent has it put into the economy?”

Read More Story on http://www.huffingtonpost.com/2008/10/03/post_168_n_131527.html

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Economic Growth is expected to decrease from 8% to 7%.

 

According to the International Business Writer, the financial crisis in the United states is damaging markets around the world, from Brazil to South Korea. Lehman Brothers  Holding Inc. Bankruptcy and the fall of American International Group Inc has brought the decrease in stocks around the world.   

Report states that, In Russia prices of shares fell to the lowest level in three years. Russia suspended trading in the day which has not been done since the financial crisis in 1998. 

The Shanghai, Hong kong and Tokyo markets also saw  trouble after closing Monday for holiday and upon returning saw   stocks drop after the massive blows to financial market. 

In a number of developing countries , banks stepped in to help provide liquidity for their banking system. Countries like Indonesia for example lowered the rate at which commercial banks borrowed from the central bank. Taiwan cut capitol- reserve ratios held by commercial banks in hopes of alleviating mounting problems. 

Investors of emerging markets around the world, are taking less risky moves to help sell assets to pay for losses elsewhere. The report points out that , Devan Kaloo of Aberdeen Asset Manager in London, the company who oversees 10 Billion dollars in emerging stocks says, “when times get particularly hairy, foreign money generally goes back to base. Everything is being sold. In the end, it’s a sea of red.”

As commodity prices fall emerging markets are taking a number of loses. 

With continuing concerns of a global market slow down Arjun Divecha of GMO LLc ” the logic explanation for why these markets have fallen so much is that there is a real growth scare.”

China cut interest rates due to growing worries of the stability of the wide markets with goals of boosting the economy. This is the first time in six years the Chines government has cut interest rates. Some investors believe that the market values of some emerging market stocks are good values. Although most believe it is a time of careful analysis and caution because high risky stocks do not expect to do very well. 

In London shares in HBSOS a United Kingdom mortgage lender fell 22% while Barclays fell 2.5% after Lehman Brothers report of bankruptcy. Lehman brothers was planing  on selling some of it s assets to Barclays bank in which some reports say an agreement was made.

Markets worldwide are taking a hit after a weakening trust in US banks following the bankruptcy of Lehman Brothers. 

A look at China:-

On the other note ,China who is one of the US top lenders still moving forward with the business innovation power.

International business writers at Seton Hall University, States that : “It is a tough call on what should be thought about China. With so much instability having been seen and the ever present question of their still communist government to deal with, one never knows what can happen in Chinese economy.” 

As of Sept 17 2008, the Chinese government has stepped in again to change the face of telecommunications industry in China. Before, the industry was set stone with China Mobile controlling the mobile market and China Telecoms controlling the fixed-line services. Each had its own competitors would combine forces creating three major players in the industry. 

As part of the deal, China Unicom will sell a substantial portion of its cell phone services to China Telecom to help Create Competition against the giant, China Mobile. Then the mobile and fixed- line capacities of China Unicom and China Netcom would merge to Create China Unicom ( Hong kong) Limited,” Leading fully integrated telecommunications service provider( Hong Kong Business Wire). 

The new company will serve as competition against the two giants China Telecom. How ever China still hovers above the rest. With talks of pending 3 G network going through China Mobile will just become stronger.

Source:

Economics news letter and International Business- Seton Hall University

 

Belliah K Theise

COO and Managing Editor – Zambian Chronicle 

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I have been inundated with a lot of questions about the global economy this week; a lot of these questions are to do with the impact of the US economical woes on our global franchise, the Zambian Enterprise included.

 

So, I decided to put on my financial consultant hat and delve into as many econometrical variables as possible to try and explain what a layman may not be told are actually the causes of the economic impasse in the United States.

 

We at the Zambian Chronicle saw this coming as early as last year and in January we published David Frazier’s Global Economic Briefing in US Recession Could Affect Our Global Enterprise, The Zambian Enterprise Included …. This was followed by the Bush Administration’s rebuttal in Bush Sees No Recession Yet the very next month.

 

The argument from the administration has always been that economic fundamental have been sound and therefore much of the attention has been on monetary policy as the Federal Reserve Board has been trying to work on efficacy by reducing Fed Funds Rates. By the way, the Federal Reserve Act of 1913 gave the Fed more power than even the President of the United States when it comes to fiscal policy …

 

The problem with the reduction(s) of the funds rates though was that it created an illusion that by lowering the rates, the cost of borrowing would be lower thereby encouraging market participation by increased credit derivatives (lending and borrowing) in the market.

 

So new buyers were introduced into the system; mortgagee(s) rushed in and started refinancing already existing loans at the new lower interest rates at times cashing in on existing equity and business was booming as finance companies managed to make tones of money from loan origination fees, increased their asset holdings at much higher appraised values while turning around to sell mortgaged backed securities on the secondary market.

 

This illusion missed one point though; liquidity, liquidity, liquidity … the US unemployment rate has steadily been increasing from a “One State Recession” in Michigan at about 12% to the national average of about 6%. This meant that more and more people were getting out of work and despite their new lower mortgage rates and cashed out equity, they had no “ability to pay”.

 

Meanwhile the Federal Reserve kept on lowering the funds rates which eventually became a stimulus that would only encourage further mischief as lenders abrogated their fiduciary duties extending credit to unworthy borrowers and cut corners to close on deals.

 

The Fed regime was an accomplice to that reckless behavior. A fed funds rate of around 3.5% was a detriment particularly with commodities prices soaring and incipient inflation coming to US shores from demand-pull pressures and rising labor costs.

 

A real palliative came in as home owners started defaulting due to their lack of liquidity, leading to foreclosures and short sells. As homes foreclosed and or are short sold, their values declined thereby creating negative equity.

 

But that’s not all, what added salt to the injury is what is called “securitization”. This particularly in the US market comes in the form of Mortgage Backed Securities – MBS. These are asset backed securities sold on the secondary market whose cash flow is backed by collateralized mortgages.

 

Any one with an understanding of basic finance knows that if you borrowed $100,000.00 for 30 years you would probably pay back $300,000.00 on that same mortgage, $200,000.00 of which would be interest income for the lender.

 

These MBSs are backed by that interest income, sold as bonds and or other financial derivatives on the secondary market with a guaranteed yield. Insurance companies, retirement funds and other ultra-virus thrifts like to invest into these marketable securities because of their guaranteed revenues.

 

Well, the problem is if people have no work and thereby are defaulting, then the MBSs are not in actuality guaranteed for the loan term(s) because of foreclosures and or short sells in a downturn economy or prepaids in a vibrant one.

 

These marketable securities (MBSs) are a prerogative of the Securities and Exchange Commission (SEC) and they are regulated by them but they were asleep at the switch. The Federal Reserve Board is in charge of monetary policy and just kept on lowering funds rates and was asleep at the switch.

 

The Department of Treasury has a stake in checking on the yields from MBSs because they affect yields on Treasury Bills but was asleep at the switch; the Bush Administration was busy chasing Bin Laden and was asleep at the switch while the US Congress are supposed to be the watchdog for the tax payers but were busy fighting partisan politics, sleeping at the swath.

 

As of the first quarter of 2006, the total market value of all outstanding MBSs was approximately USD 6.1 trillion, according to The Bond Market Association. These are paper assets in which tax payers’ retirement security has been vested and is likely to be lost if no one takes the right steps going forward.

 

There two schools of thought going on this weekend in Congress, one that says a Government bailout means socializing the markets. Another school of thought wants to lend money to Fannie Mae and Freddie Mac so they can pay back with interest using market forces.

 

We at the Zambian Chronicle see an opportunity for the Federal Government so good to be passed on. The best route would be an outright bailout that places Fannie Mae and Freddie Mac under receivership.

 

This route would not only make the American tax payers shareholders in the $700 billion bailout  enterprise but as these non-performing loans are turned around into performing assets all future interest income can be turned around to be invested into the Social Security and Medicaid/Medicare Trust Funds which are scheduled to go bankrupt by 2045.

 

… problem is I am not running for President of the United States of America; can’t run – not a US born citizen and so they probably would not listen …

 

In closing, this is a dire lesson for all emerging markets, the Zambian Enterprise included. What we have learnt is that greed is bad; using securitization, fund managers increased their income as they lowered their own risks.

 

By cutting corners, greedy loan officers and finance companies made a short term killing and by sleeping at the switch, the SEC, the Feds, the Bush Administration and the US Congress almost crushed the world’s beacon for capitalism.

 

Sometimes, it’s good to know that no one is actually looking out for you after all, you are on your own and you better watch your own back …

 

Live Long & Prosper; that’s this week’s memo from us at the Zambian Chronicle … thanks a trillion.

 

Brainwave R Mumba, Sr.

CEO  & President – Zambian Chronicle 

 

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