Friday, February 27, 2009

The Crisis of Credit Visualized

The best, simplest explaination of current Financial Crisis. Must Watch !

The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.

Saturday, February 14, 2009

Is BNM doing the right thing to reduce interest rates?

Seeing The Star newspaper today, i couldn't help but to blog on the "Your Opinions" column by one of the reader through sms. His title is "Have a heart". Below is his sms:

BANKS should not lower FD interest from 3% to 2.5%!. How do you expect retirees to survive? Heave a heart! BNM, please look into the matter. [adjusted for short form]

I do have a few comments regarding his comment:

1. Who "forced" that person to put his money in FD? Obviously, the answer is nobody, and yet, why is he blaming the Government for getting that kind of return? If he's not happy with that return, then why is he still putting it there?

2. If money is important, why didn't that person learn how to let his money work hard for him? If money is not important, then why does he send that sms in the first place?

3. When he wrote that sms, he's looking from his point of view (only, which i find it selfish), while BNM looks from the overall point of view for the benefit of the overall country! When a country is in recession/depression/ financial mess, BNM's main objective is to bring the economy back to stability, which means, to :
  1. Encourage spending - so that businesses continue, which gives employment to people.
  2. Encourage business growth - so that businesses will hire people, which ultimately reduces unemployment rate of the country.

Which situation would encourage spending (or discourage savings) more than the other ?
A) When interest rate is high (say, at 10% per year), or
B) When interest rate is low (say, at 2% per year)

So, to encourage spending, should the government increase interest rate, or reduce interest rate? I hope the answer is obvious to everyone.

Now, when interest rate drops, lenders (or called depositors, who lends money to the Bank) earns lower interest. On the other hand, borrowers pays lower interest! This again would encourage consumer spending, which helps businesses, who provides employment to the general public.

I believe businesses is one of the main borrowers of money. When interest rates drops, their cost of borrowing is therefore reduced. This would encourage business expansion as their risk of losing money is reduced because of lower cost (which would mean lower break-even, and higher profit). When businesses expand, they create employment to the public.

In conclusion, do not depend on the Government (or anybody to take care of you). Take responsibility, learn about Economics, Finance, Business and Investing. Then, you would know that :

  1. Owning the Casino is better than gambling in the Casino.
  2. Owning Tobacco companies is better than smoking Tobacco, and lastly,
  3. Owning the Bank is better than keeping money in the Bank!
    (assuming you're buying a RM 1 business for RM 0.80 or lesser)