The nigerian economy in crisis.
The SEC chief blames the banks for the current economic downturn and mainly for the stock market plunge. He blamed the ways the banks gave out loans and their way of raising money.
Lending is a vital part of every capitalist economy, but sometimes not paying back the loans can bring out the cons of a capitalistic system or a free market.
In Nigeria, 388 billion naira in such loans could not be recovered, why? Because mainly the loans where used to buy shares in the then thriving stock market and the colaterals used to borrow such loans where also stocks. In an event of any bear market, consumer confidence will plunge and a big sell out will make the market fall further thereby making the borrowed money depreciate with the stock prices and as the collateral also depreciates, this causes more kaos and panic. Even if the borrower sells the stocks, plus the stocks, he cannot pay back the loans and the banks are left with collateral in stocks that are almost worthless. In this kind of scenario, the borrower or investor loses everything and the bank too loses the money it lent out.
This is very similar to what happened in the US, only for what we have in Nigeria may be less stable and a bit more risky. there also, the crisis was ignited when people took mortgage, they couldnt pay back the money they borrowed for their homes, while the homes depreciated in value and they were forced to go into foreclosure. The lost their homes and the banks got stuck with real estate far less in value than the money the lent out to the home owner. The crisis hit the banks real hard that Government had to intervene and many people lost their jobs, many more their homes.
What we are seeing here in Nigeria could be worse than what there is in the US. why? Because the stock market is more volatile than the real estate or housing market, i.e a housing crisis could be a bit more stable than a stock market crash.
As a solution, we can see how the Government in America reacts to its crisis. If successful, we can borrow a few startegies and save the economy.
Also government can buy and hold a few stocks to reduce the amount of selling and dealing that causes the stock to plunge back as soon as they start gaining some ground and people start selling off again. the sec can also intervene and try and enforce a minimum holding period for some stocks so as to eliminate some trading done by investors to profit from turmoil like this.
The executives responsible for this shouldnt go unpurnished if the is proof of their wrong doing or carelessness.
At first, the Government officials though that Nigeria was immune to the global economic crisis. I dont blame them, though I dont know why the thought so, but I also though we were immune to the crisis citing our growing revenues from crude oil sales. I thought we were heading into a boom like in india and china only that ours is not fuelled by manufacturing or information technology but by crude oil.
I did not expect the crude oil prices to fall back quickly and now we are stuck in a correction following the overvaluing and manipulation of share prices in the stock market.
Anyone knows where we are heading?
Tuesday, February 3, 2009
Monday, February 2, 2009
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