And their deadly plans!
US & Europe face a deadly recession due to slump in housing prices

(column by Bikram Keshari Jena)

Be it an active mortgage broker in Madrid, or Paris Hilton in New York, or Lenny Kravitz in Miami, or Mel Gibson & Britney Spears in California; there's something common about all of them. First, everybody has made fortunes out of the recent housing boom. Second, each one of them, and the US & Euro economy, equally run the deadly risk of going belly up once this bubble pops. The June 2006 data of the US housing sector is definitely no breather for those who are still locked in the sector as the Home Builders/Wells & Fargo Housing Market Index (HMI) slipped to its lowest since 1995. On an extremely perilous note, HMI, which was at 46.01 points in May 2006, came crashing down to 42.39 in June.

All the components of the HMI index - sales, expected sales for the next six months and buyer traffic - most precariously declined to their lowest since April 1995. Commenting on this hazardous depreciation, National Association of Home Builders (NAHB), Chief Economist, David Seiders frighteningly sounded off, "We now expect new-home sales to be off by 13% from the record posted in 2005. Single family starts, supported by large builder backlogs of unfilled orders and some continuing reconstruction in the wake of last year's hurricanes, should be down by about 9% from the 2005 record." Well, it shouldn't be hard for anyone to accept the fact that housing has been the anchor for the US and consequently the global economy at a time when yawning deficits and global imbalances have constantly exerted downward pressures. Housing had kept investments & consumption alive in US & OECD markets. And the most upsetting news is that dampness is clearly settling in now.

Firstly, this fall in real estate prices would affect employment and investment as the construction sector will hold itself back. Secondly, it would have a significant impact on the US & Euro banking system, which had outright financed this boom. With interest rates around the world going up, not only would money supply immediately be curtailed, but banks might also find more and more customers turning bad. But most worrisomely, the price depreciation in housing itself has happened only because consumer demand, and subsequent spend, on housing has gone down (and will continue to do so in the coming year). Ergo, due to the multiplier effect, consumer spending in other sectors would also cascadingly come down, thereby debilitating economic growth significantly. Well, numbers are even scarier. According to IMF, a 10 percentage drop in housing prices in the US could wane consumer spending by 0.5% to 1%, but most terrifyingly, it would bring down the US GDP growth rate by a whopping negative 2% within a year of such decline. Considering the fact that US still plays a major role in the Euro financial system, one can only imagine the cataclysmic impact the above would have on the Euro area. But strangely, no central bank, either in US or Europe, seems to be specifically worried about these issues.

It seems that the assault by various central banks, both American & European, on inflation has proven to be the death knell for housing. Money is no longer cheap for Americans now. Consumers are feeling the pinch as the heyday of cheap money is starting to vanish. The Federal Reserve, which to a great extent had fuelled this boom with its expansionary monetary policy, is on a rate hike spree and has increased the interest rate 16 times in a row. Even the European Central Bank has begun to hike rates after remaining silent for quite a long time. In an exclusive interview, global financial guru, Mark Faber, drew up a troublesome forecast, "First, central banks will continue to increase rates in baby steps. Once housing weakens & other asset markets, such as Dow Jones, decline by 10% from their highs, the US Fed will cut rates in giant steps & print money to support the economy. This will eventually lead to a collapse in USD & bond prices, and finally, a recession amidst high inflation." The situation is even worse for the Euro area as inflation concerns could force the ECB to take steps that might prove debilitating for some countries. Interestingly, due to co-movement of prices between countries, no central bank acting singularly would be able to resolve this issue. Unless the Fed & ECB urgently act in tandem to attack these massively incapacitating issues, the only way for US, Europe and of course, Kravitz, Gibson et al to go is the way Bush's popularity ratings are going... Abysmally down!

(End of Bikram Keshari Jena column)

Sarbanes-Oxley acts, and it really SOX
SOX should be amended to keep public companies upbeat

(column by Deepak R. Patra)

Winston Churchill once said, "Americans always try to do the right thing - after they've tried everything else." With due respects to Churchill, perhaps the time is finally up for corporate America to find out how many things they actually need to do to have tried out 'everything else', as the solutions put forward by the US government to resolve various compliance loopholes (that allowed big corporate scandals like Enron and WorldCom) are themselves turning out to be problems. Leading this problem brigade is the Sarbanes-Oxley Act (SOX), which, with its involvement of huge compliance costs, has become the biggest nightmare publicly listed firms in US could ever dream about. According to the survey titled, "The cost of being Public in the era of Sarbanes-Oxley," released in the third week of June 2006, by the US based law firm Foley & Lardner LLP, 21% of the public companies surveyed have considered going private to avoid SOX.

The report further adds that the average compliance cost for public companies with annual revenue of less than $1 billion, stands at anun believable $2.88 billion per annum, up by a whopping 174% from the average compliance costs before SOX. Interestingly, when SOX Act. was enacted in the year 2002, companies were asked to swallow the expense pill as many of the provisions required initial one time implementation expenses; and the costs were expected to decline there after. But as per Tom Hartman, the Study Director and partner at Foley & Lardner, "While some of the one-time setup costs have gone away, we are seeing trends that off set that and costs that are going up significantly." For example, audit fees - which were up by 96% in 2004 - was benevolently forecasted to decrease in 2005; instead it climbed up another killing 16%. Now, while every fi ft h public company is planning to go private, a lot others are planning to get listed outside US (one reason why NYSE bid for Euronext stock exchange). The government must understand that unless the norms under SOX are relaxed, public companies in US might not have any choice but to end up like Sir Churchill, Lord rest his soul.

(End of Deepak R. Patra column)

Kamal Nath caught avoiding taxes!!!
The Commerce and Finance Ministries must resolve existing conflict

(column by Asif Ahmed)

Perhaps the best way to watch the boom in the Indian economy is to have a look at the budgeted figures presented by every finance minister. However, if one plots budgeted figures, revised estimates & actual receivables, the graph would reveal a different story altogether. As per figures released in June 2006, the Centre's gross tax collection stood at Rs.3,658.74 billion, as against a revised estimate of Rs.3,701.41 billion; the budgeted figure, however, was at Rs.3,700.25 billion. That is, the gross collection has fallen short by a whopping Rs.40 billion; the government now faces a strange dilemma in tax collection from its own policies. If we have to look at specific tax groups, even the share of indirect taxes in gross tax revenues has gone down significantly. According to Praveen Nigam, Partner, Indirect Taxation, Grant Thornton, this share "is expected to further decline as the government will align duties to ASEAN levels. India is obligated under WTO to reduce peak customs duties.

There isn't much the government can do." Another suicidal blow to the government's tax collection efforts has come from Special Economic Zones (SEZs), which, rather than increasing collections, unfortunately have turned out to be a tax shelters, and have even resulted in investment diversions, rather than investment creation. In fact, in the meeting of empowered group of ministers with respect to SEZs, held on June 6, 2006, the Finance Ministry forcefully differed from the move put forth by the Ministry of Commerce to allocate even smaller areas of land for single product zone than currently being given. The Finance Ministry claimed it would lead to a massive loss in tax revenues as even more companies would then join SEZs to escape taxes. The dream for better trade is actually turning out to be a nightmare in terms of revenue collection, as it could even affect the government's fiscal management programme. Unless this loggerhead paradox is resolved at the soonest by the Finance and Commerce Ministries, it is tough to tell who would lose the most - fiscal prudence, or economic growth?

(End of Asif Ahmed column)

Indian growth: 9th wonder of the world
...as RBI, with its unbelievably unique policies, must be the 8th wonder

(column by Asif Ahmed)

In order to contain inflation, the Reserve Bank of India has hiked interest rates twice since the beginning of 2006. Amidst rising global interest rates, RBI has raised the reverse repo rates from 5.25% in the beginning of 2006 to 5.75% in June. Though inflation has shown no signs of fatigue, banks in India have been very quick in responding to RBI's rate hike by hiking lending rates. However, this continuing tighter monetary policy has started showing signs of disgrace. The yield on the benchmark 10-year bond has touched a four year high of 8%, while the G-Sec prices touched a four year low, as short-term interest rates continue to race northwards. Besides, increased rates being charged by banks is also beginning to affect the credit off -take. The non-food credit demand has been experiencing a continuous slow down and has been declining since May.

For the Indian economy, which is aspiring for a double digit growth, this is surely not good news. Definitely, the era of cheap money is over, which is bound to have significant impact on industrial productivity. It is evident from the funds absorbed by RBI by reverse repo (the last time RBI injected funds into the system was in April, 2006) & the recent hike in auction size from Rs.50 billion to Rs.90 billion that RBI is having a tough time dealing with inflation. Even WPI stood at 192.3 as on May 28, 2006, a hefty 4.7% increase over December 2005. Rather than blindly increasing interest rates, RBI should immediately target specific sectors (like construction, energy) that are contributing to demand pull inflation, and limit credit flow only in such sectors. It's a wonder they haven't looked beyond blanket moves to curtail economic growth. Surely, the fact that despite all this India still grows, must be the 9th wonder of the world. And the 8th? RBI!

(End of Asif Ahmed column)