Let us look at some things which were heralded as a fantastic solution for a problem. Then we will see how these have NOW become problems and not a solution as it should have been.
Insurance, Home loan, car loan, educational loan, derivatives, leverage, credit cards, …………..
Look at business Insurance. It is a brilliant risk spreading mechanism. If one man makes a genuine loss, it makes sense to spread the loss amongst all the businessmen. However once people started cheating by making false claims, and companies were no longer ‘Mutual’ (i.e. the owners and the policy holders were divorced) there were too many issues. Then the insurance companies became too big, life insurance became complicated with Variable Insurance, Viaticals became a big business……
Home Loan: In the 1960s Mumbai had a thriving co-operative movement. Minimum of 7 people got together, bought a plot of land and constructed a house. Then they got a loan from a Co-operative bank, and houses were constructed. Over 20 years the loan was repaid.
In the 1980s HOME LOANS were introduced as a great tool for the home buyer. Now all the home loans are usurped by the builders to grab all the land and keep home prices far beyond the reach of the middle class. The builders, land owners, lenders DARE not let land prices fall – it will hit their balance sheets.
Educational loan: the new ‘boon’ in the financial services market. Parents will pledge their houses and borrow for the future of the kid. This will again create a cartel – Middleman-Institute -Gullible parents and demanding children. Watch this space. 5 years from now it will be a Rs. 25,000 crore industry FUNDING POLITICIANS running colleges.
Car Loans: structured in such a manner that a new car will get you a loan at 11% flat and a second hand car at 14% flat. For the EMI generation, the NEW car will look cheaper. OMG talk of financial innumeracy.
Derivatives: a brilliant hedge tool. If you have cotton dresses to be delivered on a fixed price contract, you buy a call option. If prices went up, yes you paid more for your raw material, but made money on the option.
However, we converted this into naked options – put and call, and allowed everybody to play, and get burnt. Who gained from this mad trading, taking 100x position, etc.? your broker of course. Who else? yes, the SARKAR -stamp duty, stt, then the stock exchanges, the …….all except you. Hey we still need YOU – just to pay the bills.
…we could just go on, right?
SO MANY A TIMES THE SOLUTION, IS THE PROBLEM. ………be careful…
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