Tuesday, October 28, 2008

Financial Turmoil – Factor Analysis

Wall Street has been hit by financial storm in the last few months. Out of the top 5 investment banks of the US, only two still survive. AIG, the insurance giant, has also sought help from the government.

Many analysts, politicians, investors and angry tax payers point to greed as the root cause for the financial storm. The top executives of the financial institutions were greedy. So were some of the speculators.

But greed alone does not explain the whole story. After all, there are greedy fellows all over the world. The problem with Americans is that they have been living on credit for years. I spent some time in the U.S. and certainly know well that Americans are big spenders. In fact, it has been reported that there are more cars than drivers in the States. A typical family with two drivers – husband and wife – may have up to three or four vehicles.

America is a land of immigrants, and immigrants are often risk takers. This is, of course, not to say that native-born Americans are risk-aversive, as they have inherited the traits of their forefathers or have been influenced by the newly-arrives. You see, Americans like to take risk, including in investment. This is yet another factor which contributes to the financial turmoil.

Greed is bad, but some level of risk taking is actually a good thing. In his book, Microtrends, American pollster Mark Penn wrote (before the subprime crisis):
While the U.S. frets about personal debt, some in Europe and Japan are pressing for more bankruptcy options in order to generate more risk and entrepreneurship. Failure is a product of trying, of taking risk. If we never tried to go to the moon, we would never have had the Columbia space shuttle accident. Or, as the CEO of the now bankrupt Eastern Air Lines reportedly said, “Capitalism without bankruptcy is like Christianity without hell.”

P/S Factor Analysis is actually a quantitative method which I learned in my MBA study.


  1. Dude, tell me about it... I'm in Kampala, Uganda now... the inflation over here is extremely scary... things over here costs about 3 times of price in Malaysia.

    Hopefully Malaysia is not catching up with Uganda on inflation...

  2. I was really surprised to learn that everyone in America can easily live on credit.

    I don't like being in debt. Even the littlest amount I want to pay immediately.

    But of course a credit card is useful IF you know how to properly manage it.

  3. A lecturer of my school told the students, "that's the failure of capitalism. this proves that islamic banking is the way to go."


  4. tz
    No problem if your pay is 6 times the amount you earned in Malaysia.

    When we purchase car or house with installment, we are also living on credit. Of course, not to the level undertaken by the Americans.

    Islamic banking is low risk, low gain. Western capitalism is high risk, high gain. Each has its merits.

    I certainly don't think Western capitalism is dead. It just needs fine tuning.

  5. My mum used to tell me "US owe the world so much money, still talk so loud". =p

  6. All these economy news is really depressing.. Sigh..

  7. KS--aren't GREED and LIVING ON CREDIT codependents in the financial meltdown? Greed is the human emotion; living on credit, the way to facilitate it!

  8. shingo
    Amazon.com didn't make profit for many years but it shares skyrocketed. But of course the Web firm didn't go bust.

    horny bitch
    Enjoy this Halloween Day. Put the economy news aside, temporarily :-)

    You sound very Buddhist, LOL...
    GREED is the cause, LIVING ON CREDIT is the condition, and FINANCIAL MELTDOWN is the effect.