LIVE WITHIN YOUR MEANS!

Oct 08, 2008 Features / Columnists, Peeping Tom

I am not buying into this notion that the world is facing a financial meltdown occasioned by the subprime crisis in the United States of America. And I just hope that Guyanese do not fall prey to the excuse that Guyana is likely to be affected by the crisis.

The present financial difficulties which have Wall Street brokers and bankers pulling their hairs out of their heads should not become yet another excuse for any economic failures this year. This crisis will, I believe, turn out to be another hoax, so that the American taxpayers can bail out the powerful conglomerates that are now finding themselves insolvent.

The whole thing reminds me of what occurred in the run up to the new millennium. The public was sold the belief that computers around the world would crash at the stroke of midnight on December 31, 1999, since the computers could not handle the changeover.

People all over the world bought into these fears and began upgrading their computers. The computer companies made a killing. The original doomsday scenario about worldwide crashes never materialized and the world went on its merry way as the computer industry smiled all the way to the banks.

Today we are being told that there is a financial crisis caused by the failures in the mortgage markets in America. This crisis, caused supposedly by homeowners not being able to service their loans, has in turn, we are told, led to investment banks running insolvent, and this in turn will create a credit crisis since banks will be unwilling to lend as much as before thus ruining small business and by extension causing persons to lose their jobs.

We are told that Guyanese living overseas are likely to be affected in the consequent economic slowdown and therefore they will send less money back home.

And of course we are told that the demand for Guyana products will be reduced and therefore we can face economic problems. I am not buying that and especially the latter prediction that the demand for our produce can be reduced.

In relation to the homeowners’ crisis, I am yet to see convincing evidence that the situation has reached a pandemic.

I know there have been a fair number of defaults, but surely we are not in a situation where a significant proportion of American homeowners are going bust.

I believe that what we have is a crisis with investment banks and the insurance companies that insured the questionable investments made by these banks who created financial instruments to speculate on the mortgage portfolios that they bought up from the mortgage banks.

What we have is a subprime crisis caused by the creation of instruments which are backed up by little more than the paper on which they are issued. And this is what the American taxpayers are being asked to bail out. They are being asked to bailout not those homeowners whose loans went bad.

They are being asked to bail out those investment banks which bought out these poor risks and used them to leverage investments which they now cannot repay. What we have is a failure of Wall Street and not a failure on Main Street.

Of course there will be losses for Guyanese who have certain investments, but I do not see this appreciably affecting the level of remittances that are received each year. The problem which most Guyanese face overseas – and I am beginning to see the same problem here – is the overvaluation of their properties.

Many of them have presumed that the little house they bought ten years ago for a few hundred thousand dollars may have doubled in value. This bubble will burst and if they have secured loans based on this presumption, the ultimate leveling of the market values for real property is going to present some problems.

It will also pose problems for their future expansion because property values are going to decline and therefore even homeowners who can pay their mortgages will be saddled with less equity than before.

That is a reality that they will face and it is a reality that should be faced by Guyanese living here.
I have found in Guyana an extreme exaggeration of property values. I am told that this is in part due to the fact that overseas-based Guyanese have been investing in the property markets locally, thus driving up prices. Like what has happened in America, this is bound to present problems, including for local mortgage companies who are financing loans for buildings which are overvalued in the domestic market.

This is one crisis that I believe will blow over. Crisis or no crisis, however, we should all strive to live within our means because that is the safest route to financial security. Unfortunately, from what I am seeing in Guyana, we are trying to imitate the lifestyles of the West.

Many people here are living outside of their means and in this regard they are courting their own financial and personal ruin.