The Day the World Becomes Bankrupt

Ergo the end of modern civilization, if not end of the world.

Though debatable, I think global bankruptcy is a far-fetched scenario – if it really does happen civilization will just go on a re-boot; the world starting on a clean slate. Money, afterall, is just human invention. It's just like Filipino children of the 90's (yes, emphasis is needed here) playing habulan from dusk until full moon's high unanimously declaring a game over if they feel that no one's enjoying anymore. It would just take a unanimous vote of the UN General Assembly or, maybe, just the mere handshakes of the Group of Eight to declare a Jubilee Year like in Moses' Laws; all debts wiped out on the face of the earth! The only difference is Moses' Jubilee Year was mandated due to heavenly command whereas the latter is an escape from man's fall due to greed.

Yes, greed. It is the inevitable consequence of this human creation, money. Gone were the days where people works together, tills together and reaps together then festivities together afterwards; where all the harvests are communal and no one owes anyone. A scenario which, I think, existed when early homo sapiens walk the earth as nomads. As soon as people started to get settled, businesses commenced operations and the evolution of human avarice is history. It's paradoxically funny to think that the rise and advancement of human species aimed at life's simplicity come with such complexity.

And the recent global economic crisis serves as a reminder of how fragile and volatile this societal pillar we call financial institutions. For a common Juan de la Cruz such as myself, all the details of the recent events seem like Greek. All I know is just 'big-time' companies are either closing down or being bought or bailed-out with such names as Bear Stearns, IndyMac, Lehman Brothers, Merrill Lynch and AIG flashing over the headlines. A person immersed in technical engineering terms suddenly becomes interested in terminologies such as mortgage, credit crunch, subprime, recession, inflation and economic bubble – at least I find a somewhat kiddy comfort on the bubble thing. What interests me most is the idea of derivatives (ok, lower the geek-meter for this is not calculus). Apparently, financial world is as much complicated as our politics back home. Imagine investing on something that is said to have a value highly dependent on another which has obtained its value from a third entity which may have been invested on a fourth. Think of the multi-level marketing (MLM) scheme still prevalent in the Philippines. The top layer rakes in most of the profit, the ones in the middle get parts of the chunk and the lower layer, well, stays there. I'm not into these things so any 'financial gurus' feel free to correct me. But the basic idea is the volatility of it all. Imagine one card falls off the rest of the deck. And I think that what has happened on Wall Street a month ago. I read somewhere that it has its roots many years back though. Nevertheless, it may well boils down to the basic truth, that these companies, wanting to earn more, took risk investing on greed.

Picture this:

• banks started to provide credit to borrowers deemed subprime (layman's definition: imagine your usual drunkard neighbor borrowing Php500 promising he'll pay back once his sick mother's pension comes or a friend's friend convicted of estafa years ago) but on a higher interest rate
• people started to borrow and to buy expensive houses (here, I think, they felt rich)
• then there was a boom in real estate; the demand for houses started to expand (hence the term housing bubble)
• here comes the colossal financial institutions and invested on these loans and mortgages (here is a parody of derivatives):

Pedro: Hey Juan, Mario borrowed some marbles from me.

Juan: But he owes most of the kids here, do you think he'll pay it back?

Pedro: Don't worry he will. He just needed extra marbles for the game on the next block. Besides, I told him that I'll lend him if he agrees to pay me five-folds.

Juan : Whoa! That's a lot of marbles added to your collection.

Pedro : Yeah. So, do you want to have a share on that? All you need to do is pool some of your marbles to me so we can lend Tomas with the same terms. We'll split the additional marbles 50/50.

Juan : I'm in!

Then Juan did the same with Berto but the split is 60/40 from the 50% of the first agreement. Berto, who's also fond of trading cards, offered a similar scheme with Orli, a marble enthusiast: trade some of Orli's card collection for 40% of the marbles Berto can get from the previous agreement. Well, Orli wants to have more marbles so I guess he will look for a kid in the neighborhood to get a similar agreement as with the others. And you'll picture the rest of the story; no offense intended to children.

• then like any bubble, it soon burst; people are now stuck, unable to pay for what they owe
• the companies who invested on these soon accumulated liabilities (i.e. unpaid loans) surpassing what they have in assets; negative in the accounting books means corporate disaster

There you go. The gist of what had led to the current crisis in my personal understanding. They call it the US subprime mortgage crisis. Well, there are other factors that involves the government and other sectors of the society albeit too Greek, nay, alien to people like me. What stands out is that these Wallstreet biggies enjoyed quasi-autonomous run of the financial world; a seemingly exclusive club for those in black suits and top hats. Capitalists, afterall, are born to profit at any cost and this costs us big time! The world economy is now on a slowdown (Iceland is on the brink of bankruptcy!). I don't want this blog to be a sort of attack to this financial institutions. Afterall, they are just doing their job no matter how greedy they appear to me and now they are suffering the consequences of their short-sightedness. And so are we, thank you very much!

I bet the financial world will never be the same again with all the impending reforms and legislation to avoid the same fate as today. Wallstreet, in particular, will loose all its perks as a deregulated entity. Economies will not be seen as a Monopoly gameboard for a while. This period will be remembered and shall be written down on textbooks as lessons to be learned in Economic schools added to that of the Great Depression of the 30's and the Asian Financial Crisis of 1997.

I will never be the same again.

So this leads me to the microcosm of this global incident: my own avarice.

I admit I'm a materialistic person. I get this impulsive drive to buy things that I fancy. If I have the money, I'll buy it. If not, then what do my 3 credit cards doing in my wallet. Don't ask the credit limits! They say don't trust a woman with your credit card. I say, don't trust myself with my credit card. It's not all about women and their inherent love for shopping (ok, feminists feel free to attack me). It's not all about having multiple credit cards in the pocket regardless of gender. Borrowing money is not an evil thing (unless one intends to run away with it). More so, money is not evil. What's wrong is my immoderate desire, nay, lust for material things. And worst, I tend to borrow money through credit cards just to satisfy this. I remember having to owe the card company which I begun to find hard to pay. Sometimes I thought that I was just paying for the finance charge. You see, that was my problem before. I thought having credit card gives one much needed purchasing power. No worries, I can pay it anyway on the end of the month. But I fail to realize that it was a psychological warfare; having to give a self-perception that I am rich, it is also self-destructive.

So you see, I don't need to criticize and attack those companies for their greedy actions. Let authortities and experts deal with that. It's their world. I have my own world (no, I'm not autistic). Let them have their reforms, and I will have my own. Ironically, now that I'm earning more than before I become frugal with my finances; planning towards investments rather than liable expenses. No more to purchases where payment is drawn on credit. No more to purchases that exceed my income. I'll keep the credit cards though. It's still good to maintain a credit line. But I'll just use it for cashless purchases (no, this is different from credit purchases; instead of withdrawing cash, I'll pay through card and just pay in full online the same day). At least I'll earn more redeemable points (maybe donate these points to Children's Hour). At least it will be robber-proof!

I'll be buying a Nikon D90 and iPhone 3G when I come home this year. It will be my last liable swanky purchases (maybe for the next 2 years) then the rest of my savings will go to investments. But I'll be paying these with my credit cards. Only this time I'm sure I can afford them.

This time I know, personally and financially, I am far from being bankrupt.

GMT -3 Sao Paulo, Brazil