Recession and Entrepreneurship

The world economy is either hit by recession or at least the fear of it. Most of the things go down with the slowing economy, clearly indicating a positive beta with the economy (I am a finance student, you see!). But we also find a negative beta between the economy and the events such as loss of jobs and participation in entrepreneurship contest (I don’t have data on people becoming entrepreneurs). People say recession is just the right time to work on your dream as you have little to lose, but have an opportunity to conquer the world. I don’t know how correct it is to go for something that you feel is a good idea, in times when the whole world is not even looking at something that they felt to be great ideas a few days back!

A few days back, a friend of mine was asked about what he would like to do in life ahead and he had proudly said ‘I would like to an entrepreneur some 7-8years down the line’.

So, the next question, why not now?

There are various platform created for budding entrepreneur to come up and show their talent in this period, when the economy is hit by recession. So, this sounded a valid question.

My friend being intelligent and a quick thinker answered it very well. He answered: ‘Sir, most of the asset classes, particularly equity have shattered down. This asset class – equity, therefore gives an opportunity to make good money if I stay invested for next 2-3years. Therefore given that I have some money I would rather invest my money into equity for next few years and when the economy is back on track, I would like to use the money made to start my venture.’

Is this guy crazy in doing opposite to what the world generally does?

May be, but he has a point.

Probability of his venture being successful is lower than the probability of good returns from the investment. Also, even if the venture is successful, there is no surety of good return, which could also be true for equity investment (wrong timing for the stock chosen for portfolio). But nonetheless this sounds like an interesting idea - to invest now and wait for the economy to stabilize and then start your own venture.

In any case you could say ‘recession led you to entrepreneurship!’

Credit Rating Agency: A question on their functioning.

The recent crisis in the financial market defied the history of many companies as we knew them and created another for us to narrate to our grand children as a horrifying story of our times.

Not going into cause and effect story once again, let us look directly into the subject matter of the write-up. One of the entities blamed for the cause are the credit rating agencies (CRAs), other being the regulators.

So, what do you think? Are the CRAs to be blamed for what has happened or did they perform their task in the very manner they are expected to?

I here, take a different view than what most expert on the subject matter speaking and take a stand that the CRAs cannot be blamed.

The CRAs gave AAAs and AAs to most of papers which turned out to be toxic assets later on. But does that mean that their whole process of rating was wrong? I don’t know. I leave upon you to decide. I have a question, why have we not raised question on the role of the board of directors (including independent directors) who more than anybody knew what was going on; raised question on the functioning of the audit firms who proudly sign without even caring about knowing what and where they are signing; those equity research guys, who believe they know everything about the stocks they track, and specially those media people who make stories larger than life and make fool of people like you and me. We need to understand that CRAs are also run by human beings like us; they are no special people, who can read what’s hidden in each number.

But, if we take my last point and move forward, then, we cannot expect anybody to come forward and accept their fault, because it’s a human error.

So what do we do?

We make rules and regulation of what the duties and responsibility of each one of us are, be it individuals or institutions.

Can we all make the rules and regulation?

No.

So, who will do that? The government has to appoint regulators; but we already have them, now what?

If we analyse the situation what we see is a flaw in the whole functioning of the CRAs and their client. For CRAs, the clients are the companies which come to them to get them self the (best) rating (possible), and since they pay the CRAs, the CRAs feel a moral duty to please their clients. That’s what has happened and I don’t see any reason for us to blame them for anything that, as a customer, even we would like (to get special treatment).

So what’s the way out?

There are many things in my mind, but each has its own drawback. I would present the one that is clear enough in my mind to present it to you. How about, only one rating agency in each country and the price being fixed by the regulatory authorities? Sometimes monopoly can serve better than competition. I know there are lots of ‘What if’ questions that are not answered, but to be frank with you, I don’t have any answer for those questions as of now, but we surely will find right answer as the time passes.

The whole issue is not small to be left here, so I would request you to put your thoughts here for the benefit of others; who either like me has limited knowledge of the subject matter or those who would like to hear it from everyone to bring a change in the way each agencies and not just CRAs works.