onomi      on epts and erminolo ies         22.47
     echoing time and again recently has its origin in
     the United States housing market by Late 2007—
                                                              subsiDy biDDing
     being considered as the major financial crisis of     It is competitive bidding for subsidies, where
     the new millenium.                                    companies bid against one another to serve an
          Basically, the period 2000-07 had seen a         area at the lowest price—the lure is the subsidy
     gradual softening of international interest rates,    and other benefits. This system is a way of
     relatively easier liquidity conditions across the     administrating subsidies without leaving any room
     world motivating the investor (i.e., banks, financial for some competitors or technologies gaining an
     institutions, etc.) to expand their presence in the
                                                           edge over others. But competitive bidding has
     sub-prime market, too. The risks inherent in sub-
                                                           anticompetitive effects, since it gives a special
     prime loans were sliced into different components
                                                           advantage to one company. Regulators should
     and packed into a host of securities, referred to
     as asset-backed securities and collaterised debt      adopt a consumer choice system, under which any
     obligations (CDOs). Credit rating agencies have       subsidy for each high cost customer it served. If
     assigned risk ranks (e.g., AAA, BBB, etc.) to         the customer moved to a competing carrier, the
     them to facilitate their marketability. Because       subsidy would move, too.
     of the complex nature of these new products,
     intermediaries (such as hedge funds, pension funds,      substitution effect
     banks, etc.) who held them in their portfolio or
     through special purpose vehicle (SPVs), were not      The replacement of one product for another
     fully aware of the risks involved. When interest      resulting from a change in their relative prices.
     rates rose leading to defaults in the housing
     sector, the value of the underlying loans declined       sunk costs
     along with the price of these products. As a result
                                                           The costs in commercial activities that have been
     institutions were saddled with illiquid and value-
                                                           incurred and cannot be reversed. The cost on
     eroded instruments, leading to liquidity crunch.
     This crisis of the capital market subsequently        advertisement, research and development, etc.
     spread to money market as well.                       are examples of such costs. Sunk costs are a big
          The policy response in the US and the Euro       deterrant to new entrants in the commercial world
     area has been to address the issue of enhancing       as after the venture has failed these costs cannot be
     liquidity as well as to restore the faith in the      recovered—there is no two-way process here.
     financial system. The sub-prime crisis has also
     impacted the emerging economies, depending on            swAp
     their exposure to the sub-prime and related assets.
                                                           The act of exchanging one by another. It could be
          India remained relatively insulated from this
                                                           of many economic items:
     crisis. The banks and financial institutions in India
     do not have marked exposure to the sub-prime
                                                           currency sWAP
     and related assets in matured markets. Further,
     India’s gradual approach to the financial sector      The simultanous buying and selling of foreign
     reforms process, with the building of appropriate     currencies could be spot or forward/future currency
     safeguards to ensure stability, has played a positive swaps. This is used by MNCs to minimise the risk
     role in keeping India immune from such shocks.        of losses arising from exchange rate changes.