Stability is destabilizing

http://seekingalpha.com/article/76313-introducing-the-minsky-theory-stability-is-destabilizing

The author explains Minsky theory in a clear but concise manner. A nice read. Minsky's theory is that stability in financial matters has a perverse incentive of creating a destabilizing situation which ultimately leads to high risk and high leverage resulting in recession. A nice read.

Ten principles of economics

Here are ten principle of economics as dicatated in George Mankiw's book "Principle of Economics" which in my view nicely sums up the economic behavior.

How People Make Decisions:
Principle #1: People Face Tradeoffs.
Principle #2: The Cost of Something Is What You Give Up to Get It.
Principle #3: Rational People think at the Margin.
Principle #4: People Respond to Incentives.

How People Interact:
Principle #5: Trade Can Make Everyone Better Off.
Principle #6: Markets Are Usually a Good Way to Organize Economic Activity.
Principle #7: Governments Can Sometimes Improve Market Outcomes.

How the Economy as a Whole Works:
Principle #8: A Country's Standard of Living Depends on Its Ability to Produce Goods and Services.
Principle #9: Prices Rise when the Government Prints Too Much Money.
Principle #10: Society Faces a Short-Run Tradeoff between Inflation and Unemployment.

Laudable achievement

Here are the two news items which have lighted the day for me. Two coahing institutes Super 30 and Rahmani 30 where poor students were provided coaching for IIT JEE along with accomodation. 40 students have successfully made it to IIT from these institutes. The achievement of these students will not only allow them and their families to get themselves out of the trap of poverty but will also inspire the other poor students from my state to aim for the best college in India. Without belittling the need for primary education as an important factor for social transformation, these developments are a great factor for development of an educated development oriented identity for Bihar.

http://www.bihartimes.com/Newsbihar/2009/May/Newsbihar25May7.html
http://www.bihartimes.com/Newsbihar/2009/May/Newsbihar25May6.html

quote

"We have always known that heedless self-interest was bad morals; we know now that it is bad economics" FDR in 1930s

Surprised!!!

I have been completely taken aback at the current political crisis in England. Having observed and suffered at the hands of a political system in India where corruption has become an accepted evil of the political class and getting bribed supposed to be a right for politicians, the theatre of resignations and uproar in Britain about second home expenses come as a very pleasant surprise. So here is the detail that is what I have figured out from the wide coverage at BBC. Members of parliament in England were provided a second home expense allowance where they can claim for expenses required for their works during stay at the two houses - one at their constituency and the other in London for attending parliament. These expenses were reimbursed by the parliament after production of appropriate bills. Due to some ruling by parliament/court (I am not sure), the parliament was supposed to publish the details of second home expenses claimed by MPs over the last 4 years in July. Telegraph got these expense details through an informant and started publishing the expense details of individual MPs day after day and shaming them.

Now here there was no fraud committed by MPs in majority of cases. The bills that were submitted were not fradulent. And these bills were approved and agreed upon by the authorities in the house. But there was a huge uproar on whether the MPs have followed the law in its spirit. Seeking reimbursement for maintaineance of a swimming pool, dog food, television, security system etc are not what is required for working of MPs and it was alleged that MPs though have followed the rules in writing but have rigged the system for their own benefit. This has caused resentment and uproar among the common people aggravated by the global economic recession. The speaker of house has resigned and 5-10 MPs have decided not to contest the next elections scheduled next year. There is a possibility that many others will be defeated in the next elections. The leader of opposition has called for independent members to join his party and fight for elections showing how much discredit has been brought by this scandal.

So what do we take from this episode. First this is an example of the power of information in democracy. Corrupt practices which may not stand illegal in courts of law are completely a no-no in the courts of public opinion. This may lead to a generational shift in English politics towards a more transparent and less corrupt political system. Second this is a lesson for Indian democracy. We have politicians in India which have been charged with corrpution of millions of ruppees and still they are elected representatives of people. In the last elections, 20% of MPs have criminal charges against them. And learning from the English experience, it is not the rules that make up for cleaner political system but it is the public opinion that unseats the corrupt politicians. Rules can aid but ultimately it is required that the public opinion be guided towards yearning for a clean political system where corruption is a strict no-no and probity in public life valued with the highest respect. And this change in political opinion can only come through literacy and empowerement of masses where they understand how much each of their vote counts.

Capitalism in gutter!!

Here is a pic which says it all ..
http://www.nytimes.com/imagepages/2009/04/26/world/26icelandB.ca0.ready.html
overboard but some countries have faced the largest burnt of this crisis..

why charity is not popular in india?

I read in Greg Manikaw's blog

"conservatives who practice religion, live in traditional nuclear families and reject the notion that the government should engage in income redistribution are the most generous Americans, by any measure. Conversely, secular liberals who believe fervently in government entitlement programs give far less to charity. They want everyone's tax dollars to support charitable causes and are reluctant to write checks to those causes."

That is possibly one reason that we Indians not believe in charity and want the tax paying government to take care of income inequalities.

(P.S. No statistical or empirical proof are available for this analysis.. I found this interesting and thats why it is here)

Making of a great CEO

In a nytimes article http://www.nytimes.com/2009/05/19/opinion/19brooks.html?ref=opinion, the author describes a recent survey undertaken by Steven Kaplan, Mark Klebanov and Morten Sorensen to understand what characteristics of CEO matter? 316 CEO's across America were interviewed and a detailed personality assessment of CEOs and their companies performance were carried out to determine correlation. My reservation about this is the standard problem in regression. How to control for the factors which may be indirectly affecting the performance of the company. Also no details of analysis have been present, so there may be questions about conclusions derived from the study.

But since this is published in a reputed news magzine like nytimes and hence we assume that there is some credibility for the conclusions, we do come across a very interesting view of what makes a good CEO which is against the current popular understanding. According to the article "What mattered, it turned out, were execution and organizational skills. The traits that correlated most powerfully with success were attention to details, persistence, efficiency, analytic thoroughness and the ability to work long hours." It is about ability to emphasize on incremental gain rather than waiting for some exciting new breakthrough setting media in the frenzy.

In the course "Leadership skills", we studied about Level 5 leadership(http://www.imaginal.nl/articleLevel5Leadership.htm) which also explains that the most successful leaders are self effacing, builds enduring greatness through a paradoxical blend of personal humility and professional will. Manmohan Singh who is castigated repeatedly for being a weak leader will come in this category though he lacks in being resolute which is also a necessary criteria. And also he is a political leader where being charismatic is an important aspect of getting masses to listen and follow your policies.

If this becomes an accepted truth and HR recruitment starts leaning towards these characteristics in recruiting managers and CEOs, we will see higher insistence on excellent GPAs which arguably reflect the characteristics of doggedness and incremental efficiencies. Geeks are the one who look for big breakthroughs, boring guys get their heads in the books and study to get high grades.

One sad part is that the study also proves that "These sorts of dogged but diffident traits do not correlate well with education levels. C.E.O.’s with law or M.B.A. degrees do not perform better than C.E.O.’s with college degrees." So getting an MBA degree doesn't correlate with higher salaries but if I am aiming for middle management, will it help...

And always remember there are exception to rules...........

wall street quotes.

"To prove that Wall Street is an early omen of movements still to come in GNP, commentators quote economic studies alleging that market downturns predicted four out of the last five recessions. That is an understatement. Wall Street indexes predicted nine out of the last five recessions! And its mistakes were beauties"

Paul Anthony Samuelson

A case for outsourcing

Greg Mankiw makes a case for outsourcing ..
http://gregmankiw.blogspot.com/2006/05/outsourcing-redux.html.
Though need to build more arguments in favor of outsourcing... remember one
cant oppose outsourcing expecting the other countries to open their borders for
trade..

Where is the right in India?

Watching the Indian election news at BBC, I was struck by BBC's description of BJP as "Hindu nationalist party". I always had this thought ingrained in the mind probably by the Indian media that BJP is the party on the right while communists are on the left with the INC at the centre moving from left to right during its long history. So I get to research what does "right" and "left" means in terms of political divide.

In United States the republican party which are rightist have the small government as their major agenda while the democrats supposed to be party of the left favos presence of a larger benficial government . Similar divisions exist between Labor and Tory parties in England though the New Labor by Tony Blair deviated from the extreme left to much more centre left by reducing taxes on the rich though continuing large public spending. A more elaborate research is required to understand the historical legacy of these terms but lets take these two countries as example and see where the Indian political parties sit on the spectrum.

The communist parties are definitely leftmost of the spectrum with their agenda of large government with anti privatization and dis-investment policies. The Congress has been traditionally supporter of socialist governance, moved to 1991 towards market reforms but never espoused the agenda of free markets and smaller governments in its long history. In the last 5 years, it has moved more to the left and is certainly currently left of the centre in the political spectrum. So where does that leave BJP. BJP has actively supported self-dependence as its economic policies against the economic reforms of 1991. During the Vajpayee times, though it pressed on some of the market reforms, divested some of the PSUs. While fighting for the last elections, I also didnt hear any support of market during the speeches though I have to admit that I didnt went through their mainfesto. This puts BJP also in the left to the centre spectrum.

So what we have finally is that all Indian political parties exist on the left of the centre and there is none on the right. The reasons can be found out in the socialist past of India's history. There seems to be very people supporting Friedman, Anglo/Saxon economics.

Another thing we shall discuss here is that the "right" is also related to conservative movement. In most cases, we see the intermingling of the conservatives and the right. Conservativism means maintaining the status quo. So in economics, this in cases is interpreted as maintaining the status quo of earlier century where individualism entreprenurial spirit was given a higher priority than government in economic growth. The concept of welfare state is a very modern one in the history of civilizations. So here a conservative movement co-opts the right in the economic matters. But this conservative movement also extends its political policies in matters of faith. Here it means keeping the tradition which means more adherence to religious orthodoxy and issues like opposition to gay rights, abortions etc comes into play while the liberals wants accomodation of views of all so that no-one is persecuted due to their views.

Under this definition, BJP can be categorized as conservative movement but this also requires a re-visiting of history. If India as an entity is supposed to be under foreign rule under the Mughals, then the status quo will mean that all Muslims are foreigners and by that logic the Indian state shall favor Hindu customs and traditions and discriminate against othe religions if their beliefs come in opposition against Hindu beliefs. So it finally comes to reading of history for your own convenience and that is the case for any political party. Also BJP or its sister outfits has opposed western customs in cases and also their opposition against painters/artists who dont support their view of India set them in the conservative mould. But I have seen similar protests from the Congress in some cases for electoral gains. But if we compare these two, BJP will certainly win hands down in being the flagbearer of the conservative idealogy. The conclusion is that BJP can be described as occupying a Hindu nationalist conservative position.

RIght vs Left

I came across a very good post on "right vs left" on economic matters ....http://gregmankiw.blogspot.com/2007/12/how-do-right-and-left-differ.html .

Mr Greg Mankiw lists some of the differences in the right and left thinking and how does this finally lead to espousal of bigger/smaller government on two sides. Basically from an intellectual point of view, there is a marginal social cost of government intervention in any affair which shall be greater than the positive externality or less than the negative externalities out of government action. If this is the case, the govenrment action is fruitful else it is not. Both the left and right agree on this. The quarrel between the two sides is that the calculation of these costs since these calculations are not straightforward and brings in assumptions and time period which are debatable. Hence we have a situation where the two sides though agree on the common intellectual principle have different manifestations of the application of principle hence arriving at separate conclusions causing disagreements.

Norway : heaven!!!

In the fictional account "HitchHicker's Guide to Galaxy", two scenes/subplots have been my favorite. One was the plot when Earth was destroyed by inter galactic municipal system and the head exclaimed how ignorant these Earth beings are as they dont know abt this proposed destruction since such a notice has been posted at Proxima Centuari notice board for a long time. I felt aghast at those lines as they were able to show how vast the Universe is and how small we are which is what the writer supposedly aimed to create.

The second scene is more to do with writer;s love for Norway and he expresses it in the best possible manner. There is a character who designs planets and he was part of the team who designed Earth and he got a special award for designing fjords and Norway. This is the best complement one can give to a place in Norway. Other than the scenic beauty, Norway has a large amount of oil reserves and a very small population with one of the highest per capita income in the world. I came across this article in nytimes about Norweigan economy http://www.nytimes.com/2009/05/14/business/global/14frugal.html?ref=business.com which complements the fact that Norway is heaven not only due to its natural but also in the type of government and social environment. Here are some facts from the articles which exemplifies the previous statement. Norway's economy grew last year by 3% during the last year when the world went into a recession. Government has enjoyed a budget surplus over the year which has been well invested in a soverign wealth fund. And they have a social support system where the government takes care from cradle to grave. What else one can wish for?

Google: where is the diversification?

Google still earns 97% of its revenue from internet ad business. Here is a nice blog on business insider which lists all what Google promised but has failed. http://www.businessinsider.com/all-the-things-people-thought-google-would-do-but-it-hasnt. The list include

• Take over billlboards, TV,Print
• Replace advertising agencies
• Replace microsoft office
• Develop an operating system
• Build a google phone
• Become a nationwide ISP

among others.. Also google has failed to monetize its social networking website orkut while facebook and myspace has taken the lead both in United States and rest of the world. Youtube is still making losses and efforts to get a positive return on its large investment in buying Youtube has largely been a failure.

The internet advertisement business though remains strong and Google has been able to maintain and increase its market share of this business. But despite the oft repeated culture of innovation, Google has not been able to deliver a new revenue stream.

If we compare this with Apple, they have been more succeessful in going fromMac to ipod to iphone. Diversification is one of the biggest cry in the current business environment as we have seen banks betting huge on mortgage backes securities and forgetting about diversification has paid a large price. so what is in store for Google ?

The power of information

A recent example of the power of information is the expensese scandal in the British House of Commons. The British MPs were provided a second house allowance so as to carry out their works in London. As a method to line their pockets, many MPs rigged the system where they stayed within the rules but probably violated the spirit of the rules by claiming reimbursements for items like dog food, swimming pool maintaineance etc. I am not clear about the back story but the MPs agreed upon public pressure to publish these expense items in July. The Telegraph got hold of all these expenses and over the last week have published them in their newspaper shaming the concerned Member of Parliaments. The result is that many MPs have agreed to return the super-fulous expenses that have been claimed and call for a new system for reimbursement where there are more checks and balances. The hue and cry generated in the public and the corressponding public pressure seems to suggest that in future there will not be a single MP who will try to claim for expenses against the spirit of the rules for the fear of being exposed and shamed across the countries.

This is truly an example where the information has played a critical role in getting public servants to behave in a manner that upholds the dignity of their offices. In India after passing of the Right to Information bills, we do have instances where the information has helped to get justice for commonn people but I hope that the events that unfolded in England would be repeated in India where certainly the belief is that Members of Honorable Parliament are certainly not honorable. Who is going to take the lead?

Fundamentalism

"Fundamentalist movements use the fear and prejudice of each other to sustain themselves" - Anonymous.....

The extreme right of the Hinudu fundamentalism needs the hardcore fundamentalists on the muslim side to create an environment of hatred and fear among the moderate Hindus and get their allegiance to their cause.. Cow slaughter is one of the examples...In the moderate sufi version of Islam which persisted during the Mughal times, with exceptions cow slaughter was banned so as not to hurt Hindu sentiments and this not being core to Islam practices.. But the hardline ulemas in cases had advocated cow slaughter as probably the issue on which they want to test the identity problem. The Hindu rightist party took up this issue to get the moderate Hindu in their fold by creating the environment where the whole of Islam has to be resisted to protect Hindu beliefs.... Similar examples can be found on the other side.

Another way the fundamentalists thrive is re-writing history. History is a funny business since by nature, it has lots of ambugities which with the help of some imaginations and lying can be interpreted to suit their agenda. Here history includes what is written in holy books and the books of foresight as they are called. The interpretation of scriptures written hundreds of years ago is a very subjective process. The fundamentalists usually take this route to create a place in the larger scheme of history and hence able to demand legitimacy among both the hardliners and the moderates who are their targets..

Is management more difficult in boom times?

The popular thinking is that true managers are discovered when the going gets tough. Coal metamorphs into diamonds when it is put under high pressure deep beneath the earth. The best leader is one who radiates enthusiasm among his followers during dire times and finds a way out of the darkness. The mettle of a person is tested when the whole world stands against you. Though there is no denying the fact that leadership during times of adversity is very challenging and needs the best out of person to wade out of big waves, I believe that there are many things present which are of assistance to leaders in such times. But in times of boom, leadership can be trickier.

As the saying goes that "The only way now is up because you are at bottom". If you are down and out and we have a charismatic leader, he/she can marshall his followers easily to follow him. The trick is to have the people believe in him/her which is easy since the people are all down in the dark and it is human nature to follow that white lone light. The challenge is to make sure that you are convincing "the light is bright " and its the only one which in this analogy requires that the voice of leadership is clear and adresses the problems infested in darkness. Certainly charisma and clear ideas are critical requirements in a leader in such times.

Now lets think about the times of boom. The things are all going fine and the feeling in the team could be that why the hell the leader is required. They can chart their own courses and be successful. In such times, the greed to be agressive fuelled by external surroundings and take more on the plate is big and then the common sense takes a backseat. As with the example of banks, "when the music is playing, you need to dance". When everyone is earning money, risk assessment policies were relegated to the background and everyone betted big out of the greed. Each of the crisis infested banks had leaders who were blinded by this greed and didnt take any steps to stop the dance. The reasons of agency problem does exist but there was also the pressure from the shareholders and employees. If you are not earning and taking risk similar to other banks, you as CEO can be removed by the board. There are evidences where the CFOs of these banks made the role of the risk assessment department smaller and smaller so as to concur with CEO and board's assessment for taking larger risks. What we learn here is that it is very difficult for people to stand, raise their hands and say that this policy is wrong since that is going against what the market and external surroundings are saying. The herd behavior was followed by all the banks with no leadership shown by any of the parties.

The reason is that Leadership in getting people to stop what they are doing and chart a new course is very difficult since getting support for this is near impossible. It is easy in the times of the recession since the people have no other way out. But to get people to follow a difficult path when they have a choice to follow a smoother one on the other side is the most difficult things to do and that is what is required in a true leader.

Essence of capitalism

"The essence of capitalism is creative destruction" -- Joseph Schumpeter .

By saving the banks, are we breaking the basic tenet of capitalism?

Hue and cry about nothing?

There has been widespread condemnation of the recent announcement of anti-tax haven policy by the United States government in the Indian media and people have expressed concerns that this will lead to job migration back to United States from India. Mr. Obama in his speech also emphasized this point that the new policy aims to reward companies that create jobs in Buffalo rather than Bangalore. But the tragedy behind this that both the public and media have not separated the populist speeches and the real effect on the current labor market.

In India also during elections and policy announcements, we see politicians making hyperbole claims as part of playing to the gallery and this policy announcement is also a similar example. The first question we need to look here is how much tax rates play a part in the final investment decisions. Though the differences in instutionalised tax rate can be large as 30% in India to 40% in United to zero in Cayman Islands, the actual tax rate paid by companies cab vary a lot from this rate since the government subsidies and the very complicated tax laws present in every country plays a role. Even if the difference in tax rates can create a positive difference in NPV for two investments, other factors like availability of resources both human and machines, strategic policy, local laws, competitive advantage etc are more important in making investment decisions.

Even if the argument is made that tax rates does make a difference, the question is how much of an influence will it have for jobs in India. According to Wall Street Journal Editorial " The current tax law in United States require US multi-national to pay taxes according to local tax rates and when the company brings the profit back to US for paying dividends or investment, the US company is liable to pay tax at US rate at this profit while claiming a credit for the tax paid in local country. So if say in Ireland where tax rate is 12.5%, the US company brings back the profit to US, then the company will pay a tax at the rate of (40%-12.5%) where tax rate in US is 40%. What the Us government's new initiative aims to do is that the period for which profit that can be kept in foreign locations is reduced so that the company can bring those profits quickly and invest in United States." But by this logic, this new policy doesnt have much influence for India since India has already high tax rates and the investment in India is not due to tax arbitrage but due to labor/knowledge arbitrage.

I read that Mr. Yashwant Singh made this also a poll issue which shows how much the politicians all over the world are well connected in criticising each other and in the end getting their own way with their respective electorates.

I dont have any knowledge about tax laws and may be these policies would have effect on Indian jobs in future but the underlying thing remains that taxes are not the only input towards investment decision and till we maintain a liberal investment climate with availability of quality human resource, we will continue to attract investments and creation of Indian jobs. Globalisation hopefully in its second avtar is an irreversible phenomena and any attempts for protectionism will backfire.

"Rush Limbaugh" post....

So i was hearing the name "Rush Limbaugh" many times in the last month out of my timepass of watching CNN nowadays. One out of five speakers/expert I guess used to refer this guy and so I decided that lets find out more about him. So here is what I find out about him. He hosts a radio show where he views his conservative views. He is prinicipally opposed to liberal politics and wants the republican to go back to its conservative roots. This conservative roots refer to espousal of policies like small government, minimum taxation, individual liberty (no gun control), anti abortion, belief in faith(religion) and possibly opposition to affirmative action as no identification of race as any criteria for affirmative or discriminative action(not sure of this). Can you believe it that there are clubs/committees in USA which supports zero taxation policy? It was difficult for me to believe that. But lets not digress from the topic.

So I visited his website(www.rushlimbaugh.com) and read some(emphasis on some...) of the transcripts of his radio shows. I did expect conservative views but this guy is just a petty showman in my view. In one of the shows, he supports/propounds the theory that Obama is supported by liberal conspiracy to destroy America and he is an agent of George Soros, Saudi Arabia and any other(u name it)... I cant follow his logic and reasoning and this is what I understand is my fear behind this insistence on logic. By logic one can I believe prove a monkey a man and vice versa. And hence by bizaare reasonings, this gentleman is running his radio shows and he is pretty popular and earning millions of dollars. I have heard similar bizaare logic when I hear of leaders from VHP, Bajrang Dal in India how the muslims is out to kill all the Hindus in India and or how CIA is bank rolling all Indian politicians .

A recent incident was after Mumbai terrorist attacks when a mullah on Pakistani television was supporting that this incident was the handiwork of RAW intelligence and RSS to do something I forgot....I was of the opinion that this type of ultra-stupid logic was the output of immature democracies like ours and Pakistan and as we mature, we will be able to put them to grave.. But Mr. Limbaugh broke this dream..

My conclusion is that the right wing conservatives or for that matter left wing dreamers will always have listeners and in times of trouble, their supporters are going to increase... we just have to make sure that we find the best ways to keep them in check and not to wreak havoc on the society by coming to power directly or indirectly...

"Politics and power are same everywhere..Politics breeds power...power breed meglomania ..and meglomania brings corruption which in turn completes the circle by encouraging politics..."