economics books and resourcers

http://www.chicagolife.net/content/politics/Gift_Books_for_Econ_Lovers

Free Internet and totalitarianism

This whole internet revolution was lauded on the premise that the technology will reduce the transmission cost of information. Everyone will posses same access to information and there will be minimal arbitrage in access. One of the expectation was that there will be a single fact. You cant lie and get away with that. Internet is supposed to make totalitarian regime difficult to manage as people will have access to other sources of information. 1984 will be only a fiction. People will be able to cross-check statements and will not be hoodwinked by lying statesman.

But has that worked. When I see these groups of ill-informed media analysts, pundits who distort fact to prove their agenda and get away with that. When I see people believe those lies and persuaded to be led by them. Even though checking facts is a mouse click away, people believe outright lies.

That forces me to believe that facts are as good as source. We human do have a need of trusting someone and being led by them. Thats why anyone can distort facts and if he/she has an convincing argument to make or he/she can harness the infallibility present in human nature, that person will be able to carry his/her word. So 1984 is not a fiction, there can easily be another hitler.

"Opinion matters and not truth because we human minimize the usage of rational capacity"

simple vs complex problems

"If you have a simple problem, you can offer a simple solution. But the economy is a hugely complex problem. So we either simplify the problem and offer a solution, or embrace the complexity and do nothing"

One can apply the same learnings to business. Businesses are very complicated problems not as complicated as economics but certainly more complicated than the pure sciences. One can build complex models which doesn't have any solution, or cant monitor the solution or dont know the inputs to the solution. So the problem has to be simplified and the limitations well understood. This makes the solution easy to use and dynamic so that the simple solution can change with situations.

Media business - the elusive search for scale and customization

Any business search for scale and customization for growth. Scale provides cost advantage; it is less costly to serve more customers because of division of fixed cost among bigger customer base. Assembly line production was one of the main reasons of rapid progress of automobile industry. Customization is what allows business to capture a larger premium from customers and hence higher revenue. If people are able to get products/services based on their individual tastes, they will be willing to pay a premium. And since profit = revenue – cost and through scale and customization, business can increase revenue and reduce cost, bottom-line improves.

It is quite difficult to achieve scale and customization in the same breath. Scale needs uniformity of production while customization requires the opposite. There is a compromise to be made between those factors and in essence, businesses thrive on some linear scale between scale and customization. I remember that in OM, there was a case where the company “national Bicycle” has been successful in achieving these twin objectives.

Media business has also followed the same trend. The elusive combination of scale and customization has been the objective and with the advent of internet, it seems that media has found something spectacular where other business has been slightly successful –scale and customization.

For this we first need to define media. Media is an abstract concept here which subsumes all form of activities which are outside productive working hour. Books also are a type of entertainment on an abstract level. Reading books don't produce food to eat or clothes to wear or machines to manufacture clothes. It may aid in making us more productive but other form of leisure also do the same. Same goes for movies, music,plays, news etc. Lets retrace the steps of evolution of media business and we will find the trend towards this search.

Nautanki in villages where musicians, dancers would come and perform for a paltry sum of money was the most ancient form of media. The performers would be quite poor as it was difficult to monetize the activity. The reasons were many. First people were not productive enough and so leisure was very expensive. Second they didn't produce enough surpluses to afford paying for leisure. Third, these artists also had limitations of scale. In a year, they can produce a maximum of say 365 shows if they do it once a day. That will also be difficult to achieve since they have to move to different places. Villagers will not be willing to pay to see the same act. Variety in media will be inadequate as the artists will have limited songs to play and since this wasn't a very profitable profession, there will not be many different performing artists. But there will be variety of art developing in different pockets of world. Since there will be limitations of how much distance that artists can travel, entertainment tastes will be local. So we had quite a form of media which was local, limited in variety on a local scale and artists were poor. Whether poor artist led to poor or good quality is a matter of different discussion.

Going ahead, artists found a different source of sustenance. The productivity of people was low but there were few who had the control of means of production through use of sword, winning the ovarian lottery etc. These people were hence able to collect monopoly rent arising out of their control of means of production and hence the surpluses generated by the rest of the population were captured by them. These were the kings, nobles and ministers of ancient kingdom. So artists thought that making money would be easier if they cater to the taste of this minority of population like ministers, kings etc. This will provide them scale in monetization. The kings will capture the surplus of population and the artists will get some portion of it. This started the phase of what can be called the regal media. As you don't need to cater to popular taste, one can make "art" movies rather than mainstream "bollywood" movies and make good enough money for their living. This media will have lots of variety and "local" form will go away. There will be some powerful kings who needs to be pleased and artists will form music to their taste. So we saw all these famous gharanas "Mughal", "Carnatic" etc. They took the place of folk music.

Printing Press was the next set of innovation which revolutionized the form of media called books. The ability to make copies out of a form of art was a very powerful concept which can bring the required scale in media. The fixed cost increased while variable cost reduced. The scalability by its nature has few winners and many losers. So now there will be few books which will be widely read and many books which will never have audience because they will not be able to find enough profit to compensate for the fixed cost. But customization was not easy. Niche writers will not earn much as it is difficult to monetize readers in different geography without expending high cost of distribution and advertisement.

Movies, camera and theaters did to visual media what printing press for books. One can make multiple copies at very small cost and distribute it. Popular movies started taking the center-stage since the commercialization was much easier. But this visual media was lacking in convenience of watching it any time. One has to go at a designated place to watch movies. So variety in content was limited.

Television and radio solved those issues. One channel can broadcast content while customers can receive that content through installing television in their home. But the question was how to monetize such a business model. Cinema theater can charge subscription fee to enter the theater. Television was an open media. Putting restriction on what can be captured and viewed by a single customer was impossible from a technical perspective. This was quite spectacular also in the sense that there was now a divison between content creator and device producer. Device companies which produce TV and content creator needed to come up with a complex arrangement if they had tried to monetize this with the existing model. The advertisement model used in newspaper industry was applied here and we saw a revolutionary growth in television. The “idiot” box was able to play varieties of programs not possible with theatre due to convenience of watching. 24 hr media help to capture a wider audience. Advertising with its scale advantage was able to produce big winners. Now there were no regional stars but only national stars. Whoever wins the publicity race has to win the race on national level. Earlier it may be the cases that say local cricket players were able to monetize affection of their city and everyone earn decent money. Now with advent of television, we had national cricket player who capture surplus of all the regional players. The regional players become poorer and national players become much richer.

That’s one example of how scale can make few winners and large number of losers. This model though had enough flexibility to develop customization on some level. Regional television channels catering to peoples taste developed and grew. They profited from need for local companies to advertise in local areas and hence took away the scale advantage of national television channels.

Internet is a totally different paradigm which subsumes all the advantages of various media channels. The main advantages are

a) Visual, voice and text and much more: Internet had the ability to support one and all types of display.

b) Interactive: This was quite extraordinary where users can provide feedback, create and collaborate to form a different type of entertainment.

c) Scale: One can reach to people in any part of the world because the IP protocol is standard across different places. So one can use that protocol to access content from any place. The audience was larger and hence the winner was much bigger. Wikipedia,youtube became a worldwide phenomena rather than its equivalent CBS,NBC in the world of television.

d) Customization: It was easy to customize to personal tastes due to two reasons. One since the reach was worldwide, it was much easier to aggregate demand from different parts of world and monetize. And other reason was that fixed cost of production became much lower. Anyone can produce content and publish it on this medium.

e) Monetization: This has been not easy to achieve and the toughest cookie to crack as can be expected. Getting money out of customers pocket has never been easy. Advertisement model has worked on some level and this will grow as soon as more people are present on this media. Subscription model can be the key here. Ecommerce is on the upswing and as soon as people start trusting this, this will have accelerated growth. Internet due to its vastness has contributed to its difficulty to monetize. People always think that there are free things available in some corner, so why pay for it. This in my view is because of the newness of internet paradigm and as soon it will mature, people will be willing to pay for information. Paying is critical to keep the internet growing. Quality of content will improve only if there is able to monetize. Wikipedia may be the best possible encyclopedia on internet but there is much to desire in terms of quality. If youtube has to replace television, monetization is the key.

So internet is one of those innovation which has broken this compromise between scale and customization. If this has to be preserved, business models have to find a way to monetize the content. The contents are much richer, realtime and whatnot . So media business shall have the ability to take a higher time out of human productive time and convert into leisure. Facebook at work is one of the example for that. And the productivity growth will definitely aid the growth in media business as leisure will become affordable.

Is this the real thing?

http://mashable.com/2010/07/23/india-cheapest-laptop/

35 $ for a computer. Is this real? We have heard rumors earlier . Simputer was supposed to revolutionize computing in India but that didn't happen.

But think of a chance that this is possible. 1500 rs for a computer. I never thought that computing power of processors are a big bottleneck in making these cheap PCs. There is limit to which computing power is required for a machine which is useful for average user. This computer will be like TV possibly better TV. This TV will be interactive, more choices of channel and a paradigm where users can connect in realtime to jointly produce content. The possibilities for education, personal development are indefinite.

Inception and the bigger question of what makes for a good movie

Frankly I dont think that Inception is one of the best movie made ever. Neither it is a very good movie. It is an above average movie. I think it was more of action movie rather than anything new.. some of the scenes was good camera work but on the whole it was a Van damme movie with slightly better actors and more convincing script.

But the world disagree. This is based on numerous facebook posts and astonishing imdb ratings.
So does my opinion matter. I have always this question of what makes up for a good movie.
There have been instances in the past where my opinion of a movie/serial was sharply divergent of the minority. And there have been cases when I have presented my divergent views, where friends have accused me of being a show off/pseudo intellectualism. "You have become corrupt enough to enjoy these simple pleasures of life".

See I can understand where my friends are coming from. Being a contrarian helps to identify yourself in a crowd. Many times I myself have been agitated by people who present their opposing views to commonsense just for argument sake.

Showoff in your hobbies is a normal way to get peoples' attention. If someone says that they like English rock music and have no qualms for any Hindi music, that person may seriously like English music or may be just trying to showoff.

Pseudo intellectualism is another charge for which I dont have a defense. Finally whether "Dead Poets society" is better than "Terminator" as a movie is a matter of personal opinion. Whether you are a pseudo or really like it, you need to go into ones dream and check it on a sub-conscious level.

But I had a different point to make when I started to write this blog. My question is does my opinion matter about what makes for a great movie. If you follow utilitarian principle or market based theory, whatever movie makes money shall be made more. So if "Inception" and "Transformer" is liked by majority of people, that shall make for what society shall produce more in the form of "entertainment".

This outcome of encouraging crass movies may be harming my personal liberty of "not able to watch more movies which I like". But this freedom is not the fundamental tenet of individual freedom which needs to be protected from being abused.

Then I came across John Mill's version of "greatest-happiness principle". Here is a snapshot of principle lifted from wiki .

"Mill's famous formulation of utilitarianism is known as the "greatest-happiness principle". It holds that one must always act so as to produce the greatest happiness for the greatest number of people, within reason. Mill's major contribution to utilitarianism is his argument for the qualitative separation of pleasures. Bentham treats all forms of happiness as equal, whereas Mill argues that intellectual and moral pleasures are superior to more physical forms of pleasure. Mill distinguishes between happiness and contentment, claiming that the former is of higher value than the latter, a belief wittily encapsulated in the statement that "[i]t is better to be a human being dissatisfied than a pig satisfied; better to be Socrates dissatisfied than a fool satisfied. And if the fool, or the pig, are of a different opinion, it is because they only know their own side of the question."

Mill defines the difference between higher and lower forms of happiness with the principle that those who have experienced both tend to prefer one over the other. This is, perhaps, in direct contrast with Bentham's statement that "Pushpin is as good as Poetry", that, if a simple child's game like hopscotch causes more pleasure to more people than a night at the opera house, it is more imperative upon a society to devote more resources to propagating hopscotch than running opera houses. Mill's argument is that the "simple pleasures" tend to be preferred by people who have no experience with high art, and are therefore not in a proper position to judge. Mill supported legislation that would have granted extra voting power to university graduates on the grounds that they were in a better position to judge what would be best for society. It should be noted that, in this example, Mill did not intend to devalue uneducated people and would certainly have advocated sending the poor but talented to universities: he believed that education, and not the intrinsic nature of the educated, qualified them to have more influence in government."

I can put forward this version of political philosophy to protect my right to get better movies. Good movies are higher form of happiness and hence shall be encouraged over bad popular movies. Am I claiming to be intellectual enough to know what makes for a good movie and hence higher pleasure? Am I arrogant enough to know more than choices of majority of the world? Well that is the charge against which I don't have good defense. I need to think more about this.

google android

HTC and Motorola both posted profits with their phone based on android software doing very well. but what about google . when they will start making money from android. they saved smartphone makers from an anhiliation at the hands of iphone..

a report on chinese manufacturing

there has been a slew of appreciation of what china has done in the world of manufacturing . this article in NYT explains the value addition by Chinese manufacturing which is very low compared to designers, retailers, marketing and patents.
http://www.nytimes.com/2010/07/06/technology/06iphone.html?pagewanted=1&_r=1&hp

there is a limit to growth that can be achieved using contract manufacturing . they need to move to higher end of product cycle a travail which Indian IT giants are going through. The difference is that contract manufacturing has been broad based while contract servicing has been narrow due to technological constraints. Hence china has been able to grow at a higher rate compared to India.

windows and viruses

one of the argument provided of the defense of windows for the complaint that windows are prone to virus attack was that windows was the largest OS in terms of people using it. So any hacker wants to harm, cheat users, he would spend time and energy in creating virus, malware for an OS like windows where he has the opportunity to maximize his impact. Thats why there are fewer viruses for linux since nobody cares about that.

Real life is complex and doing controlled to prove such behavioral hypothesis is near to impossible. But this time we can possibly see a real world example where controlled experiment is being played out.

IPhone OS and android OS are taking leads in OS to be used in mobile phone, and later to possibly every other consumer electronics other than PC. If we take the current trend, we are pretty sure that in the next 3-5 years, number of people using these OS will be equivalent to number of people using Windows when Windows was quite prone to virus attack.

Hence if the initial logic is true, we shall see the increased attacks on devices containing these OS too. Android is linux based, so there is credibility of linux which Android will have to stand upto.

One can always argue that now OS makers are more aware of vulnerabilities in OS and have found ways to plug them , hence the attacks will reduce because of improved knowledge. I don't know of exact mechanism of development in this area, but from philosphical point of view, hackers will always find a way to find weakness in OS if they exist. If android and iPhone OS are designed in a manner that vulnerabilities don't exist then only these can be saved from hackers' action. So fingers crosses. Lets see the controlled experiment to begin.

consumer revolution in media

"That emphasis on giving readers what they want to read, as opposed to what lofty notions of civic responsibility suggest they ought to read, is part of a global trend."

An efficient economic system is putting the power in the hands of consumer.. The technology is enabling those changes by reducing information asymmetry .making it easily available to people. This is supposed to do better price discovery and hence a more efficient system,

The current changes in media where newspaper and TV news media are succumbing to perverse form of free media, focussing on what is popular taste rather than the real issues can be seen in enabling more powers to consumers rather than intellectuals who used to suggest what shall be read as part of civic responsibility.

The argument against such an efficient system will lead to a "Race to the bottom". The news media will compete against each other to cater to the shot term needs of consumer and in process affecting the long term future.

Media in a democracy are supposed to be the guardian of opinions and enabling check against government power. Even now media has in crisis taken the responsibility of delivering second objective but first have taken a beating due to inability of doing a deeper analysis of the situation.

Newspaper like leaders need to be leading the curve of public opinion and not always following it.High competition in short term will make newspapers following the public opinion curve, catering to instant needs.

So is everything dark out there. Ford, Apple and many other corporate examples have proved to be forming opinion and these are result of efficient economic systems. We shall expect to see similar revolution in media where some agencies will form a niche and cater to intellectual taste rather than crash public taste.

Swedish family values

http://www.nytimes.com/2010/06/10/world/europe/10iht-sweden.html?ref=general&src=me&pagewanted=all

In Sweden, the revolution from pay to family friendly environment is taking place big time. The parental leave reserved for fathers, free education etc are making the society gender neutral . The cost of this is higher meddling of government in family affairs, higher taxes. but even after these, Sweden has maintained fiscal prudence with low debt to GDP values and productivity keep on rising. Sweden is a prime example of how even large government interference in economy and large taxes has not hampered productivity growth. The point is whether this model is dependent on Swedish culture and hence can't be exported to other countries. and whether this is scalable enough for a larger country like ours!!

why it is so difficult for judges

During MBA, I took this course Business, Government and Law. There we get to know that Constitution is finally a living document. One need to interpret constitution in the light of incidents that happens today. The boundaries of law henceforth shall change and any robust constitution needs to have the flexibility to allow that change but in the process protecting the core values.

Another aspect is creation of institutions which can keep checks on each other and doesn't grant unilateral power to anyone for it to be finally abused.

The third part is what Justice Souter states here.
"A choice may have to be made, not because language is vague, but because the Constitution embodies the desire of the American people, like most people, to have things both ways. We want order and security, and we want liberty. And we want not only liberty but equality as well. These paired desires of ours can clash, and when they do a court is forced to choose between them, between one constitutional good and another one. The court has to decide which of our approved desires has the better claim, right here, right now, and a court has to do more than read fairly when it makes this kind of choice."

One can appreciate the difficulty that judges face when they have to decide between good and good. The choices are more difficult and one has to keep decisions in perspective of future, how will those decisions be interpreted in future.

Constitution will always have general guiding principles. Having set of rules for every current and future circumstances is impossible to achieve.

democracy in action

why we don't need power located in one hand because it will be invariably abused by someone. Even very intelligent, great , purer than thou soul once given power will be enamored by the possibility of using power for his/her own agenda.

the other thing is the risk of relying on a single person, its all about diversifying risk by taking opinion from a group and finally deciding on what to do .. one can always say that it finally leads to horse-trade, bullying, cheating to do things your way . but we are comparing this to a system where one person takes decision .. expected value of taking a right decision over a long time will be higher in democracy . no hard number proof , but this is sociology, so will be difficult to do so..

In democracy , one intend to come up with institutions which can cancel each other powers. so judiciary is a check on executive and one will hence want judiciary to be independent of executive . but making them too independent will concentrate power in their hands which will be also an undesirable state.

I see judiciary are in a position where they can take unpleasant decision which will be good for long term where the political class fails a lot..

Fama in his interview said that regulation fails because it is driven by political affiliations which are not efficient rather than prices which are efficient because of its ability to gather information from all places. Politicians are driven by short term greed/political favor and hence will enter in bubbles of under and over regulation. As we have seen that prices can also be irrational , so there are limits to both .

Prices are the most democratic institution from a point of view . They get inputs from all and finally decide on one ..

Interesting bit on inflation

http://krugman.blogs.nytimes.com/2010/02/26/core-logic/

Beating up the speculators

Gary Becker on usefulness of speculation

"Applied to the financial crisis, if when housing prices were rising so rapidly, more speculators had been shorting the housing market, or shorted mortgage-backed securities whose value depended on what happened in the housing market, their actions would have reduced the sharp increase in housing prices, and reduced the subsequent steep fall in these prices. Therefore, it was the absence of sufficient short speculators when commodity and asset prices were rising sharply that helped widen the run up and eventual collapse in these prices.

No amount of writing by economists will eliminate the hostility to individuals who make lots of money when times are bad."

Interesting bit as part of news about Euro Debacle

"Yet even as it predicted the trouble, Germany failed to anticipate that the countries running a trade surplus would inevitably need to finance the southern states’ shortfalls. The five most heavily indebted euro members owe German banks an estimated 700 billion euros (nearly $900 billion), and these German surpluses, once regarded abroad as a symbol of great strength, have emerged as a dangerous source of vulnerability. Most sickeningly for the Germans, the indebted nations are likely to say that their debts need to be reduced or restructured in the name of European solidarity."

China shall be looking at how Germany has to fund his neighbors to save European union future , china would be in similar danger sometime if they keep on running trade surpluses and US decides to default.

rumblings II ( innovation and social usefulness)

So taking the story forward in the last post- what will happen if the innovation by the third person in business activity is not weaving clothes but say brewing alcohol. The third person finds out a way to produce alcohol from food produced by the other two person. The alcohol is liked by all the thriee persons and hence GDP increases which comprises of three portions of food and three portions of alcohol.

So how this situations stands vis a vis the earlier situation of three portions of food and three portions of clothes. In terms of GDP, this will depend on what is the utility value of clothes vs alcohol to people. How does one calculate utility? Well it will be the value/happiness that one will get out of consumption of alcohol/cloth? Both alcohol and cloth can keep you warm in winter but clothes can do extra in making one fashionable.

From a GDP growth perspective, does it matter? Well in short term no. In long term may be. If usage of clothes lead to better processes of weaving of clothes and people discover another profession like fashion consultant which is of higher utility, while on the other hand , usage of alcohol may lead to finding its usage in medicine and someone start producing them. So in the long term, GDP may grow differently depending on the productivity growth and the future innovation of goods.

The next question is what is socially useful. Well for that we need to get a definition of social usefulness which doesn't exist or change depending on the person that you talk to.

Lets take the social usefulness as factors that affect social structures like family, legal system etc which in long term will negatively affect the economy. On this criteria, if say alcohol consumption makes people violent and more prone to fighting , this will make it socially harmful. So clothes innovation is better than alcohol on this scale.

The other criteria is a more philosophical one. What type of society do we want. Do we want to develop a society where clothes symbolizing comfort takes precedence over alcohol symbolizing leisure or vice versa. Or to take a better example whether we shall spend money/innovate profession in finding medicine for AIDS or on space exploration. In the short term, it doesn't matter. In the longer term the results may vary.

What matters here is who are "we". Could there be political leader or social evangelist deciding what we want or is it the choice arising from trials and errors of utility functions of people, the other name of this is entrepreneurship.

This also explains the charm of planned economy vs market economy. In planned economy, the planners by their supposed "super- intelligence" decide what type of goods/profession/path that the economy shall take. So in this case, through their calculations and social judgments, the planner will decide what is beneficial and hence choose the path. This will be done through quotas on goods production in private arena and capital investment by government. Also since the goods are already planned, there is no waste in form of entrepreneurship since no experimentation on utility function of people is required.

And there lies the fallacy that someone or a group of people can know what is beneficial for others in the economy and hence make a judgment on the utility functions which is impossible to perceive for a single individual leave aside the whole country.

The "socially useful" advocates also makes implicit assumption on long term utility functions of individual while deciding on what set of professions need to take precedence. Deciding on expenditure on AIDS drugs over space exploration does have the assumption that people would have larger utility of AIDS drugs as there is fear of epidemic rising in future. What may happen that in future, space exploration may lead to discovery of alien race that has already discovered drugs for AIDS.

Financial innovations can also be thought in this framework but that will be the subject of another post.

rumblings - I

so i was thinking of some basic economics and thought to put down in a basic form so as to improve my understanding.

So how will be new jobs created in a economy? Let take an example comprising of three people where all of them are involved in food gathering and they work for 12 hours every day to gather enough food(3 portion) to satisfy hunger for each of the three. In this case, each of the person has wages equal to 1 portion of food. All have 12 hours of leisure everyday.

Now lets think of situation that by trial and error and working in 2 hours of leisure, they figure out a way of producing food out of land which is agriculture. By this method, they can produce enough food using only 24 manhours per day so as to satisfy hunger of three people. Now in this case, there are two choices.

First choice is that all three now work 8 hours a day, produce three portion of food which they divide among themselves. But each of them will have 16 hours of leisure in this case. The economy remains the same and in the way we calculate GDP, the GDP has stagnated. This is socialism at its best.

The second choice is that two of them decide to continue working 12 hours a day to produce three portions of food. And the third one becomes unemployed because he doesn't know the technique of agriculture. So what will happen now.

Case one is that he dies of hunger. Since there is no one to consume 3 portions of food, they will start producing 2 portions of food and start spending more leisure time. The GDP will reduce but per capita GDP remains the same. This is capitalism at its worst if one has even a slight bit of humanitarianism in his soul.

Case two is that the third person innovates and create a product which is useful for all three. Say that he learns to weave clothes for which the two farmers are ready to provide one portion of food to him for his survival. This situation increases the economy and GDP grows to three portion of food and three portion of clothes. The per capita GDP also increases. This is capitalism at its best.

too big to fail

Its not about preventing "too big to fail", it is about preventing "too connected to fail". Breaking up Too big financial institutions make sense for political reasons since these lead to legislation favoring banks and which are detrimental to general public welfare. But that is a phony arguments since that is true for all private enterprises and that brings into question of determining what is meant by "too big".

The concern over future bailouts come from "too connected to fail". That is the reason why credit market freezed after Lehman collapsed and there were billion dollars bailout even though Lehman by its size is quite small compared to overall size of financial institutions. The same thing can be seen in earlier crisis of 1930s where it was the failure of many small banks but inter-connected bringing the whole of US economy to ground.

Hence in future, one can't be sure that when banks start failing , one may not have option of not bailing it out if it is too inter-connected and hence endangering the system. Inter-connectedness can't be determined apriori since that will depend on the general situation of economy and the environment of fear, cynicism present in such situations.

tech voyeurism

http://www.nytimes.com/2010/04/23/technology/23share.html?ref=technology

list of startups which are catching up the idea of voyeurism and naked self-promotion from facebook to the next level. The mindset is changing and we have now the technology to drive it.
will this work? Yes. From my recent increase in activity on facebook, I have come to realized some points about this craze of letting other people know what you are doing. The real analysis of underlying emotion is best left to some social scientists but on a crude level this is self promotion and voyeuristic nature coming to the front.

Inflation (rumblings)..

Well let me start by saying what Freidman said "Inflation is always a monetary phenomena". Due to excess liquidity available global as a result of low interest rates in all countries, the stage could be set for inflation worldwide which is not a case currently. US is still experiencing sub-normal inflation and the same is case for European countries.

The argument that if the world prices are high, one cant cut down on domestic inflation is basically proxy for the argument that the whole world is a giant connected market with free flow of capital and trade. Hence even if domestic interest rates are increased, there will be large influx of capital. This will either (lead to appreciating the currency, hurting exports and hence GDP) or (increase in forex reserves -> high inflation) . This is a major concern currently as even though there are inflation concerns in Brazil and Australia and they have raised rates, but some country like Brazil had to impose capital controls in order to control appreciation of the currency.

But after saying that, the Indian Market is not so integrated with world capital markets that the rise in interest rates in India will have no effect on underlying domestic inflation. We in India and China to some extent are facing a much higher inflation compared to US, Europe which would not have been the case if the world has been flat.

The other aspect of monetary policy which I guess have become a big issue now whether there is broad based or sector specific inflation. This is taking the same logic from international to sectors. Due to sector specific distortions like government taxes, incentive etc, infrastructure etc, there could be inflation in specific sectors or specific geographies. One would like the central bank NOT to play the role of stocks speculator and decide whether some specific sector is inflated or not because that is complicated, impossible to do and would lead them to favor one over another. It is expected that they look at broad inflation numbers and do a good job in managing growth along with maintaining a growth target. This aspect is currently being questioned though in light of housing crisis. Whether the central bank has the duty to identify the inflation/bubble and prick it or it is too difficult task and hence they shall not intervene. My view is that they shall not do it but I guess one can differ. It is about accepting small positive changes or large changes with variation on both sides.

Now coming back to current changes by RBI, this certainly is not geographic specific inflation. Is this a sector specific inflation? Well I am not so sure about it. I will see if I can dig some data for this.

interesting piece of social rule

http://economix.blogs.nytimes.com/2010/04/20/a-tale-of-many-cities/

This has explanation of Zipf law according to which "the population of town is inversely proportional to its rank among cities. So the largest city has twice the population of second ranked,thrice the population of third ranked and so on."

Very interesting piece. Such elegant piece of rule in such a complicated real world scenario. Is this random or God playing its hand? Or there is a sincere explanation for this.

The network effect of aggregation of population can be understood but will this lead to such a clean relationship, that is difficult to explain.

Exchange rate

I came across a very interesting piece about exchange rates in the book "Lords of finance". Setting Exchange rate rather than being a technical exercise is more of a political one where decision has to be made on which group has to be favored. Normally it is exporter vs importers which comes down to producer vs consumer. The producers being small in number and organized does lead to moving the rate in their favor. Another decision has to be made is on the amount of inflation invariably linked to exchange rate. A high inflation transfers wealth from savers to debtors while protecting the people who own means of production while deflation does favor the other way around.

After the first world war, all the three European countries Britain, Germany and France were riddled with large monetary expansion and foreign debt. The value of exchange rates would determine the inflation and total national debt.

Britain chose the conservative approach to get the exchange rate back to its pre-war level thus protecting the creditors and savers but causing a recession and later stagnation due to required deflation. Germany took the opposite path leading to a period of hyper-inflation and hence destroying the wealth of savers in this case the whole middle class. France took the medium path and in short term was the most successful economy, growing at a good rate.

Setting the exchange rate is always a political decision.

Next step: Look at the political economy behind China's current exchange rate dilemma.

Blankfein's take on Goldman being accused of fraud

Lifted from Simon Johnson blog

"http://baselinescenario.com/2010/04/19/discount-rate-mismatch/#more-7226" ..
The facts may not be right but is downright funny..



You want the truth? You can’t handle the truth. Son, we live in a country with an investment gap. And that gap needs to be filled by men with money. Who’s gonna do it? You? You, Middle Class Consumer? Goldman Sachs has a greater responsibility than you can possibly fathom. You weep for Lehman and you curse derivatives. You have that luxury. You have the luxury of not knowing what we know: that Lehman’s death, while tragic, probably saved the financial system. And that Goldman’s existence, while grotesque and incomprehensible to you, saves pension funds. You don’t want the truth. Because deep down, in places you don’t talk about at parties, you want us to fill that investment gap. You need us to fill that gap.



“We use words like credit default swaps, collateralized debt obligation, and securitization… We use these words as the backbone of a life spent investing in something. You use ‘em as a punchline. We have neither the time nor the inclination to explain ourselves to a commoner who rises and sleeps under the blanket of the very credit we provide, and then questions the manner in which we provide it! We’d rather you just said thank you and paid your taxes on time. Otherwise, we suggest you get an account and start trading. Either way, we don’t give a damn what you think you’re entitled to

financial reform ..

http://krugman.blogs.nytimes.com/2010/04/18/six-doctrines-in-search-of-a-policy-regime/#more-8819
Krugman at his best in being lucid and descriptive about financial crisis. what is surprising is how close are economists on the left and right (centre-right) are in their views about fianancial reform are and how far the politicians are in terms of slogans like "too big to fail" and "cut payments to banks"

is this the only way one can make money?

so in the recent crisis, there were some people who didnt lose much money and in made some cases made real good money.. Paulson Hedge fund, george soros and goldman sachs were few of those who bucked the trend and made profit. And this was supposedly because they were the smartest guys in the room and knew that this was coming . I remember that in goldman sachs presentation, one of the gentelman said that one of the reason that they did better was their risk management and they used long term investments rather than repo to fund the investments..

The recent SEC investigation is a bad publicity to this . Being smart has been always respected at least in US but defrauding and your investors is a big no-no at least with respect to reputation if not in terms of legality.

But from news report, the evidence doesnt look cohnvincing enough. Anyhow given the credibility and past history of SEC, I suspect that this case will go nowhere. Politically though this is a bomb shell. Everyone gets a whipping boy of its own. The finance reform bill will get a lift. Making derivative trades transparent has to be part of any reform bill and this incidence will make sure that such a provision is added if not present.

Another question of does the market clears in terms of reputation? Even if Goldman Sachs is not punished, shall this act as a reduced revenues for them since other investors shall be wary now. I would love to say yes but I am not sure looking at the evidences in current crisis. The investors at other funds are also playing with others money and they can come back and invest . What probably they will do is to use a consultant advice to protect their asses if this thing unravel.

There are sometimes a thin line between having enough freedom for taking risks for the good of business and esentially defrauding the shareholders. Doesn't it come back to corporate responsibility , a special sarben-oaxley for financial institutions!!

Nation under debt

With the whole debate on national debt, I come across this interesting piece of history while reading the book "The Lord of finance".

After the first world war, all the european countries (england, france and italy) had amassed huge debts mostly from the US governments. Since the war was the main reason for this large debt, the European countries started clamoring for reducing the debt. Mostly being linked to a war and since US was the biggest debtor, the debts were renegotiated.

Keynes famously announced that in these cases it is the debtor who has the upper hand and asked England to hold out.

England possibly out of its civility gave in first and 80 cents to dollar, France got its debt reduced to 40 cents and Italy negotiated a settlement of 24 cents to dollar holding out till very end and negotiating finally in 1926.

A similar example was when Argentina threatened to default in 2001 and got a deal by which 76% of the defaulted bonds were exchanged by others, of a much lower nominal value (25–35% of the original) and at longer terms.

Key lesson: the countries typically being sovereign and under the false modicum of international law where penalty is non-existent can easily threaten to default and negotiate its debts. This can be key lesson for the bonds of European countries under crisis now.

though it will be interesting to see whether such instances of default, debt restructuring by sovereigns lead to building a higher risk rate in the long term treasury bonds of those countries.
One of the reason for low long term interest rates for US has been the instances of US government always acceding to pay its debt particulatry after the civil war. The free market voices in US will never allow a sovereign default by US.

But if comes to shove, u don't know where the public opinion will turn to.

ebook and ecommerce

If e-books become the order of the day, would Amazon or any aggregator will be able to charge a high sales commission (right now 30%) ? In that scenario, the aggregator would be delivering search service for which commission would be very low. Hence ecommerce would move to
a) Diversifying to other goods where physical delivery is required. There supply chain efficiencies, good customer service will justify the presence of aggregator.
b) New tie-in business model like Amazon and Apple are doing. Sell hardware to which you can tie-in your e-book sales.
I think the spectre of future where Amazon and apple would lose its functionality as aggregator of music is playing a big role in forcing these companies in adopting model (b) and not trying to act just as a platform.

The same logic applies for music(mp3). Movies are a different story. There one can have a third business model of being a platform through which movies are sold by content creator (Hulu.com, Netflix).

free market..

"The free market is a successful motivator of people because it does not rely upon the altruism of its participants."

Altruism is individual dependent and can't be built in a model for developing a robust process of economic exchange. Hence free market systems shall work better as a process in a large system while planned system can work in a small organization where altruism can be determined using personal interactions.

But selfishness taken to its extreme level , doesn't it cause the system to die from its own weight?
Well the thing is to have the right systems in place. All externalities are taken care of and a person is penalized for his extravagance. Is it easy to put the system in place?

No certainly not . There are lot of thin lines to be taken care of . The question is whether this line of thinking has been well accepted truth or still there needs to be debate around it.

rachel getting married

just saw the movie. was blown away by the strong emotions present in the movies. the movie was replete with strong characters which were greyish. i think the most fascinating aspect of movie making or story writing for that matter is to create such interesting unique characters and tell their story, bring our their emotions. And this movie is a live example of it . story of a family with their complex emotions on display bound by circumstances no one can wish away .

and what was icing on the cake was anne hathway's acting. she never appeared to be any good in all the movies I have seen earlier but in this, she was brilliant. this does show that with good direction and script , bad actors can also bring in an impressive performance . kudos to her. and deservingly she own an oscar nomination.

climate economics

http://www.nytimes.com/2010/04/11/magazine/11Economy-t.html?pagewanted=1

a nice matter of fact, easy to read view on climate economics in US

never underestimate politics

it is said that money is supreme and corporate tycoons are power brokers who can do whatever they want. the recent incident of goldman CEO accepting/being given a very low bonus of $9mn as compared to $68 mn in 2007 with similar bank performance is an indicator of how strong popular voice supported by politics can force the mighty to do their bidding. I mean one can't get go back next year and give bonus for this year. then this is something spectacular happening here. public anger over perceived or actual incompetence of wall street forcing people to change their practices.

now the thing to see is whether there will be movement away from goldman sachs of the key employees due to low bonuses. does the bugbear of the reason why we need high pay in wallstreet is talent which will move away if denied obscene compensation is true or not? This is certainly me not being envious/jealous of wall street and want some sort of closure ..this is more from economic theory of whether labor markets clears and is so efficient?

articles on barack obama's first year

http://www.newyorker.com/online/blogs/newsdesk/2010/01/one-year.html