Two This one on what the experts say to the world and what they do with their own money.

BTW, a bit off-topic, I am watching Zee’s SaReGaMaPa and I believe if this reality show goes on as it is going on, then we can see this platform (or say a feeder pool) for the singing aspirants. I think, all other singing reality show stands nowhere compared to this show. If you had seen the previous series then you would agree with me. These singers sing better than the original songs, hear this one by Amanat Ali from old Masoom and let me know your opinion.

Article on Warren Buffet on ClusterStock.com

Trade protectionism is certainly not the way to fight an economic crisis…interesting article on BS

Some interesting views in the BS article for Indian IT/ITES industry

In response, the industry has adopted several strategies even as it has been blessed by a few fortuitous developments.

1. The depreciating rupee is one, though the immediate gains may be limited because of the rates at which hedging was done.
2. The second piece of good news is that attrition rates are falling, and compensation costs will come under control.
3. The third good news is that more complex, higher-value work is coming to India in both software services and BPO.

The crisis in the western financial services industry, which has provoked several mergers, is presenting new opportunities. These new merged entities will need to re-engineer their processes so that the earlier separate parts with their different IT architectures can talk to each other, and that presents work opportunities. The BPO industry had already been undergoing structural change by reducing dependence on the low-value, high-volume voice business, and focusing more on knowledge and legal process outsourcing. The importance of outsourced engineering services work has also been growing.But the biggest challenge for Indian IT to get out of its dependence on linearity (hours multiplied by wage rate) and to move into the products business, based on ownership of intellectual property. Making this into a substantial business is still a distant goal; in essence, Indian IT remains a software services (rather than a software) industry, and that will not change for the foreseeable future.

This is what my view was since the crisis erupted and it is still the same. One can’t treat Mumbai the same as Maharashtra. Making Marathi compulsory is a plain IDIOTIC stunt and is an insane behavior which is expected from politicians (latest one is Praful Patel). I had an argument over the topic with my boss couple of days back and even he supports the view that Mumbai being a Maharashtrian city, everyone is bound to know Marathi. I don’t understand how can someone treat Mumbai to be a property of Maharashtra (I know its a capital of Maharashtra, but more important is the tag of being a financial & entertainment capital of India). Everyone would be happy if tomorrow Mumbai is declared a Union territory. Its not just Maharashtrians (NO OFFENCE) who built this great city, but its a joint effort by all. Atleast, I don’t live discriminating between different caste and religion (I can brag that I have the most number of Muslim friends in Mumbai). Ajit Rande is pragmatic and he doesn’t speak taking any sides (though he himself is a Maharashtrian…if I am not wrong).

For comparison, lets take NYC, where we don’t see any compulsion on what caste of people will stay or in which language they speak and that confirms that global cities don’t discriminate whereas cities like France,etc though progressing, is not liked by other nationals due to their racial behavior.

BTW, Swami jee came 2nd in this year’s Bastias Prize, would loved to see him had he came first. About Bastiat visit here

Full article here

“The RBI keeps forex reserves mainly in US government bonds, yielding around 5%. But Indian companies today pay 10% or more for dollar loans, and often cannot get loans on any terms at all. If India, like Russia, creates a war chest of $50 billion for rescues, this sum can be switched from 5% US bonds to 8% dollar bonds issued by Indian companies. That will increase the government’s income, while easing the credit crunch on companies too.”

A win-win situation? No, it would be crony capitalism. Indian companies must learn that foreign borrowing carries unanticipated risks of the sort evident today. In good times, companies have gaily ignored these risks. It is fair and just that they should suffer the downside of foreign debt, just as they benefited from the upside earlier. We must not privatise profits and socialise losses.

On Govt giving guarantee: Swami Jee – Normally, I am dead opposed to government guarantees. But in a global panic, there is a case for guarantees if they thaw an otherwise frozen market. The government must charge a substantial penal fee for giving such guarantees.

Saala yahaa ek English samajhne mein problem hoti hain, ye bhaisaab itni bhaashaa kaise bolta hain?

I like the quote “I felt like Charlton Heston landing on the Planet of the Apes,” says Fink. “My world had transformed.”. Isn’t it that we all felt the same that Monday morning? Suddenly felt that we got the powers that the scientist in the movie “Back to the Future” has got to peep in to the future. It surely was an informative article for me, hope its the same for you as well.

Some from the article….

“

But before anyone organizes a ticker-tape parade for Fink, keep in mind that 25 years ago he was an early and vigorous promoter of the CMO (collateralized mortgage obligation). Today the CMO and other asset-backed securities have become the monsters responsible for the credit crisis.

Fink sold his first CMO in 1983 while working as a bond trader at First Boston. He pitched this new product to Freddie Mac (FRE, Fortune 500) as a way for the company to offload $1 billion in mortgages.

This hugely profitable offering made Fink a rock star at First Boston.
Fink left First Boston in 1988 and went to run the asset-management business for the Blackstone Group, but feuds with co-founder Steve Schwarzman over equity prompted him to leave and start BlackRock in 1994.

The capital markets are pure capitalism. When there’s demand, pure capitalism produces supply. Whether the demand is appropriate – that’s another question,” says Fink.

“What happened at First Boston was minor. What’s happening now is 1,000 times harder,” says Fink during an interview in early October.

BlackRock’s first big assignment in the current crisis was the State of Florida. In November 2007 the state’s CFO called BlackRock because a press report said the state’s investment pool – a kind of bank for local governments – had subprime mortgages in its portfolio (mostly sold to the state by fellow BlackRock client Lehman Brothers). And those mortgages were headed for trouble. A panic erupted: Schools, fire departments, and police stations around the state all started to withdraw from the fund. In weeks the fund shriveled from $27 billion to $14 billion.

The nerve center of BlackRock Solutions looks pretty much like any Wall Street trading floor. There are rows and rows of computers – 2,000 in all. Hunched over them are a cadre of analysts of every stripe: a physicist, a nuclear engineer, an electrical engineer and, of course, economists, MBAs, and accountants. Their job is to construct computer models designed to answer the only question companies care about right now: How much is the collapse of the debt markets going to cost us?

BlackRock’s experts can take just about any kind of loan-based security and analyze it from top to bottom – literally starting with some deadbeat signing up for an interest-only mortgage in Bakersfield, Calif., and following it through the bowels of the financial system until it comes out as an ingredient in a credit default swap on the books of a Swiss bank based in Geneva.

Currently BlackRock runs tens of millions of risk models a day. On each of those, computers continually run through an ever-changing number of potential risk scenarios, some 200 million of them per week – everything from what happens if the U.S. starts defaulting on its debt to what happens if China stops buying it. This type of analytical power is what has drawn the world’s most desperate companies to BlackRock.

For weeks the team at BlackRock Solutions worked around the clock – taking each individual swap, following its chain down to the original borrower, and assessing the risk of whether the loan would default. By the end of August, BlackRock had come up with some viable numbers, and Willumstad was preparing to use them to present his 90-day strategic review on Sept. 25. He never got to it.

Here is BlackRock’s edge: It’s not an investment bank and it does not trade for itself, so it does not compete with its own clients. And while there are other independent managers that provide risk-assessment services, none of them analyzes as broad a range of securities as BlackRock.

The point of the anecdote is not lost on the listener: Even as the world of finance is transformed, Fink will remain at its center.

“

Financial regulation: west on trial now

Kishore Mahbubani, former foreign minister of Singapore and currently Dean of Lew Kuan Yew, University, makes the point that the quality of regulation in western economies will now be closely watched by Asian regulators.

In the past, Asian governments expected western counterparts to be role models of good governance. One story illustrates how times have changed. This year, a European banker consulted the Reserve Bank of India to learn how to get a banking licence in India. He was briefed on the conditions and told that the Indian authorities would also assess his regulator. The European banker smiled and said: “No problem. We have excellent regulation.” The Indian officer replied: “After subprime, we are not sure of US regulation; after Northern Rock, British regulation; after Société Générale, French regulation and after UBS, Swiss regulation.”

This is very different from the times when banks from Asian economies were considered suspect until proved innocent.

Bureaucrats become capitalists with the right set of incentives. I have been visiting China periodically since 1985, and have personally witnessed the incredible changes wrought in people’s lives by the Chinese economic miracle. The spectacular opening and closing ceremonies at the Olympics marked the emergence of China as the ancient civilisation which had once again regained its self-confidence. But there is a question that has always nagged me: how has a bureaucratic authoritarian state delivered the intense economic competition which is at the heart of a market economy without ceding any political control? A brilliant book by Steven Cheung (The Economic System of China, Arcadia Press, Hong Kong, 2008) at last provides the answer.

Cheung has used the insights he developed about share-cropping in his The Theory of Share Tenancy to explain the transformation of the Chinese economy from “one based on delineating rights in terms of hierarchy [through bureaucratic ranking] to a system of delineating rights in terms of property” (p.36). At the centre of this was the household responsibility system introduced in agriculture in 1978. This separated the ‘ownership’ from the ‘use’ rights to land, and was “the equivalent of the granting of private property rights via a state lease of land” (p.38). Difficulties in the application of a similar responsibility contract in industry lay in depreciable industrial assets, where questions of maintenance and reinvestment led to constant controversy between the authorities and the state enterprises. But as most of these enterprises were loss-making, their physical assets had become economically worthless by the early 1990s. The only constraint on closing them was that state employees could not be legally discharged. It was only with the rise in the value of their land in the late 1990s that they could be successfully privatised.

But, how did this rise in land prices occur? It was based on fierce local competition to get the largely private industries (most often the assembly platforms of Western multinationals) into their particular locality. I had observed this fierce competition, but had assumed that it was based on the corrupt ‘rents’ the local bureaucrats could earn by selling these ‘use’ rights to state land. But corruption on the massive scale that the observable explosion in industrialisation and urbanisation required, would have undermined the legitimacy of the Communist party, particularly with the rapid decline in popular adherence to the Marxist creed. Hence my puzzle: how had the Chinese state delivered the indubitable miracle based on the fierce competition of a market economy, without losing political control?

From his field research, Cheung found that, whilst there was corruption, it was not massive. More important, the Chinese had evolved a form of local bureaucratic competition based on granting ‘use’ rights to urban and industrial land without the need for corruption. At the heart of this was the evolution of a set of incentives provided to bureaucrats in xians (municipalities) to act like landlords selecting and granting share-cropping contracts to investors. The economic power of the xians lay in their sole right to decide and allocate the use of land. This right did not belong to villages, towns, cities, provinces or even Beijing. The xians are part of seven geographically determined layers: country, provinces, cities, xians, towns, villages and households. These layers are vertically linked by responsibility contracts (which, from their Chinese name, imply, “guarantee what I want and you can do what you want”). But horizontally, there are no contractual links and they are free to compete.

The pecuniary basis of the set of bureaucratic incentives at the level of the xian was a uniform national value-added tax (VAT) of 17 per cent paid by investors in a xian. The xian can keep a quarter of this VAT, which allows the bureaucrats to receive various perks like houses. This gives them the incentive to compete for maximising the VAT in their area. So the xians are like landlords whose investors are like share-croppers, and they themselves are share-croppers with the upper geographical units. In his earlier work, Cheung had shown that, if the landlord could vary the share of output given by his tenants, he could obtain the efficient outcome, with the tenants putting in the optimum effort to maximise production.

But how could the xian ‘landlord’ ensure this efficient outcome if he could not vary the ‘share’, which is determined by the nationally uniform VAT? Cheung’s answer is that, if the landlord is also providing ‘capital’, then by varying this, he can obtain the efficient outcome even if his share of output is fixed. The ‘capital’ that the xians can offer are the price of land they charge investors and the costs of the infrastructure they provide, as well as rebates on the VAT to be paid. This is precisely how the xians have competed for highly productive industrial investments in their area. A trip to the showpiece industrial park in Shozou near Shanghai (which we took with the Cheungs) provides a visible demonstration of this fierce local competition by using the ‘capital’ at their disposal to lure the high value-added, labour-intensive export industries that have made China the workshop of the world.

There is, however, a growing cloud on the horizon with the introduction of a new labour law with minimum wages, security of employment etc (reminiscent of India). Unlike past ones which the xians ignored, it is to be centrally enforced. By raising the price of unskilled labour this would be a shot in the foot of the Chinese miracle, which has been based on free labour markets in an open economy. The best hope is that pragmatism will prevail and the xians will be permitted to turn a blind eye to its local implementation. The reason for the introduction of this new labour law is the purported growing inequality in China. But as Cheung rightly notes, given the large floating number of workers who are classified officially as resident in the rural areas from which they migrated, and not considered residents of their new urban homes, there is a gross overestimate of the urban-rural per capita income gap as reported in official statistics and touted by international agencies like the World Bank. There is no reliable statistical information on which a robust measure of inequality in China can be based. As in so many other areas, letting the heart rule the head may yet stall the Chinese economic miracle.

Roughly speaking, there are four steps to every decision. First, you perceive a situation. Then you think of possible courses of action. Then you calculate which course is in your best interest. Then you take the action.

Over the past few centuries, public policy analysts have assumed that step three is the most important. Economic models and entire social science disciplines are premised on the assumption that people are mostly engaged in rationally calculating and maximizing their self-interest.

But during this financial crisis, that way of thinking has failed spectacularly. As Alan Greenspan noted in his Congressional testimony last week, he was “shocked” that markets did not work as anticipated. “I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms.”

So perhaps this will be the moment when we alter our view of decision-making. Perhaps this will be the moment when we shift our focus from step three, rational calculation, to step one, perception.

Perceiving a situation seems, at first glimpse, like a remarkably simple operation. You just look and see what’s around. But the operation that seems most simple is actually the most complex, it’s just that most of the action takes place below the level of awareness. Looking at and perceiving the world is an active process of meaning-making that shapes and biases the rest of the decision-making chain.

Economists and psychologists have been exploring our perceptual biases for four decades now, with the work of Amos Tversky and Daniel Kahneman, and also with work by people like Richard Thaler, Robert Shiller, John Bargh and Dan Ariely.

My sense is that this financial crisis is going to amount to a coming-out party for behavioral economists and others who are bringing sophisticated psychology to the realm of public policy. At least these folks have plausible explanations for why so many people could have been so gigantically wrong about the risks they were taking.

Nassim Nicholas Taleb has been deeply influenced by this stream of research. Taleb not only has an explanation for what’s happening, he saw it coming. His popular books “Fooled by Randomness” and “The Back Swan” were broadsides at the risk-management models used in the financial world and beyond.

In “The Black Swan,” Taleb wrote, “The government-sponsored institution Fannie Mae, when I look at its risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup.” Globalization, he noted, “creates interlocking fragility.” He warned that while the growth of giant banks gives the appearance of stability, in reality, it raises the risk of a systemic collapse — “when one fails, they all fail.”

Taleb believes that our brains evolved to suit a world much simpler than the one we now face. His writing is idiosyncratic, but he does touch on many of the perceptual biases that distort our thinking: our tendency to see data that confirm our prejudices more vividly than data that contradict them; our tendency to overvalue recent events when anticipating future possibilities; our tendency to spin concurring facts into a single causal narrative; our tendency to applaud our own supposed skill in circumstances when we’ve actually benefited from dumb luck.

And looking at the financial crisis, it is easy to see dozens of errors of perception. Traders misperceived the possibility of rare events. They got caught in social contagions and reinforced each other’s risk assessments. They failed to perceive how tightly linked global networks can transform small events into big disasters.

Taleb is characteristically vituperative about the quantitative risk models, which try to model something that defies modelization. He subscribes to what he calls the tragic vision of humankind, which “believes in the existence of inherent limitations and flaws in the way we think and act and requires an acknowledgement of this fact as a basis for any individual and collective action.” If recent events don’t underline this worldview, nothing will.

If you start thinking about our faulty perceptions, the first thing you realize is that markets are not perfectly efficient, people are not always good guardians of their own self-interest and there might be limited circumstances when government could usefully slant the decision-making architecture (see “Nudge” by Thaler and Cass Sunstein for proposals). But the second thing you realize is that government officials are probably going to be even worse perceivers of reality than private business types. Their information feedback mechanism is more limited, and, being deeply politicized, they’re even more likely to filter inconvenient facts.

This meltdown is not just a financial event, but also a cultural one. It’s a big, whopping reminder that the human mind is continually trying to perceive things that aren’t true, and not perceiving them takes enormous effort.