Reading links

I have a lot of sympathy for what Chinese regulators have done with respect to the sale of derivatives by Western financial institutions to Chinese investors (companies, individuals, funds, etc.).  The article makes a veiled reference to the implications that it would have for the internationalisation of the Chinese currency. But, that is best ignored.

The S&P report (have not seen the full one) on the world’s top 45 globalised banks shows most of them to be under-capitalised. It is not easy to understand the methodology they used from the news report. But, the conclusions are unsurprising. Their capital adequacy, even under less stringent definitions such as Basel II – was boosted by accounting liberties that banks were allowed to take.

Even as one respects Paul Krugman’s erudition and exposition, he does not make it difficult for us to disagree from time to time given the polemical nature of his comments and extreme views he takes, borne out of his confidence in his own analysis.  In fact, in his debate with Niall Ferguson, NF did not fare as badly as PK tried to paint. We have commented on it here and here.

We have also commented on his revisionism on ‘Chimerica’ here without acknowledging his own cheerleading of ‘Chimerica’. He does it again here in this NYT article. Just to point out that he did not paint this relationship a chimera, here are the concluding lines from his original 2007 paper with Moritz Schularick:

Nevertheless, so long as both sides discern the benefits of their remarkable economic marriage of  convenience, Chimerica – and the global asset boom it has created – will remain a reality and no mere chimera.

Well, what does this say about Niall Ferguson?

The Indian PM is now in Washington. Coverage of the visit in International press has been good. I am referring mostly to FT. See here, here and here. His interview to ‘Washington Post’ on the eve of his departure was an exercise in firm and precise communication. Chidanand Rajghatta in ToI dramatizes the PM’s remarks on America’s ability to bounce back.

While it may be going too far to suggest the Prime Minister has walked India into the American camp, he has clearly taken a bold stand on the future world economic scenario by betting on continued US salience, if not primacy, at a time it is not  considered trendy or prudent to do so.

In some sense, Singh’s gamble in endorsing the primacy of the dollar is as crucial a call as India has ever made in its history, given the fluid geo-strategic situation  that many experts say presages a shift in the balance of power. [More here]

Unfortunately, Mr. Chidanan Rajghatta continues to hyper-ventilate. Is geo-political power about scoring small debating points? Worse, are we misrepresenting what the PM intended to convey and causing unnecessary damage to a fragile relationship?

If one wishes to be informed about the PM’s visit to America without spin, better check out these links.

I like this piece by Arvind Subramanian in Business Standard very much. It is realistic and recognises global economic realities. He writes:

One possibility that remains is for a number of emerging market and developing countries – including South Korea, Indonesia, Thailand, India, Turkey and Mexico among others – to come together and highlight the impact of China’s exchange rate  on their trade and competitiveness and hence on their ability to manage inflows. [More here]

His ‘prayer’/wish was answered partially. Some one has studied the terms-of-trade impact on Africa from increased trade with China. See this blog post and the paper link. The paper can be downloaded for freely from SSRN. But, you need to be registered.

Beltway or the highway

Recently, I came across the following observations in a research note provided by a vendor:

Some have blamed the Federal Reserve for inflating yet another asset bubble. If this is the end result, so be it. Debt deflation and the associated recession are rooted in a balance-sheet crisis. As such, the remedy must be oriented toward addressing balance-sheet stress. The only effective way to alleviate balance-sheet stress is to lift equity prices, even at the risk of creating another asset bubble. One could argue that this a short-term quick fix that will sow the seeds of the next destruction. May be it is bad policy, but for now the alternatives are even worse.

The Austrian school approach is idealistic and not at all practical. It was tried in the 1930s and failed miserably, wiping out nearly one third of the Western world’s GDP. Also, over a quarter of the labor force was thrown onto the streets. The slogans at the time were “liquidation” and “thorough cleansing”. The system had indeed been thoroughly cleansed, but the economy was almost “cleansed” to death. No serious policymaker today will want to repeat the same experiment”.

It is not important to know who wrote this for that would detract from the discussion of the point and divert our attention on to the protagonist.

These are very interesting and normative observations. The dispute as to which approach is right is unlikely to be over with this crisis. There is one strong argument in favour of what this writer has said. If crises are rooted in human nature and hence, endemic, there is no point in trying to forestall crises. By definition, one cannot. Therefore, the correct attitude is to deal with the fallout of the crisis and that is what policymakers have done.

The counter-argument runs as follows: Crises might be endemic and intrinsic to human nature but policymakers can still achieve two things: they may not be able to pre-empt crises but they can pre-empt the degree of destruction by leaning against the wind when the pre-crisis boom is sowing the seeds of the crisis. Second, by allowing the pain of crisis to be felt and fixing responsibility for it, they can extend the gap between two crises.

Recent economic history favours this counter-thesis. The 18-year boom that started in 1982 was perhaps due to the aggressive and painful high interest rate medicine of Mr. Paul Volcker in the U.S. that wrung out high inflation and set in motion a long-term trend decline in interest rates and cost of capital. Per contra, the green-signal that Mr. Greenspan gave to fiscal stimulus of the previous U.S. administration and his low-for-long interest rate policy gave rise to a pyrrhic recovery in 2002 that peaked in 2006, busted in 2007 and morphed into a full-blown crisis in 2008. No one can argue that America’s 17.5% unemployment rate (including underemployed and discouraged workers) is the outcome of following Austrian policies!

Of course, both arguments are made with the benefit of hindsight and without possible recourse to counterfactual scenarios. In the final analysis, when it is possible that ‘in a low-growth world without an intervener of last resort, conflicts of all kind could be on the rise’,  it is unsurprising that the ‘pain first and gains later’ prescription has few takers in the political and policy space.

That does not mean that all those who warn of the consequences of such an approach are hypochondriacs.

Postscript: I came across this timely post in Macroman blog. This parting observation of the blogger deserves a special mention:

Still, if Kohn’s claim that “our abilities to discern the “correct” values of assets is quite limited”, how can the Fed fail to recognize that Nasdaq 1999-2000 was a bubble….
…as was the 2003-05 housing market…..
…and oil last year…..
…but that a less than 10% decline in the value of the S&P 500 in the first few weeks of last year was sufficiently worrisome that it merited a 75 bps inter-meeting cut a mere 8 days before a regularly scheduled FOMC policy decision (which produced a further half-point cut.)?

Put another way, why does the Fed feel powerless to identify bubbles in real time, but is evidently highly confident in its ability to determine when asset prices have fallen below equilibrium?

If the Federales are truly concerned about ensuring financial stability, addressing asset price moves in a symmetric fashion would be a great place to start. Because on the evidence of the last dozen years or so, the Greenspan/Bernanke/Kohn is a helluva lot more trouble than it’s worth.

Some clues for the U.S. outlook in 2010

How to become an expert in predictions for 2010 – not just for the economy but for the society, social stability in the U.S.?

You might be able to piece together your own thoughts and forecasts from the following reading links:

Home builders get to write down losses (NYT – Gretchen Morgenson) – one more instance of State capture – read the stuff on how much the homebuilders spent on lobbying. RoI is pretty impressive.

Chicago Fed governor says that official policy rates would stay low beyond 2010. Not quite a surprise.

Jeff Immelt says that a second stimulus is more likely than not. That too is not a surprise. What could be surprising is the reaction of the bond market in the U.S.

Which is the welfare state now? U.S. or EU? Who pays for it and how?

The plunge in State and local tax revenues tell their own story.

Rural BPOs in India

Ms. Lydia Polgreen based in Delhi and covering South Asia for New York Times (NYT) had written a news story on rural BPOs in India. She has covered what appears to be a start-up company (RuralShores) that is beginning to set up rural BPO centres. This has the potential to transform the rural skills and employment scene. There is room for many rural BPO companies.

I personally know of a company called Desicrew. It was incubated in the Rural Technology and Business Incubator (RTBI) at IIT, Chennai in India. It is led by a young woman entrepreneur – Saloni Malhotra. The company has been around for two years.  Check them out here.

I have no commercial or any other interest in either of the two companies.

Reading Links

This morning I circulated a mail that another friend had sent, to few other friends. Couple of friends were not pleased with the reality that the article claimed to depict. It showed that Indian retailers suffered heavily from shop-lifting. They will be pleased with this piece. The piece reminded me of the movie, ‘Trading Places’ starring Eddie Murphy.  Of course, Professor Dan Ariely would not have been surprised by the movie or by this news item.

One way or the other, MicroFinance is in the news. FT carried the news that Deutsche Bank has brought micro loans from Congo to the securitization market. Socially responsible investors have bought the AAA tranches. The news left me with mixed reactions. When would the tail start to wag the dog as happened in the case of sub-prime mortgages with mortgage brokers creating more loans so that there are enough loans to be packaged into securities?

Speaking to an industry veteran on reading the news, TGS was happy to note that at least some of them are thinking of a counter-eco system if the forces of financial capitalism are now putting in place the same eco-system for microfinance that took sub-prime mortgages to the cleaners.

Now, Swaminathan Aiyar writes a great piece about microfinance and Muslim women.He has thrown a gauntlet to eminent Muslim personalities. Will they rise to the occasion?

Role of ethics in market economy

As I read this long piece, I wondered whether capitalism was only chipped and not broken as Martin Wolf claims in FT. Perhaps, his co-columnist John Kay was closer to the truth. Where is capitalism without morality? Wasn’t that one of the factors in the decline of Communism?

What is that makes us beasts? Or, more precisely, why corporations make men (and women) heartless? Perhaps, it is a question for Professor Dan Ariely. Pfizer (or the companies it acquired) certainly does not come across well at all. Very sad reading. On what basis, do they question corporate governance and business practices in the developing world?

I was reminded of the Bloomberg article when I saw this news item in Reuters. Perhaps, angry questions should wait until the end of the flu season.

Mark of America’s decline?

These two posts by Barry Ritholtz unmask Warren Buffett. He is scathing in his comments. Regardless of the tone and tenor, there is some explaining to do, for Mr. Buffett, if he cared to, that is. Many of us have wondered about his silence on Moody’s. It makes sad and disappointing reading.

In this one, he recommends reading Randall Forsyth regularly. Based on this post, it appears a rather sound recommendation. Indeed, if one looks at the non-farm payroll data, the ‘galley slaves’ are clearly not feeling the recovery, if there is one, that is.

Of course, for the ‘masters of the universe’, the concerns are quite different.  In this post, he blogs on Floyd Norris’ original article titled, ‘Goodbye to reforms of 2002’. The original is here and it is worth reading for there are other meatier pieces of information there.

Is this the change that America wants to believe in?