Archive for the ‘Economics’ Category

Funeral’s better than life support

February 23, 2009

I’ve often wondered why don’t they funnel stimulus funds to Greenfield projects than resuscitating the dying gorillas.  My argument – it’s lot more productive because it saves time (no wounds to heal) and money (no clean-up cost, no claims from the past). It saves jobs as well because trained workers can be re-hired at lower wages because of their huge supply.

But I needed an ally before I could air my views. Today I found one in Tom Friedman.  Excerpts –

“Bailing out the losers is not how we got rich as a country, and it is not how we’ll get out of this crisis…When it comes to helping companies, precious public money should focus on start-ups, not bailouts…If we are going to be spending billions of taxpayer dollars, it can’t only be on office-decorating bankers, over-leveraged home speculators and auto executives who year after year spent more energy resisting changes and lobbying Washington than leading change and beating Toyota…Our motto should be, “Start-ups, not bailouts: nurture the next Google, don’t nurse the old G.M.’s.

Our country is still bursting with innovators looking for capital. So, let’s make sure all the losers clamoring for help don’t drown out the potential winners who could lift us out of this. Some of our best companies, such as Intel, were started in recessions, when necessity makes innovators even more inventive and risk-takers even more daring.…they will drive innovation in all these areas — and move wind and solar technology down the cost-volume learning curve so they can compete against fossil fuels and become export industries at the “ChinIndia price,” that is the price at which they can scale in China and India.

That is how taxpayer money should be used to stimulate: limited financing, for a limited time, targeted on an industry bristling with new technology start-ups that, with a little push from Uncle Sam, won’t just survive this crisis but help us thrive when it is over. We need, and the world needs, an America that is thriving not just surviving.

Thank you Mr.Friedman. You nailed it – well, almost !

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The earth could’ve stopped spinning

December 26, 2008

Oh, for the year that was… Battered global economy, foreclosed homes, Oil prices that soared and crashed, currency values that swung high and low – ah, the Madoff Scam that ended the year with a flourish.  If I had the magic powers, I would have put the spinning earth on pause mode and have time stand still so that 2008 comes after a long enough pause to forewarn the world of the economic crisis that awaited it.  And till we all had time to get out of our portfolio stocks 🙂

So what does that leave us with? Some bitter lessons. Will we miss the automatic deference accorded to titans of investment banking? The senior executives of banks used to command great respect; it is now clear that many of them did not deserve it.

The Anglo-Saxon capitalist model has been sorely tested in the past 12 months. Governments have been forced to prop up the banks and tempted to erect scaffolding around industrial titans. We may come to miss some of the dynamism and inventiveness of unfettered capitalism, but we will not miss glib free-market fundamentalism.

The ground is now clear for a safe touch down of Keynesian prophecies.  The first lesson – Never analyze the economy like you do a business. For a company, it makes sense to cut costs. If the world tries to do so, it will merely shrink demand. An individual may not spend all his income. But the world must do so.

Next lesson – Never treat the economy as a morality tale. It’s a technical challenge. In the 1930s, two opposing ideological visions were on offer: the Austrian; and the socialist. The Austrians – Ludwig von Mises and Friedrich von Hayek – argued that a purging of the excesses of the 1920s was required. Socialists argued that socialism needed to replace failed capitalism outright. These views were grounded in alternative secular religions: the former in the view that individual self-seeking behavior guaranteed a stable economic order; the latter in the idea that the identical motivation could lead only to exploitation, instability and crisis.  We can’t predict which is right.  But we can certainly believe neither is.

We bid a hearty farewell to the lack of discrimination that characterizes the height of a boom. When even conscientious investors are happy to hand their money over to a man with inexplicable returns, a peculiar business model and whose name is pronounced “Made-off”, something is awry.

Finally, we are pleased that it looks like the end of a casually unsympathetic attitude towards society’s walking wounded. When even the highest in the financial land have been forced to seek assistance from the great mass of ordinary taxpayers, a humbler approach from all of us must be in order.  So usher in 2009; only if you remember the lessons…

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Dr.Y.V.Reddy, the man who insulated Indian financial system

December 20, 2008

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It was George Bernard Shaw who said “We are made wise not by the recollection of our past, but by the responsibility for our future”.

 

A child can ask a question that many wise men cannot answer. Similarly few could explain why great leaders err on the side of caution even as there seemed little to worry.  They are even blamed for missing out on great opportunities. These worries epitomised the rudimentary yet sagely wisdom (that most realized only in hindsight, after he was gone) that underscored the era of Dr.Y.V.Reddy as the Governor of Reserve Bank of India (RBI), India’s central bank.  Dr.Reddy during his tenure as the Guv was criticized for being too stringent with his policies that sucked out liquidity from the system even as the economy was growing at a scorching 9 percent plus.  Yet when credit crisis struck global finance, India remained relatively secure thanks to his early braking mechanism.

 

NYT correspondent Joe Nocera captures many a banker’s opinion in his column “Talking BusinessHow India Avoided a Crisis”. 

Dr.Reddy post his term is now being lauded by one and all for India’s relative resilience in the face of global liquidity crisis.  The man deserves kudos for not letting Indian banks sin excessively.  By seeing the real estate bubble early, he made regulations more stringent by increasing the CRR and risk weightage for realty loans.  He banned bank loans for buying land and allowed them to lend only for financing construction costs.  He never allowed securitizations and credit derivatives to gain prominence and setting up off-balance sheet vehicles that hide debt.  Thus the Indian banks never could slice and dice debt and palm them off to unsuspecting buyers that fueled the mortgage crisis in the US.  The banks were forced to hold on to the loans they made to customers until maturity.  It meant banks made sure the loans got paid back since that was their only way to ensure liquidity.

When he saw huge foreign fund inflows into India, Reddy feared inflation and he duly pushed interest rates up to more than 20 percent, which of course dampened the housing frenzy. He increased risk weightings on commercial buildings and shopping mall construction, doubling the amount of capital banks were required to hold in reserve in case things went awry. He made banks put aside extra capital for every loan they made. In effect, Mr. Reddy was creating liquidity even before there was a global liquidity crisis.

India’s bankers were naturally furious, just as American bankers would have been if Mr. Greenspan had been more active. Their regulator was holding them back, constraining their growth! They felt Reddy was being too harsh, excessively paranoid and cutting things to the bone. For a while they felt if Indian bankers were missing out on something, but now they know they missed out only on the toxicity.

As Luis Miranda, who runs a private equity firm devoted to developing India’s infrastructure, put it: “We kept wondering if they had figured out something that we were too dense to figure out. It looked like they were smart and we were stupid.”   Joe Nocera rounds it off  as he says “Instead, India was the smart one, and we were the stupid ones.”

Dr.Reddy has indeed acted responsibly for our future.  No words to thank him.  Perhaps he realized wisdom is never on the menu.  But he ended up owning the restaurant !!!

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Cucumber standard, anyone?

November 15, 2008

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De-leveraging may be a fashionable word now (but nobody bothered when global markets were riding the leverage propelled liquidity wave).  One of the solutions folks put forth now is to return to gold standard as a way out of the economic mess. Remember why gold standard gave way to dollar standard?  Gold was way too rigid, it was scarce and its production process was complex.  There was not enough metal to go around.  Printing paper was easier.  America had all the gold after the War and Europe was in tatters.  That made it easy for U.S.Dollar to become global currency.

 

Anyways it’s amazing how they chose gold as the substance to be valuable in our world.  Isn’t it just sludge that comes out of the mud?  Mud sludge, if you will. Humanity decided to base all of its wealth and prosperity on mud sludge.  Imagine they had picked something else like flowers or something, how different would things be. It’s funny to think gold is valuable just because some people in ancient times decided that the sludge they found in the ground should be called valuable. After all, it wouldn’t be valuable at all if the ancient people felt it ain’t worth the sweat and let it just be mud sludge.  Why couldn’t they have picked something better, like honey or something. Why did they have to pick something that is so rare and capable of getting extinct? Were they trying to make life tough for future generations so they’d always have to go around digging? What if one day there is none left in the ground? Would we all starve? Or could we just decide that the ancients were wrong and we could then pick something better to represent the wealth of the world. If we did, we wouldn’t pick something stupidly rare like truffles in the ground, we could pick something easier to mine or grow. Like cucumbers. Now wouldn’t that be something?

 

“Get me Hank Paulson please, will ya?”

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How about a large wall street collider?

September 10, 2008

Over to the Big Bang research. The Large Hadron Collider is designed to accelerate protons to energies of 7 trillion electron volts and then smash them together, recreating conditions in the primordial fireball only a trillionth of a second after the Big Bang.

Many physicists hope to materialize a hypothetical particle called the Higgs boson, which according to theory endows other particles with mass, or identify the nature of the mysterious invisible dark matter that makes up 25 percent of the universe and provides the scaffolding for galaxies. Some dream of revealing new dimensions of space-time.

As I understand, those discoveries are in the future. If the new collider is a car, then what physicists did today was turn on an engine, that will now sit and warm up for a couple of months before anybody drives it anywhere. The first meaningful collisions, at an energy of 5 trillion electron volts, will not happen until a few months down the line.  Nevertheless, the symbolism of the moment was not lost on the experts and non-experts gathered there.

Wish they invent some ingenious machine to do some predictive analytics at the Wall Street as well to see what will be left there after the big crunch that started off since september last – a Large Wall Street Collider?  But I won’t bet they’ll ever learn.  They hardly did from LTCM debacle. As striking as the parallel is to Bear Stearns, Long-Term Capital’s echo is far more profound. Its strategy was grounded in the notion that markets could be modeled. Thus, in August 1998, the hedge fund calculated that its daily “value at risk” — meaning the total it could lose — was only $35 million. Later that month, it dropped $550 million in a day. I hope the scientists are a different breed, and hope they learn a few things from this new `why machine’ 😉

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How to screw a virgin

March 28, 2008

I never give in to spam mails or TV commercials.  I zap’em all in one swoop.  I chuckle at the  ad spend that just got wasted and feel pleased with myself for being completely in charge, right on top. 

If I were a brand, my tagline will be – “Don’t sell me stuff; make me buy”!

But the whole world wants to market or sell stuff to folks like me because it is hard to get us to buy!  I recently came across a bunch of young entrepreneurs with little or no marketing budget.  Being the cheapest and with scope for a decent outreach, they had zeroed in on viral online marketing.  I told them how I loath spam mails and how much I like an unchoked inbox. I told them about my tagline too and in an instant they were staring down a pest.  But it got them thinking seriously since they badly needed orders.  Soon they were busy figuring how to sell to these eclectic if not elitist, spam zappers.

So, how to screw a virgin? 

Rape is impossible within the confines of her inbox. She calls the shots in there where she is free to open, save or zap mails.  Marketers can at best land a message and forget about it.  Ah, messages can be followed up over phone.  But calls cost and budgets rule, don’t they?

Then I read this piece by Kim snyder on getting the most out of email marketing.  Interesting spin.

[Got here because of title?  Silly you!  Fools die 🙂 ]

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Hey VC, be good to me

November 28, 2007

In the startup circles, I often hear the founders living on Ramen noodles and soup.  No Sushi, No Starbucks for them. Sign of frugality that is good startup economics?   

Read this.

Stanford professor David Cheriton made his billions by introducing Google founders Sergey Brin and Larry Page to the venture capitalists at Kleiner Perkins Caufield & Byers. He was rewarded with a sizable chunk of Google stock.

Canadian Cheriton says he prefers to ride his bike around his Palo Alto, Calif., neighborhood, and relies on an old Volkswagen van or a Honda sedan when he needs to get behind the wheel. He says he only flies commercial, prefers jeans to designer clothes and claims to reuse his teabags. He also cuts his own hair to save time going to a barber. His indulgence: two windsurfers.”

Hits me like a ton o’ bricks. HuH…? Do VCs reward introducers?  I do so much more in beefing up startup business plans, fixing early bugs, getting them right resources and connections and even doing preliminary due diligence and documentation that makes it so much easy for a VC.  A couple of VCs that I’ve dealt with have even recommended a few founders to me to run their plans over.   I lost a few million already.  Had it only from my clients so far.  

Ok VCs…let bygones be bygones…. Now be nice to me, huh ? 🙂

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