Thursday, September 30, 2010

RBI policy review and my views

There is excess liquidity for sure both in the Indian and Global financial markets today. Thanks to the near zero interest rates in the developed world; it is felt that the developing world is sitting on asset pricing bubbles. So it is more interesting to notice how these bubbles can be spotted today. The 20% food price inflation is not just a problem in India, but the rest of the developing world as well. Also the stock market was defying all logic 3 months ago, but recent quarter results have quelled some fears of over valuations. Moreover even commodities including oil have staged an upward trend in prices, even though the developed world is still healing its wounds. Thus it is a very difficult situation for the RBI to be in today, especially to be overseeing the global economic rebalancing also taking place in Asia’s favour.
Governor Subbarao has dishonourably failed on his most important job of controlling inflation and maintaining the value of the note he himself signs. Such high inflation in a recovering economy can spell misfortune in subsequent cycles.
The inflation is putting increasing pressure on the economy and the common man, which is not a sign of healthy recovery. Also foreign flows of capital into India have been touching enormous amounts, and the weaker dollar is a nightmare for the exporters and RBI alike. But it was as expected that on Friday, 29th January 2010 the RBI hiked its CRR by 75 basis points, as looks to mop up Rs. 36,000 crores of excess liquidity. RBI had indicated in its previous policy review in Oct 2009, of its intent to gradually withdraw monetary support, but had just increased the SLR back to 25%.

I was expecting 50- 100 basis point hike in CRR, and along with it increases in Repo rates as well. My analysis proved worthy on two grounds. First, the CRR rate would have been increased in a calibrated and gradual manner instead of giving sudden shocks to the financial systems. Second, the RBI would have succumbed to Manmohan Singh’s cabinet to control inflation.

However I do not expect a rise in bank rates and other rates too soon, because then the RBI leaves the door open to even more foreign capital inflows. This would nullify the desired outcome as more money would still be chasing the same amount of commodities. Also it will further cause the rupee to be more susceptible to the volatile dollar currency markets as the foreign investors would be looking to hedge their currency risks and attracting more speculative movements.

Could do better
Although we all feel that the RBI has done well enough to save the economy in the crisis and its previous prudent polices have indeed protected the banking system, but to me its recovery management has failed in many ways. Firstly, India witnessed a slowdown, not a recession, so the work was already half done. Secondly, the earlier populist fiscal policies of the government were more than a helping hand to its monetary policies. RBI’s ineffectiveness was visible initially (in last quarter of 2008) where banks refused to bring down their lending rates; especially at the time economy needed the most. Thirdly, its failure to control inflation is big embarrassment for the usually pompous banker. Governor Subbarao has dishonourably failed on his most important job of controlling inflation and maintaining the value of the note he himself signs. Such high inflation in a recovering economy can spell misfortune in subsequent cycles. What and how it unfolds precisely is difficult to predict just like today’s economic crisis.

Wednesday, September 29, 2010

A World Oft Forgotten

Within the mainstream news these days, two parallels clearly emerge, the success of developing economies such as India and China, contrasted with the failure of erstwhile capitalist western nations. But sadly the third world remains the ‘third’ world which is still reeling under the bandits of economic growth: high poverty, low literacy, religious fanaticism and administrative inefficiency. It is as if there is no place for this third world on this planet. The everyday East-West comparison in newspapers and journals woefully neglects their presence. Globalization and its benefits are completely absent from the region. They do have footprints of globalization, but as dumping grounds of the products not suitable for the aforesaid two worlds.

As I am writing this blog post, a family somewhere in the far neglected corners of the world is being pushed below the poverty line. To my interpretation, the rise and revaluation of poverty line measures in such regions have been higher than the effective number of people coming out of poverty.

They do have footprints of globalization, but as dumping grounds of the products not suitable for the aforesaid two worlds.
Today the world has changed more than we can grasp in one go. New measures need to be employed to pull up such neglected and backward regions.  First on my mind is the need to shift from macro initiatives to the micro level. Focus should shift to micro-level programmes like micro-lending which have done so well in emerging countries. I feel that measuring and monitoring micro level support plans can be monitored and evaluated more easily and quickly.

Second, would be to eradicate “energy poverty” as coined by Thomas Friedman in Hot, flat and crowded. In simple terms, to enable the masses to fulfil their aspirations by giving them secured supply of electricity. Today, any rural programme even the basic ones from education to vaccination drives require electricity. Overcoming the third world’s inability to connect to the globalised world will be a big step in helping grow confidence.

There are many more measures which are being talked about. But these are the major recommendations which I feel are indispensable. The third world needs to be given more attention. But with tightening budgets of major donors in the West and exploitive bargain hunters of the East, I feel my worst fears for them are going to be true. 
No wonder they pray so much.

Sunday, September 26, 2010

Reforming the Media: Influences & Suggestions

Media Corporations are getting bigger and bulkier than before, as they try to capture market share of multiple platforms of radio, print, television, movies and internet. The competition is high, margins are small and their business cycles are dynamic. There is so much stress and competition that today news reporting can be easily influenced in cash or kind. Let us see the various mechanisms of influence

  1. Direct ownership: In many of today’s media corporations number of companies or interest groups have stakes in ownership and management. Shifting their focus to shareholders satisfaction and biased news coverage at times.
  2. Influence of Advertising companies as clients: To keep their shows and prints running, media companies need advertisements. Thus media companies have to service their relationship with clients and that does imply a favour here and there.
  3. Knowledge & data processes: You may have seen on business channels on tv, smartly dressed people with big company banners sharing their thoughts on the markets, which are as volatile as the market itself. Media needs these industry thinkers to lend credibility to their shows, but then it makes the audience credulous to their views.
  4. Pre-existing political influence: Media thrives on the news makers and politics is very much intertwined with media coverage. Barack Obama showed us the power of social media in the US Presidential elections last year and I feel all of our Indian politicians are no less then drama queens. It is very well prevalent observation that India’s biggest print newspapers are lenient towards different ideological political parties.
Moreover, large advertisers can influence even competing media outlets by threatening to withdraw their advertising; numerous small advertisers can exert influence if they share a common interest and can coordinate (e.g., when represented by an advertising agency). As a result, media competition alone is not always sufficient to prevent commercial media bias.


The Possible Solutions
There maybe many more ways of influence, present but what is more important is to see what all can be done to improve news reporting, specifically financial journalism. I have certain measures in mind, radical they may seem but radical change is the need of the hour.

Firstly, removing advertising from public TV stations as imminent in France and Spain. This reduces commercial bias of their content and pressures their competitors to reduce bias; it also shifts ad revenues to private media, complementing plans to subsidise media consumption and media entry.

Secondly, making the consumer or viewer or reader more aware that certain views and opinions of this show or column maybe biased. This can be done by running a disclaimer before or during the programme, reminding viewers that it is just an opinion, not advice.

Thirdly, moral suasion is what is most required and most practical. Readers should advocate more investigative journalism, especially in business and finance. This should prevent scams like Enron or Satyam to ever happen again. Most importantly nip improbable frauds and thefts in the bud, and prevent full blow ups in the future.

Another important step would be to remove views or suggestions from the main report and keep them collected on a few pages or a different show. An easy example is the ‘Times View’ section in India’s leading English daily, which comes along with the news event; at times even on the front pages. This is bad journalism, as it induces the reader to opinion of the newspaper, rather than give him time to formulate his own. Opinion sections like these should be put in separate pages of the editorial.

Saturday, September 25, 2010

Has Financial Journalism Lost Its Teeth??

John Friedman of MarketWatch was at the press conference announcing the Bank of America's acquisition of Merrill Lynch and wrote,
"the media were so polite and deferential to the two CEOs; they behaved as if the press conference were a victory lap for the financial services industry."

The above comment just so simply describes the present appalling state of financial journalism. It is true as I pointed out earlier and how easy it is for the media to be susceptible to external influences and how financial dailies and shows can influence the markets themselves.

Too much respect for seniors
One of the main problems affecting financial journalism today is the that business reporter are too close to the Wall Street that they forget the Main Street, and have too much respect for the institutions they are covering. If you have pre-bias towards the organization your covering, then most certainly you would end up asking sugar coated questions.

Also the innate behaviour to idiolise famous public figures like Warren Buffet, Richard Branson or George Soros is very damaging to prejudice free reporting. Every word that comes out of their mouth is said to be the view of the market or industry. It is shown as an implied piece of advice. Rather the journalists should be reviewing their decisions and investments.

Losing reality
Besides the above pre conceived impressions that have set in, many angry bloggers point out gradually financial journalists become part of niche circles in the industry and lose touch with the base and the common people they are writing for. They become very influenced by the views of the circle and many a times their daily columns show their responses to each-others opinions.

A major part of the flaw lies in the fast paced media culture, where ‘journalists are like fireman, going from one fire to another, dousing flames and moving on’. So they publish what is seen and avoid going to the heart of the story and dig out the facts. This surely leads to ‘the death’ of investigative reporting.

Listen then seek to be understood
During an interview recently on the Editors Weblog, the Financial Times's Managing Editor Daniel Bogler said, "It's unfortunate that the financial literacy and understanding of how things work in the City and of basic accounting and so on, is actually very thin in financial journalism." Thus this amplifies the need to have more knowledgeable people covering events which they fully understand and thus are more effectively communicate with their readers or viewers.

Looking back over the rapid collapse of the world's financial markets, and the uncertainty ahead, I very confidently say it is, a financial system failure, a regulatory failure and a media failure.
Everyone is willing to talk about the first two, but they are not willing to discuss the last one. We are all in this. It's a media failure of omission and commission.

Tuesday, September 21, 2010

Two Worlds Apart

The world is clearly split today. With one half looking forward to a bright future and with big aspirations in their hearts and the other half of the world looking behind, still picking up rags from the remains of the last bust and trying to rebuild their economies. One half of the world is flush with liquidity and raising money is just a blink away. Whereas the other half is still carrying heavy debt burdens on their shoulders and has no idea how to lessen it. One half of the world is witnessing rapid economic progress and expectations of growth, even better than before the recession. Meanwhile, the other half is still finding it hard to recover and repair, with its problems ranging from looming inflation to mounting unemployment.

The world that was once ‘emerging’ has now arrived and the world that was once long arrived, is now trying to re-emerge. Okay enough of euphemism, let’s make it more simple! What I mean is the rebalancing of global economy is taking place more quickly than anticipated, with the current recession being just a catalyst. According to my understanding, the change was always happening, but not noticeable.
The world that was once ‘emerging’ has now arrived and the world that was once long arrived, is now trying to re-emerge.
The welfare states of the West were gradually piling up debts and unproductive government spending was further exacerbating this debt. The 2 ‘lost decades’ of the Japanese economy clearly highlight the implications of an economy saddled with expensive welfare programmes. However, not many have taken notice. For instance in America, healthcare as a percentage of GDP was just 5% in 1962. It has grown to 15% in 2010 and even after the present Obamacare reform; estimates are poised at 20% in 2017 and 25% in 2025.

Difficult fiscal outlooks are not the only problems the West faces today. Other depressants are heavy national debts, aging workforce, slowdown in consumption, expensive factors of production and the growing social and cultural discontent, especially towards immigrants and minorities.

On the other hand the East is brimming with optimism and consumption is rising at a frantic pace. Emerging economies are filled with opportunities. Innovation is growing with leaps and bounds. They successfully decoupled themselves from the collapse in the West, which was a surprise to many pundits. But again many had learnt their lesson from the Asian crisis in the 90s, and their adjustments in policy making were gradual, but not that impactful or noticeable. Strong domestic consumption accompanied with prudent foreign exchange controls built over the last decade or two have helped them recover from the crisis and in general brought in public glare their economic might. Even politically they stand taller than before. The extension from G-8 to G-20 is a significant reflection of today’s time.

Cooperation or Isolation?
What the West needs is not to grow discontent against their growth but, to learn and partner in their success. The West still holds the cards on many fronts. Ranging from intellectual asset base and technical prowess to existing influential shareholding in global institutions like IMF or UNSC. But now starts the real challenge to build partnerships, rather than blocs and give the world a better tomorrow.

Sunday, September 19, 2010

Why Germany Lost To Spain And Continues To Lose In Finance

Part 1-
On the onset I would like to start by saying that, it was a fantastic match, which surely lived up to the expectations of a World Cup Semi-final match. For keen observers of the game, it was a real treatise; quality of the highest order. The blackboard strategies and planning were implemented well by the players on the pitch, and it took the match to another level. Nevertheless, Spain proved to be a better side, with their fine passing and skill. For me, the Spanish flair and game-play had more of a Barcelona character than the traditional Spanish style of play. (7 out of Spain’s 10 outfield players were Barcelona players.)

It was heartbreak again for Germany, and the prominent thought on everyone’s mind was ‘Not again!.. when will they?’. The next day, the match had a better hangover on me then any vodka-rum mix has had. Thus, in one of my erratic moods, I started to think about last night’s thought. How Germany often falls, just before reaching the zenith. I tried to correlate it with the recent Euro debt crisis and the role Germany has played in it.

Yes I think, Germany truly deserves the blame for exacerbating the Debt crisis, by holding on to bailout kitty until the last moment, and then the surprise and uncalled ban on short selling and CDS. If you look deeper into the German economy and their socio-political structure, you will find them to be very different to their fellow Europeans. Germans are more thrifty and prudent, but yet still pertinacious and very conservative in their opinions and preferences.

The Germans have always held pride over their seemingly impregnable defence, which has been their legacy for the last five decades. They have invariably been a defence focussed team, but what we saw in the beginning of the world cup was a radical shift in strategy. The Germans were bursting with energy and youth, and so an aggressive and attacking approach came naturally to them. Thus, they performed exceptionally well in every match except the last, beating some good opponents by 3 goal margins. (I said ‘good’, so please lessen by one if you included England.)

But I was really surprised to see their strategy in the Semi-final. They left their wining for their old defensive strategy. From what I understood they planned to soak up all the pressure and to release only on the counter-attack. But, what really transpired on the pitch was the frustration of German players of not getting the ball enough, and eventually then not holding the ball in possession long enough.

From then onwards it was a downward spiral, till they finally suffered a goal and so they were forced to go all out and attack. If you remember closely they had more chances in the last 20 mins than before. So what really did them in? In one word- Hubris. The Germans felt that they could rely on their archaic style of play and because they have always been so good in the past, then why not depend on it as always. It is truly said, that when you walk with your head in the clouds, you either flying or dead. Either ways you lose touch with reality. So did Germany and they paid the price for shunning the modern for the old.
But why finance?? Follow up in sometime.

On India’s 63rd Birthday


“Long years ago we made a tryst with destiny, and now the time comes when we shall redeem our pledge, not wholly or in full measure, but very substantially. At the stroke of the midnight hour, when the world sleeps, India will awake to life and freedom.”  - Jawaharlal Nehru

Nehru himself would be ashamed to see his “free India” ruled by his own family for a majority of years and possibly even the years to come. If that wasn’t enough, just to see his dynasty, not using his own name, but rather that of a man, whose only dream was to empower every Indian to rule himself, would send Nehru back to the dead. But unlike Nehru, we have lived with the quotidian lies and false promises, and have become immune to the pain of seeing our values being floundered and our patience been mistaken for innocence. So I stand up today and differ from the contented and biased editorials, to assess ourselves critically on our 63rd birthday.

On our 63rd birthday, the Commonwealth Games preparations have exposed how the Indian bureaucracy is still corrupt, unproductive and a drain on the economy. The Games were supposed to be a symbol of national pride, but have become source of disgust and embarrassment. They are a perfect example of what is wrong in the present system, where the intermediaries eat away most of the benefits of the beneficiaries. Today, being an average and lazy engineer in the government department is better than being a hardworking and disciplined gold medalist for your country.

On our 63rd birthday, our black economy is growing at double the rate that our economy is growing. The government has no idea how to curtail the inexorable rise in prices. The Finance Minister is perennially pointing to our persistent fiscal deficit. There is more than what meets the eye. In a Planning Commission Report dated June 2010, it has been reported that of every 1 rupee the government spends on the PDS, only 27 paise reaches the poor! (Source: http://planningcommission.nic.in/reports/peoreport/peo/peo_tpds.pdf)
The government has not shown any inclination in removing the corruption and rot inherent within the Public Distribution System (PDS). Today, it is a well known fact that politicians along with bureaucrats have formed a tight nexus with illegal hoarders and speculators. Such things are never written in newspapers and never said in the policy review meetings of the RBI.
Manmohan Singh has shown us all in the last 6 years how economists are good yet hypocritical planners and pathetic yet popular implementers.
On our 63rd birthday, the rich urban India is a minority amongst the majority poor rural India. The average urban voter is disillusioned with the polity, for he feels that there is no point in voting. So much so, that there were serious discussions on “None of the above” option to be given as a choice. Urban India feels realizes that it is not within their control to stop the uneducated and criminal politicians from coming to power. Populist measures are used to appeal to the rural majority and the government is able to manipulate them in such a way that they feel that the government is acting on their behalf.

Like many other people of my age, I feel like a minority within another minority. The minority of being a ‘General’ citizen of the country is the quiescence of the social trends existing in the country. Students are being taught the benefits of violence, strikes and political appeasement rather than merit. There maybe a time a few generations down the line, that children born to general category mothers in general category wards in general category hospitals will blame God for not being born in a govt. approved caste.

On our 63rd birthday, we will today hear from our Prime Minister after weeks of silence, even as the country has witnessed major problems from honour killings, derailment of trains, growing protests in Kashmir, exponential increase in the spread of the violent Naxalites and the permanent menace of inflation. Many of us had forgotten that we even have a Prime Minister.

Manmohan Singh has shown us all in the last 6 years how economists are good yet hypocritical planners and pathetic yet popular implementers. Probably it is because they all believe that in the long run; all conditions (or equilibriums) adjust on their own to the policy planned (or ideal state). Classic textbook stuff will teach you that in the long run, market players adjust to the changes. Unfortunately today, my fellow country countrymen are the ‘market players’. The ‘adjustment’ is in reality an inurnment. The changes are often shocking, malfeasant and pervasive. I think probably Manmohan Singh forgot to read Keynes best critique at his time in Cambridge, or like we say in college “It was out of syllabus”. Keynes said and I shall repeat with great enthusiasm,” In the long run my dear, we are all dead!!”

So those of you, who are hoping to see the violence in Kashmir cease, forget it. The renegade Naxalites cornered up and taken care off, don’t expect it. The complacent, corrupt and inefficient bureaucracy cleaned up, get a life. And the inflation coming down “in the next six months”, don’t fall for it. All in all, we are here in for a long journey, driven by a group of people who are only keen to get off at the next stop available and ask for a refill from the passengers. My advice to fellow passengers: fasten your seatbelt, wear your helmets and be sure to carry a parachute large enough for you and your family, because you never know how low the road might stoop or how high you will drop from.

Why Germany Lost To Spain And Continues To Lose In Finance II

Part 2-
Drawing parallels, this is exactly how they behaved with financial markets. Their surprise ban on short selling and CDS was indeed odious, and still it was prolonged. The Germans, it seems, still feel that they live in a dystopian world, and they are the ones who have to set it right, with their traditionalist rules. Some German editorials on the web are talking of an Anglo- Saxon conspiracy to destabilize Germany through the Greek crisis!
German politicians abhor financial innovation of the 21st century and still believe in the archaic policies of the past. A time when laws were biased and an average investor had no real protection from defaults and frauds. Calling new innovative models like CDS “speculative” might be partially correct but blaming it completely for the mess is blatant hypocrisy.

Germany needs to learn from its world cup semi-final opponents Spain, how to embrace others and their diverse characteristics. And blend them into your own system. It said that Barcelona’s current flair and flamboyant style of play was brought to the football club in the 80’s by its Dutch coaches. From thereon, after years of adjustment and adaptations Spain borrowed the same game-play and has been successful in using it in the last 6 years.

Germans must come out of their conservative shell, and embrace the modern world and its free markets better. The way their engineering industry has grown leaps and bounds in the new era of alternate energy, policies too should open up more. Germany is conspicuous by its absence on the world stage, despite being de facto Europe’s powerhouse. It often remains quiescent on serious international issues and when it does speak out (rarely that is), it is rather disappointing.

The German starting XI reflects its diverse multi-cultural background and the new attacking flair innate within the young team. However, it seems the coach did not identify with this and imposed the “old German way”, which cost Germany the match and eventually the cup.

As I see it, Germany will continue to lose football finals and in finance, until wakes up like the rest of Europe and accepts the changing times.

Wednesday, September 15, 2010

Evaluating Crisis Management Options

Now as we know in a recession, typically the economy slows down, credit becomes expensive and exclusive, industrial output is negative or roundabout zilch, consumer confidence takes a toll and route to other cyclic gloomy events. In financial terms to sum it up; the investment dries up as private participants register heavy losses and stay bearish for a while.

Thus it is obvious that the emptiness in economy and even the financial markets have to be filled in by someone. That someone has to pump blood (that is money in this case) into the economy, in order to maintain life. That someone has to mend the loopholes, revise regulations and show sympathy to regain both public and private confidence in the system it governs. That someone has to wait for businesses to digest the losses, consumers to get more optimistic and investors to feel safe again. I hope you have realised by now that our ‘someone’ is none other than the government itself.

So now we know that it is the government only which is the final responsibility and authority to step in. The next thing to question is what all options it has to choose from:
1)      Spending large amounts of money or reducing taxes to increase money supply.
2)      Using central bank reserve and lending rates to boost money supply.
3)      Or do nothing and let the market and economy correct itself; as the classicalists suggested a century ago.

What is usually seen, is a combination of both the fiscal policy (first) and monetary policy (second). Moreover, what constraints the government to go the whole mile is the presence of the third option. Invariably it exists in the back of the mind of policy makers. It is brought to public domain in business journals and newspapers by some economists who remind about the benefits of perfect competition and warn about crowding out private investment. Sociologists will hark back to the founding principles of capitalism. In addition we are also alarmed by opposition political parties, who suddenly become more concerned about the tax payer’s “hard earned money”, raising slogans about their management (probably motivated as their own pockets get thinner too).

Thus a balance is maintained wherein prudent policy makers are stopped from overspending and crowding out private investment. So the government has to be very careful in order to not fuel a bubble in the economy which bursts as soon as it exits. Thus another major aspect is the timing of withdrawal of economic relief policy in both monetary and fiscal fronts. I will discus this in detail in my later posts.

It is also of course implied that a fiscal or monetary policy cannot be implemented in isolation. They both are interdependent on each other. The leakages in a policy can be countered by the other. For instance the concept of Quantitative Easing which is being adopted by central banks all over the world involves the central bank buying government securities in order to facilitate the fiscal expenditure. However if this was not done, the excess supply of treasuries would have pushed up interest rates and choked off investor confidence and credit flow in the economy.

Thus, we have seen what are the alternatives to be considered, which are evaluated on the basis of market and economic conditions. Now let us see what has really happened this time.

Tuesday, September 14, 2010

Do or Di(v)e for Euro

The response to the trillion dollar support package announced by EU for Greece has mostly been negative. The investors feel that it is still not enough to save the sinking European pride. The pride and unwavering faith in the euro was mistaken to be the absolute truth. With pacts and regulatory bodies in place, the Europeans thought their model was unique in economics and finance; just as their political clout was.
The Eurozone countries' average fiscal deficit as a percentage of GDP is a around 7 % which is well over the limit of 3% as per the above pact.

However, today for most, including me, the Euro has failed in this present set up and so has the European Union. It is quite shocking to see that none of the Eurozone countries are within the fiscal deficit limit set by the Growth and Stability Pact. Their average fiscal deficit as a percentage of GDP is a around 7 % which is well over the limit of 3% as per the above pact.

The reason for this as mentioned by me before (http://finmadeasy.blogspot.com/2010/02/euro-has-its-inherent-risks.html) rests in the clash between the two roles played by Euro member nations. Firstly, all members maintain sovereignty in their political, economic and foreign affairs which in many ways lead to many voices and adversely makes Europe sound like one noisy and divided entity. The EU in simple terms was designed to make their voices coherent as one and a collective European opinion which the world would respect. Sadly, today the collective consensus reached in Brussels is not respected by fellow member states themselves. So what we have seen till date is that member states have put national issues before their European obligations.

Their second role is to work together as a united region and uphold the European legacy, to command respect in a multi-polar world of today. Often egos are bruised, like Angela Merkel’s in the run-up to the stimulus decision, and often issues are dealt with a strong hand in unison. But rest (or most) of the times, members go around trying to show their might, trying to not let the EU take the stage lights off them.

Held at ransom
The message markets have sent is clear. The market is no longer going to be fooled by smart talking and insubstantial measures. They want to see the real deal. Some legally bound promises and structural changes to the Euro system are essential to placate market sentiments. After the Greek catastrophe, Euro bonds are already on a thin line.

Eurozone member states need to come up with concrete plans to limit their fiscal negligence and until then no sums of money promised will be adequate enough to win back confidence. They have to act fast or otherwise, a second dip is not far away.

Thursday, September 9, 2010

Reforming The Reporter

The reform season is in the air and reason is clear, as people look for loopholes to cover and introspect the mistakes of the past to shield the future against a possible re-run of the crisis. Leading the charge and clarion of change is the media. But the media itself has blood on its hands. For long it has been shifting the blame on to the financial system but it has overlooked it own role in the crisis.

I am of the firm belief that it is the bias, profit making and gutless news reporting of today’s media firms is responsible for the various cycles of boom and depression we see in the economy. Like a columnist in the Financial Times put it in his blog, 
“If the banks make the soap water, the media blows the air into the bubble.”
The media and the industry share a symbiotic relationship, with both feeding of each others produce. What is startling is how the average investor watching TV is kept out of this relationship. This shows how the model is fundamentally skewed and biased. For the products and brand image, companies use the media. On the same hand, for bulking up their shows and references, sneaks, previews and hot news the media uses the companies.

Playing with emotions
Financial historians have often claimed human behaviour to be exemplified in the history of finance and more visibly on financial markets. Growing volumes of research in the field of behavioral finance show how investors and markets are being driven more by instincts and emotions, and less by calculative investing techniques. Booms and busts are products, at roots, of our emotional volatility

And the perfect medium to play with the markets via which to play with emotions and judgments of investors is the medium itself.
Let me give an example, say the DOW fell 300 pts in one day. One way to report; “The DOW has fallen 300 pts…these were the companies…these were the figures…blah blah”. And the other way of reporting is; “BLACK FRIDAY has just come...the DOW is very low…show stories of people losing lifetime savings…and ten honchos with big company name banners behind them, talking about their own evaluations and opinions of the gloomy day” (what irritates me is that those 10 honchos would have still earned money and would prospect to earn more after influencing the audience and in a way the market as well.)

It is important to keep in mind that large chunk of investors are not professionals or portfolio managers. So they have a huge dependence on the media for advice and suggestion, but like they say little knowledge is dangerous; so is the case with financial advisory. What the average Joe does not understand is that recommendations on investments are subject to personal circumstances and cannot be taken or applied on just watching a half an hour programme on TV.

Hiding it under the rug
Although my argument of reforming the reporter comes at a time when columnists and editorials are critically reviewing each and every jigsaw to this puzzle, but are shy to see their own mistakes. There very few writers who saw this coming in one form or the other, but were discouraged and disdained by peers.

Even today very few articles can be found in the newspapers and internet on how media has played its part. Thus I have tried to identify the issues and flawed processes and if there is any solution possible.
Stay tuned in for more on this…

Deciphering the Fiscal Policy

The biggest fiscal expenditure programme in the history of the world is underway. Sweeping across 4 continents and pulling down political barriers, this swift, responsive and coordinated effort by governments around the world have led us to diverge away from what could have been the ‘greatest’ depression. Internationally coordinated efforts of governments have defended us from fallacies of the past; having taken lessens from Dr Keynes whose medicine of rapid and expansive fiscal expenditure has indeed worked again.

Even after the death of Keynes his legacy continues, along with it the debate surrounding his bequest. Many economists still doubt till date his policy of high government expenditure and especially in light of today’s already inflated fiscal deficits. Keynes had suggested that the government should take charge of the expenditure in times of collapse and forget the increasing deficit, which will take care on its own, once the economy is back on track.

The situation which government’s face today is indeed unprecedented. 
The success of the fiscal stimulus in the past is a motivation to spend, but the danger of over burdening itself with debt is more real and feasible this time around. 
Rather then bringing in investments, it might just scare away private investment by increasing interest rates and a subsequent lower sovereign credit rating. Currently it is expected that the stimulus package would run the economy and sustain markets till the end of next year. Governments are prudent to early withdrawal calls, with the Japanese crisis still in fresh memory.

Here is an idea of how much governments need to watch out next year as well, in the recovery stage.

Country
Fiscal Deficit (as % of GDP)
USA
9.70%
UK
13.30%
Japan
10.50%
India
8.40%
China
4.30%
Brazil
1.30%
Russia
5%
          Source: IMF Estimates for 2010

Thus it would make a good case to explain that why on earth, governments are willing to take so much of risk and are pumping in so much of money and if it would ever reach the desired targets.

For me an easy way to understand this would be to break down the decision making involving fiscal stimulus and focussing on different regions and nations to derive more sense from their decisions. Thus in simple lay man terms, I breakdown to what are the options available to the governments, why the fiscal stimulus has been so dominant this time, why some economists are sceptical about it and the dilemma of timing of withdrawal of taxpayers support.

Tuesday, September 7, 2010

The Euro Has Its Inherent Risks

The whole drama surrounding Greece and its high chances of default today is quite exciting and necessary. Just at the time, when economists were martyring the US dollar, it has put the euro back into the spotlight. In my earlier post in August on the global currency debate, I had mentioned that it was too early to write off the dollar against the euro, which hasn’t been tested till date. Thus, I say exciting. And necessary because it leads us to understanding the Euro and the innate risks it was born with.

I feel that there is very little we can do to prevent another Greece from happening in the next decade. The euro is the official currency of 16 nations out of the 27 member nations of the EU. Thus the money supply and banking sector is regulated under the common European Central Bank headquartered in Frankfurt, Germany. The euro currency arrangement is somewhat fundamentally similar to the US Federal bank model, where a number of prosperous states, each having the economic capacity to exist as a nation are governed under single monetary regime.

But when we talk of the euro, economists have failed to take into the account the impact of foreign and domestic policies of the sovereign member states. 
The EU as a body has on very few occasions had collective consensus on important foreign affairs and trade related matters. Then how can we expect them to agree on issues as basic as financial regulation, asset bubbles and labour laws.

Simply put, a euro member nation is still functioning as a sovereign state fighting for the same resources and markets as its co-member nations. These guiltless vested interests appear in the form of different growth patterns and asset bubbles in different sectors for different countries. For instance, in Spain and Ireland we saw the housing bubble, which was justifiable before the crisis, as it created jobs and pushed up their economies. But post crisis has put strains on the Eurozone.

The main objective of the ECB under the treaty is to maintain price stability. It keeps with itself target of 2-4% inflation in the Eurozone. But here again comes the problem. Not everybody can be given the same medicine. For instance, Italy, Greece, Spain and others immediately after the crisis had to contend with high unemployment rates upto 10% and sizable drop in exports. If not of the euro, they would have revalued their respective currencies to support export and labour incomes. But instead, they had to grind through a period of deflation and even higher unemployment. On the other hand, France and Germany were first to come out of the recession.

The buck stops here
Hence, I come again to my main point that economists and policy makers have underestimated the impact of political and historical differences within the Euro currency arrangement members.
Firstly they have to stop passing the bill for a Greek bailout. The more indecisive they are, the more Greece suffers. Secondly, there has to be better coordination and transparency among the members. Let us see how the story progresses.

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