Archive for August 22nd, 2008

UBS appoints a chief communications officer

August 22, 2008

This Blog does not talk about appointments. However, this press release from UBS is a nice development:

UBS appoints new Chief Communication Officer

UBS appoints Michael Willi Chief Communication Officer. In his new role Michael Willi will report to the Group CEO and bear global responsibility for UBS corporate and brand communications. He will head up the areas of Communications Management, Media Relations, Internal Communications and Brand Management. Financial communications will now be part of the Group Chief Financial Officer function.

Read the last lines….financial communications will be a key responsibility of CFO.

Surely looking at the UBS shareholder report and the ongoing mess, a communications officer is welcome. What is needed is a person who can explain the developments in finance in plain English (read my post and research here). It is a much bigger task than creating all the fancy instruments. I hope Mr Willi takes some steps towards this matter. It will be a good idea if other firms also have a officer designated to take care of communications.

Another source of research dries

August 22, 2008

I am not feeling good after reading this Business Standard piece. TCA Srinivasan says he will not be writing – Okonomos anymore. Okonomos a weekly column written every Friday has been the only of its kind.

It provides a glimpse of some exciting research paper mostly in field of economics. I woke up to this column pretty late (in 2006) but have enjoyed it ever since. After TCA, it is only Niranjan Rajadhyaksha’s pieceswhere one gets to read about some research. I didn’t cover it much in this blog but I realised quite a few papers TCA pointed out, I had mentioned them in my blog already. This made me feel confident that I am perhaps reading right things.

I always felt we lack way behind in research but his column confirmed my apprehensions. He raises it again here:

When, back in 1998, I had mooted the idea of writing a weekly commentary on research in economics….The aim, originally, was to write only about Indian research. But after only a few weeks I ran into a problem: There just wasn’t enough of high quality research going on. The theoretical stuff from places like the Indian Statistical Institute and the Delhi School of Economics was good, no doubt, but hardly the sort of thing one could write about in a newspaper.

The empirical stuff was limited by the fact that there just wasn’t enough data around. The exception was the RBI and its publication, Occasional Papers. But that was mainly because the staff had the data. Sadly, it has become too occasional now. The website link was last updated in February and the last volume is dated Monsoon 2007.

I should also mention that of the nearly 600 Okos I wrote, I received less than 10 submissions from Indian economists. I finally had to conclude that the people for whom it was originally meant — economists — were not interested in reading about what other economists were saying. I would be remiss, though, if I did not mention that non-economists did find it useful.

 He drops some bombs as well:

One of the most striking things was the frequent assertion by the economists I met was that they didn’t read the business papers. This strange approach doesn’t seem to have changed much. Just two days ago, I met a university professor who said the same thing. I wondered about the point of the research they did. If, like their counterparts in the US and the rest of the west, they didn’t address live problems, what did they do then? And why?

That was not all. I also discovered how easy it was for very powerful interests, both vested and wannabes, to use naive but competent economists to further their cause. The whole “reform the financial sector now, at once, now, now now” campaign then fell into proper perspective.

So, they don;t even read business papers. There is a simple answer to his question. Well one only needs to go to the working papers of various universities and wonder how the papers help.

So how did the column survive?

It was in 2001, I think, that I discovered the NBER site.

I don’t need to say anything more as no words describe NBER.

I don;t know about others but I would surely miss this column which was a unique initiative. Good thing is it is going to continue.

I understand the column will continue, which is great news. Now I can sit back and let someone else bring me up-to-date on what’s going on in the confused world of economists. Better do a good job of it, lads.

Yeah, the successors have pretty high standards to follow.

We are all responsible for India’s Olympics woes

August 22, 2008

I am pretty late on this topic and it has been discussed quite a bit already (see this from Cowen). It is the hot topic- why do we do so poorly in Olympics despite having such a vast pool of resources? The usual blame comes on poor facilities, lack of funding, interventions etc.  I don’t really see it in this way. I agree these are factors but not the only ones. Infact we as a nation are responsible for this state of sports in the country.

Actually, this is a quadrennial question visited every 4 years at time of Olympics and forgotten after the event. We as a nation are obsessed only with one sport- Cricket and that is where it ends. The same media which blames poor facilities gives every other sport a very poor coverage. How many would know the captain of Indian Hockey Team (just a reminder Hockey is our national sport)? How many know India won the Asian Football Confederation cup? Media is surely to be blamed as one could see the interest in boxing, shooting and wrestling just rise to esoteric levels after the recent Indian performances. But I am sure it will all move to cricket after Olympics (despite such poor recent performances).

If state does not help, what prevents the private sector from supporting the players? As this Mint article shows Mittal Foundation and  joint effort by former All-England badminton champion Prakash Padukone and billiards great Geet Sethi, helpoed things. Infact, both Abhinav Bindra and Akhil Kumar (the boxer who lost in Quarter Finals) were beneficiaries as Mittal trust provides finances when both were fighting health problems. Indian industry has made rapid strides with record profits, acquisitions etc..surely they can help and finance a sport/sportsmen. But instead record money continues to flow in cricket. Let it flow in other sports as well. Before Indian Premier League, we had a Indian hockey league where similar club concept was made to make hockey popular. However, it didn’t receive the fanfare it deserved. It is irritating to see the corporate world line outside sportsmen houses after the medal wins. Why not before as well?

The players also need to understand they need to pull performances and then only private money, media, fans etc follow. However, what you get to see is disappointing performances and that too from favorites. No performance is repeated. Rajyavardhan Rathore got us silver in Athens which made shooting popular and we had maximum medal hopes in Beijing-2008. However, barring Bindra hardly anyone could even qualify for the final events. Likewise, Karnam Malleswari raised hopes in weightlifting when she won a bronze in Sydney 2000. But again because of poor performances later on, we hardly see anything happening. And surely these athletes would be looking at performances from countries where facilities are hardly going to be any better (Ethiopia etc). The Indian athletes should realise they are the chosen one to represent the country and should give it their best shot. One inspired performance is all it takes.

This is where China is really good. Looking at these Olympics, all their favorites have won and have infact broken records. They not only maintained their previous wins but have ensured they enter new fields like swimming etc. The athletes are not just physically superior but mentally as well. Imagine the pressure on them performing in front of their home crowd which has set such high standards. But still they don’t buckle and instead deliver. Looking at the recent India medals all have come (barring Vijendra at Boxing) when least attention was on them. Whenever the nation looked up to a medal performance, it was thorough disappointment.

How about the general public? Apart from watching the other sports, we need to push children in sports as well. You come across so many people who give up sports careers as there isn;t any hope if you are a sportsman.

The state of Indian sports is a chicken and egg situation. The players blame facilities/lack of funds for poor performance, private sector blames poor performance for lack of interest, public blames poor performance/media coverage etc and the circle simply goes on and on. It is time when we all act in it together. If I am asked,  private sector support surely should help make things better.

I hope Beijing 2008 provides the turning point.

Financial Sector and its growing excesses

August 22, 2008

While leading economists discuss about the future of financial regulation in Lindau, Germany (see this WSJ Blog post for various viewpoints), the concerns over financial sector excesses continue.

I had pointed earlier to a superb lecture on Inequality in US by Frank Levy where he said:

When we say that the top one percent of tax filers now receive something over 17 percent of all taxable income, it will not surprise you that a significant fraction of that top 1 percent comes from the financial sector.

I had covered the concerns from various angles financial innnovation, my views on modern finance and then this one on political economy of finance where I pointed to a comment from Liz Warren (Harvard Law Professor)

The consumer financial services industry has been the single biggest contributor in the 2000 election cycle, in the 2002 election cycle, and they’re on target to do it again in the 2004 election cycle. George W. Bush’s single biggest contributor to his [2000] presidential campaign was MBNA, the second biggest credit card issuer in the country.

And now I came across this superb lecture from Kemal Dervis, Administrator of the United Nations Development Programme. (I came to know about the lecture from this superb Dr Virmani presentation). The lecture is on developments in World Economy and Mr Dervis touches on financial sector as well.

It seems clear that the last two decades have been characterized by rapid and accelerating world growth, with the trend interrupted three times: around 1997, around 2001 and now again around 2008, although we do not know yet how serious this interruption will be. These recent interruptions are not associated with wars or periods of trade disintegration. Instead all three of them have been caused by financial sector difficulties of a more or less global nature.

The causes..irrational exuberance

In all three cases it was a certain “irrational exuberance” in the financial sector that led to the shock. The Asian crisis was caused by excessive private capital flows to the emerging markets with very open capital accounts and excessive appreciation of assets in or relating to these emerging markets.

The dot com crisis was caused by a similar type of exuberance, but this time focused on the new high-tech and start up enterprises linked to the information technology revolution, mostly in the United States. When the bubble burst the crash was quite severe in that sector.

In the ongoing crisis we have seen enough irrational exuberance (call it greed). What about the policy responses?

Moreover, as had been the case with the Asian crisis, there was a vigorous policy response in the form of greatly expansionary fiscal and monetary policies in the United States. The fiscal balance changed from a 2.4 percent of GDP surplus in 2000 to a smaller surplus of 1.3 percent in 2001 and deficit of 1.5 percent in 2002 and almost 3.5 percent in 2003 (US CBO 2008). The federal funds rate set by the US Federal Reserve was lowered from 6 percent in early January of 2001 to 3.75 percent in late  une of 2001 to 1.25 percent by November of 2002 and further to 1 percent by June of 2003.

It is important to note whereas Asian policies are always criticised, the developed world is no better. As I always say, in times of crisis all policymakers act in a similar way with monetary easing and fiscal stimulus. However, in developed we call this “prudent policies” and for others it is called “careless polices”. The latter are called careless as no lessons are learnt (moral hazard) …we don’t see any lessons learnt in former as well. Above all by cutting interest rates, they lead to huge inflows in emerging economies.

Back to finance

Over this period capitalism in the rich countries has increasingly changed its nature from one where the lead sector was manufacturing, to one where the role of traditional industries has declined, the share of services has increased and the financial sector is playing a leading role. Figure 4 presents a rather amazing picture. In the early 1980s the share of the financial sector in both, corporate value-added and profits in the American economy, was about 5 to 6 percent. The share of financials in value added has steadily increased and has reached about 8 percent in 2006-2007. The share of profits, however, climbed to reach an extraordinary 40 percent and more!

At the end of the day, the rate of return on financial assets on average and over the long term, must reflect the rate on return in the real economy. That rate of return can be higher than the growth rate, but it cannot be expected to be multiple times the real growth rate of GDP. If real growth in an economy is 3 percent, which is the maximum rate at which most analysts say potential output can grow in the most advanced economies, than it is simply not reasonable to insist on 12 or 15 percent profit rates.

Yeah 40%. So out of every $ 100 of profits, 40 go to the finance sector in US. He also suggests that financial sector is important but what we see is short termism in the financial transactions:

Many believe that this much increased role of the financial sector works in favour of greater efficiency, by forcing out lethargic managers, encouraging a relentless search for greater productivity and profits, and allowing a constant restructuring and adjustment that increases flexibility and innovation throughout the economy. All this may be quite true but the pre-eminence of the financial sector also imparts a greater amount of “short-termism” to the system with immediate profits a more important driver than long term considerations.

So what do we do? Regulation

To avoid this constant repetition of the same scenario, it would seem to be highly desirable to regulate and supervise the financial sector in such a way that incentives become more symmetric, so that losses also have serious personal financial consequences for those whose decisions cause them, and that rewards are tied to long term success, rather than quick short term gains. This requires a degree of intrusive public policy that is not necessary in other sectors and will be resisted.

Finally, a superb food for thought

The fact, however, is that the financial sector can never be a purely private affair. It is at the heart of the modern market economy and plays an organizing role that is a public good. Its failure affects the whole economy and all citizens. The public policy maker cannot let the financial sector fail in a systemic manner and has to, in one way or another, rescue it. It is important and fair, therefore, that it is regulated in a way that encourages responsibility, a longer term horizon and an evaluation of risk by its managers, that is not truncated by the unavoidable need for the socialization of large losses.

Great speech, with lots of insights. Highly recommended.

Assorted Links

August 22, 2008

1. TTR points on creating world class universities in India. Also read his post on RBI proposes and finance ministry disposes

2. WSJ Blog points nobel laureates discussing financial regulation. Cowen reflects on the discussion and says one of the ideas as the worst – setting a commission to vet fin products

3. PSD Blog points a great time to gamble

4. DB BLog on superb construction norms in Singapore.

5. NB points to first Nudge grant

6. Econbroswer on speculation in oil futures markets. It also compares various inflation measures used in US.

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