How the ancient world invoked the dead to help the living..

One is amazed to see how Halloween is celebrated across schools in India. This is not just limited to schools in Metros but even the interior ones. An event marketed as Halloween is seen as this cool and hip and called as we are globalising. But a similar event with a Hindi or other regional languages name will be scoffed at as anti-development and what not.

Prof. Evelien Bracke of Swansea University writes on how all such events are basically to help the living. It is all too ancient as well:

Though it may seem as if Halloween is a modern con trick designed to get us spending our hard-earned cash on an American celebration, this is not the case. In fact, dressing up, knocking on neighbours’ doors and asking for food at this time of year is a very old tradition. Communities on the British Isles were taking part in similar rituals as far back as the 16th century.

For centuries, people have believed this was the time when the boundary between our world and the spirit world became permeable. Terrifying outfits and specific rituals were designed and used to ward off or appease evil spirits roaming the earth around All Hallow’s Eve. But evidence has also been found of ordinary people, as early as the times of the ancient Greeks and Romans, using magical incantations throughout the year to call on those departed to help the living.

The Romans thus had similar concerns regarding angry spirits, but, like the Greeks, they also saw the uses of those vengeful dead in their daily quest for happiness.Though the Romans certainly invoked spirits for aid, they also felt the need to placate the dead. According to the Roman poet Ovid, at the Lemuria festival in May, the pater familias – that is the head of the household – walked around the house at midnight, throwing black beans on the floor to pacify any ancestral spirits who might be vengeful because they had not been buried.

….

The modern notion that those who have died before their time are eager to wreak havoc is thus not universally applicable. By means of the correct rituals, however, any spirit might be pacified or compelled to assist.

The modern Western world likes to think it is far removed from these Greek and Roman rituals – impervious to magical superstitions – and the restless dead confined to the cinema screen and Halloween costumes. But studying these past rituals can help us understand that these magic spells had a powerful function for the ancients, intended to last for many centuries.

More than anything, it demonstrates that it is not the dead that need to be feared, but the living who conjure them for their own nefarious gains.

This is so true.

One sees it in India all the time as well. Success of such serials which keep reappearing every once a while shows the same..

How transparent is the revolving door between government and India’s financial street?

It is always difficult to pick up blogging post Diwali break. But one has little choice but to warm up towards it.

One thing which has come to the fore post 2008-crisis is the strong connections between Government and financial streets across the world. We have seen quite an eminent people leaving govt and then immediately joining a bank and vice-versa. It is as if there is a revolving door between these two offices which makes shuffling from one building to the other an easy one.

Two recent news pieces made one wonder India’s stance on these crucial matters. First is South Indian Bank and second is Yes Bank. In both, there are two eminent who have joined as Non-executive chairpersons of the board. And both of these, not very long ago worked in Indian central bank and the government in senior roles.

Now I am not saying there is any wrong doing on this matter. One has respect for all such individuals as it is not really easy to rise professionally in public sector.

It is just that one wants to be sure of the rules. Is there a cooling period? If yes, what is its tenure? Ideally there should be a long cooling period which dissuades both the parties from getting into the contract.

Then is there a need to differentiate between taking such private sector roles in real sector vs. financial sector?  Are the two same or we need different sets of rules in the two sectors. May be (or may be not) one can allow an easier transition in real sector given the impact is not much. But in a finance job, it could be that direct/indirect relations between firm and government extend across a much larger space. So, may be one wants more rigorous implementation in financial sector.

It may not mean much now. But the Tata crisis tells you, don’t take anything for granted. These moments hit you suddenly and cause a lot of damage.

It is also interesting that usually we usually criticise public sector jobs as inefficient etc. But there usually is a beeline for such people as they retire from their respective jobs. It is such double standards….

Happy Diwali to Mostly Economics visitors

Wishing all Mostly Economics visitors a very happy and a prosperous Diwali. As this blog keeps saying and says it again. This blog is making Diwali (and other wishes) wishes for so many years mainly due to the several visitors. The lamp of the blog continues to be alive and all credit is to all of you.  May it continue for many years.

This Diwali one one is really confused about the appeal to ban/don’t use Chinese goods from several quarters. Economics obviously says such demands should be rejected but political economics considerations have some points to be considered. What do visitors think?

Anyways, have fun and be safe.

How culture (or lack of it) is becoming the major issue in finance….

Not too long ago, mention of culture in finance space was scoffed. It was seen as this soft issue which does not bring much value. Finance  was this hard subject all about numbers and jazz. This hard bit has taken a huge hit and has become really a soft target now. As a result, again people are going back to talking about the once soft things like culture, ethics etc in finance.

NY Fed has been organising conferences trying to figure the culture bit. The first was in 2014 and second in 2015.

In the 2016 edition, NY Fed chief William Dudley talks about things which central banks never thought they would – norms, ethics etc:

The evidence is pervasive that deep-seated cultural and ethical problems have plagued the financial services industry in recent years.  Bad conduct has occurred in both investment banking and securities market activities as well as in retail banking.²  This has eroded the industry’s trustworthiness.

This erosion impedes the ability of the financial services industry to do its job.  That job is financial intermediation—to facilitate the efficient transfer of resources from savers to borrowers, and to help customers manage the financial risks they face.  Verification—whether through regulation or internal controls—is an expensive substitute for trustworthiness.  Fines for bad behavior drain resources that could be better used to expand access and improve services, but billions of dollars in avoidable penalties are just the start.  The time spent handling a legal crisis is time not spent on more productive pursuits.  Moreover, I worry that, in the long term, an industry that develops a reputation for dubious ethics will not attract the best talent.³ 

In contrast, a trustworthy financial services sector will be more productive and better able to support the economy.  Reliable financial intermediaries can help increase the flow of credit, promote economic growth and make the financial system more stable.  This is why restoring trustworthiness must be the ultimate goal of reforming culture. 

The industry’s shared norms—its culture—will not change by mere exhortation to the good, whether from me or from the industry’s CEOs.  In my experience, people respond far more to incentives and clear accountability than to statements of virtues and values.  The latter are worthy and necessary, but remain aspirational or even illusory unless they are tied to real consequences.⁴  What does it mean for a firm to profess to putting the customer first, if employees are compensated and promoted regardless of what’s good for customers?  Or, worse, if they are not held to account for activities that can harm customers?  If we focus on nothing else in today’s conference, let’s explore how best to structure incentives and reinforce accountability to align with core purposes and first principles.

To put it very simply, incentives drive behavior, and behavior establishes the social norms that drive culture.  If the incentives are wrong and accountability is weak, we will get bad behavior and cultures.  This implies a role for both firms and supervisors.  Firms need to continually assess their incentive regimes so that they are consistent with good conduct and culture.  When they are not consistent, the incentives need to be changed.

He says private sector should play the main role. But even the govt can help:

The primary responsibility for reforming culture—and changing incentives—belongs to the industry.  However, the industry does not act alone.  The public sector can play an important role as well.  I’ll discuss that issue this morning with my colleagues Norman Chan, chief executive of the Hong Kong Monetary Authority, and Minouche Shafik, deputy governor of the Bank of England.  Later this morning another panel will discuss the ways in which supervision can further contribute to improving bank culture.

Let’s also consider ways in which new laws or regulations might help—especially to overcome perennial collective action and first-mover problems that are common across the industry.  Two years ago I proposed solutions to two such obstacles to reforming culture.  First, there should be a database of banker misconduct to combat the problem of “rolling bad apples.”⁵  Second, a baseline assessment of culture is needed in order to measure progress.  I proposed an industry-wide survey, but there may be other good alternatives.  Once again, I invite the industry to take the initiative on these issues, and to look to the public sector for support.

I also hope that we will attend to issues that we may have overlooked in our earlier discussions.  Gillian Tett of the Financial Times argues in her new book, The Silo Effect, that the key to understanding any culture is identifying and explaining “social silences”—the issues that are not being discussed.

Database of banker misconduct…

There was a time when these databases only reported high salaries and bonuses of the sector. Now it is about misconduct..

How fake notes continue to run despite all the improvement in currency technology…

Indian central bank warned against fake currencies being circulated by some players:

A notice issued by the Reserve Bank of India on Thursday highlighted the pitfalls of fake currency notes in circulation and warned the public of “unscrupulous elements putting into circulation fake currency notes of higher denominations.”

In recent weeks, there have been a number of instances of fraud in which third party agencies, hired by banks for cash management services were found to have introduced fake notes in ATMs so that they could make off with genuine currency notes picked up at bank branches.

In India, more than Rs 15,000 crore in cash is in circulation every day in the banking ATM network in India; of which Rs 5,000 crore is handled purely by third party agencies.

Multiple cases of fraud have been reported in metros like Hyderabad, Delhi and Chennai with average third party fraud running to Rs 80 lakh to Rs 4 crore per fraudulent incident. The most glaring case was when a cash recycler RCI in Hyderabad stole more than Rs 10 crore in June to pay the salaries of its employees.

One is not sure whether unscruplous is the right word here. It requires a lot of intelligence to circulate fake notes as original ones.

We had pointed to this community called Chapparbands which were expert coin forgers during British. They created a lot of headache for the British who controlled the currency and with it the economy as well. The British feared that they will lose control over their big monopoly.

In a way things are not very different today as well. With governments controlling the currency and much of it being fiat, it continues to invite people to play the forgery game. It was much more difficult earlier as one had to make the forged coins of some metal to look like the gold/silver coins. Now it is just paper and figuring out the  various security features ushered every now and then by the central bank/government. Just like the British feared then, the government fears losing control over the money and with it the economy.

It is really difficult to identify fake notes from real ones as some of them are that good. As technologies have leapt to make notes more secure, the same technologies have even gone reached the forgers. It is a game of cat and mouse between security enforcers and security breachers.

This game will continue as one gains significantly from just getting one fake lot in the market. It is after all to do with money. You might choose to rob a bank and get original notes or try and get fake notes in the market. Huge gains are to be made which is the game.

Not defending all this. But it is all about incentives which hugely attract forgers and will  continue to do so..

Is the Tata crisis another Satyam moment?

One is wondering what to make of the Tata crisis. First one was thinking whether to compare it to Lehman moment or Satyam moment. But I guess let it be Tata moment only given the huge prestige and aura of the group.

Cyrus Mistry’s letter is so damning (and shocking) that it exposes a lot what is wrong in Indian board rooms. All this happening at one of the most respected groups makes wonders of the standards in other places.

Prof TT Rammohan of IIMA says once again role of eminent individuals as board members comes under a scanner:

One particular item in Mistry’s letter stands out and it had me rubbing my eyes in disbelief. Let me reproduce that portion:

The trust nominated directors, who I would assume would use their own independent judgment and discharge their fiduciary duties, were reduced to mere postmen. As an example, once, the trust directors (Nitin Nohria and Vijay Singh) had to leave a Tata Sons board meeting in progress for almost an hour, keeping the rest of the board waiting, in order to obtain instructions from Mr Tata. Such a work pattern has also created the added risk of contravening insider trading regulations and exposed the Trust, apart from exposing the trustees to potential tax liabilities.

This is incredibleif the staements are indeed correct. The Dean of Harvard Business School, we are told, excused himself from the board meeting and kept the board waiting for nearly an hour in order to take instructions from Mr Tata, who was not even a member of the Board! Is this what they teach by way of corporate governance at HBS? Is this how independent directors are expected to function- go out and take instructions from the leading shareholder even while a board meeting is in progress? The possible violation of insider trading regulations, to which Mr Mistry refers, makes the disclosure even more lethal. SEBI and the stock exchanges, one hopes, will look into this item closely. If proved right, Prof Nitin Nohria’s behaviour might well attract strictures from the regulator and the exchanges. Since some of the listed Tata companies are shareholders in Tata Sons, institutional investors would be within their rights to raise this issue.

One wonders what HBS would make of this matter. This is not the first time that an HBS prof’s behaviour has raised questions in the Indian context. In the Satyam Computers scandal, Prof Krishna Palepu, another HBS professor, drew attention as he was found to have earned a tidy amount by way of consulting fee from the company with which he was associated as independent director. As reported in the media, the court dealing with matter issued an order asking him to disgorge around Rs 2.7 crore in excess remuneration paid to him.

Many questions arise on governance and board room matters:

The question arises: did Mr Mistry raise these concerns at Tata Sons board meetings and were these concerns duly minuted? Did he express his disapproval of the two independent directors holding up proceedings in order to seek Mr Tata’s input? What did the other independent directors have to say on various matters? Were their comments, if any, recorded and minuted? It would be appropriate for SEBI to go through the minutes of the board meetings and take stock. Perhaps SEBI needs to issue guidelines on the minuting of board meetings, an area that needs considerable improvement.

Two thoughts arise. One, if this is the state of affairs at what has been India’s most respected corporate brand, what can we expect at other boards?What sort of discussion happens at those places? How well are minority shareholder rights protected?

Two, what do we make of the role and functioning of independent directors. As readers of this blog would know, I have been extremely sceptical about the functioning of boards and independent directors. Most boards are rubber-stamp boards that duly accord their approval to whatever the CEO or Chairman wants done. There’s very little dissent, very little questioning. This state of affairs cannot change as long as so-called ‘independent’ directors are selected by the CEO or the promoter. We need a wide variety of stakeholders to appoint independent directors- institutional investors, banks, minority shareholders, employees and others. In my book, RETHINC, which came out last year, I devote a whole chapter to corporate governance and the functioning of boards.

Alas, there’s no sign of genuine reform in the board room.

All of a sudden we are looking at lack of talent to head firms in India. This was not even a case of an outsider but pretty much an insider. The media on the appointment in 2011 touted this as an insider who will bring fresh external perspective. But all this has come bunkum.

Mistry letter could go into history as one of the most damning ever written. It is yet to be seen whether it will push into some real changes at the top..

Post Axis bank Q2 2016 results: Will private Indian banks disclose truer picture of their balance sheets ?

I had written a post in Feb-2016 titled as: How is it that Indian private sector banks don’t have NPAs and losses? The post was based out of a discussion where one was told that private banks are hiding much more than they are revealing. How is it that given the same set of companies and business environment, losses are only made by public sector banks and not private ones?

Those who are privy to the working of Indian loan market tell you that usually the largest and most worthy deals (hopefully) first go to public sector banks (read SBI most of the time). The public sector banks are able to offer the lowest rates given their much lower cost of deposits. It is only when public banks either reject or do not give the full amount, deals come to private banks. So private banks usually get the raw side of banking market in India. So, if bad loans indeed happen, there is a case for suffering being higher on private banks. But here we actually have a case of private banks suffering much lesser whereas it should be atleast equal to public banks if not higher.

It seems the chickens are coming home to the roost for private banks as well. Axis Bank reported a huge loss in Q2 2016 report:

If there were any doubts that banks in India, private and state-owned, were hiding bad loans in the depths of their balancesheets, those doubts should now be vanquished. On Tuesday, Axis Bank reported quarterly earnings confirming how deep the problem was, atleast at that one bank.

According to the earnings report, loans worth Rs 16,379 crore have been classified as bad loans or gross non-performing assets (NPA) by the bank. On a quarter on quarter basis, bad loans jumped 71 percent. But that is not even the shocker. The real eye-opener is the way bad loans have moved in the last four quarters.

In the second quarter of the last fiscal, Axis Bank had classified Rs 4,451 crore as bad loans.

The bank is still not done cleaning its books and has put Rs 13,789 crore in loans on its stressed loans “watchlist”. At the start of the fiscal year, Rs 22,628 crores were on the watchlist. At the time, the bank’s management said that it expects about 60 percent of these loans to slip into the non performing category.

In the six months of the fiscal so far, 40 percent of the watchlist has already turned bad. In a post earnings conference call with the reporting media, Jairam Sridharan, chief financial officer at the bank said that he now expects “materially more” than 60 percent of the watchlist to turn bad. The bank calls this the “net dissolution rate.”

Assuming materially more refers to a conservative estimate of 70 percent of the watchlist- that suggests atleast another Rs 6,700 crore in loans will be added to the gross NPA number over the next two quarters. That would take the gross NPA number to over Rs 23,000 crore – more than five times what it was before the Reserve Bank of India (RBI) conducted an asset quality review (AQR) of bank books.

Is it poor risk management?

When asked, whether the extent of under-reporting suggests lax risk-management processes at the bank, the management pointed to the choice of industries that the bank had lent to and the operational environment across those sectors.

“Your question around risk management is a question that can be framed as – why did the watch list come up in the first place? It turns out that there are some choices there which are portfolio choices in terms of which industries and sectors one wanted to be in, for example infrastructure, power or iron and steel. Some of these sectors, over the years, have turned out to have significant issues from a macro perspective either in terms of government policies or in terms of commodity prices. Certainly there is another set of issues in terms of internal underwriting policies and control and governance. Needless to say, all of them are important and useful lessons that one needs to internalize as one constructs future portfolios.” —Jairam Sridharan, Chief Financial Officer, Axis Bank

It will be interesting to see this private banking space now..

Journeys of Triumph: Some really interesting rags to riches stories from Indian corners..

The News Minute is running a series called Journeys of Triumph. These are unsung stories of successful business ventures which started from a really humble background and mostly against all odds.

• From a single pushcart to TN’s trusted greengrocer, Kovai Pazhamudir Nilayam’s phenomenal rise
• From selling 5-paise sweets as a kid to running a multi-crore idly-dosa batter empire (birth of ID brand for those in Bangalore)
• Once a cleaner at Hyderabad’s famous Niloufer cafe, this man now owns it
• From their homes to yours: Ernakulam’s online delivery platforms that specialise in home-cooked food

The common theme here is all these ventures are connected closely to food businesses..

 

Why markets do not require existence of Homo Economicus and central planners do…

Few students studying economics question the presence of this homo economicus/rational man.  Those who do are told this is how economics has always been and not to waste time on it and instead think of bigger questions. But how does one move to bigger questions when answers to all questions begin from assuming this rational person?

Ryan McMaken looks at this issue and says if we look at history of thought, there is no reason why we should assume this rational being:

In the minds of the left-wing market critics such as Brown and Monbiot, the whole market system relies on an imposed view of human nature to make it work. The anti-capitalist fable goes like this: once upon a time, all human beings recognized that humanity was naturally community-minded and motivated by pursuits other than monetary profits. But then came the economists who created a new “normative,” “hegemonic,” and “imposed” world view in which human being are all selfish profit maximizers. Thanks to generations of brainwashing by capitalist economists, people now really believe that the relentless competition in the marketplace is the way to happiness, and all other human institutions are secondary at best. Society has been destroyed as a result. 

In truth, of course, the market does not depend on any imposed ideology whatsoever, and Mises and the Austrians have never based their analysis on any such assumption. No good economist denies that human beings tend to be social, and Mises himself writes that “[m]an appeared on the scene of earthy events as a social being.” Far from depending upon the existence of anti-social or atomistic human beings, the market economy simply responds to human beings as they are. Indeed, it is the consumers who impose on the market by deciding what is produced by the marketplace and when. 

Moreover, far from being a foundation of market economies, homo economicus is far more useful in providing theoretical help to enemies of markets. After all, in opposing the construct of homo economicus, Mises notes that human desires are far too diverse to allow for generalization about what can and should be produced by markets, or what consumers should do. By extension, given the unpredictable nature of human wants and talents, it is impossible to centrally plan an economy, or even intervene in an economy, without impoverishing the consumers who may want something different than what is assumed by government planners. Homo economics in many ways buttresses the conceit that we can know ahead of time what consumers and producers will want and what they will do. 

When anti-capitalists think they are somehow striking at the heart of laissez faire liberalism when they denounce homo economicus, they are doing nothing of the sort. 

All this is so opposite of what we are made to think..

Baby bonds to reduce racial inequality in US…

The major issue in US racial inequality. The solutions to address increasingly mirror those adopted by the developing world.

Lynn Paramore of INET writes about this idea by Prof. Darrick Hamilton of Professor at the New School. He says the same thing. What determines your future is the income your parents had in the past. As most of the time, whites parents have higher incomes, they do better than blacks.

Baby bonds is one idea which tries to address these income at birth differences:

Baby Bonds, in Hamilton’s formulation, would be funded directly out of Treasury and held in an account by the federal government, similar to Social Security. The amount a child receives would depend on the wealth position into which she is born. If she’s the offspring of Oprah Winfrey and Bill Gates, she might get $500, but upwards of $50,000 if she is born at the lowest rungs of the economic ladder. The average amount for a child would be around $20,000. Accounts would be guaranteed a nominal one and a half rate of return, and the payout would not take place until the child becomes an adult. At that time, you get to spend the money — but not just on anything. The funds would have to be used for a “clearly defined asset enhancing activity,” like financing a debt-free education, purchasing a business, or buying a home. (The program would need to be coupled with financial reform and regulation to mitigate predatory effects, including extraordinary tuition increases aimed at exploiting better-resourced young adult baby bond recipients).

A commission would be set up to identify exactly what kinds of activities might qualify.

“These conditions are set up to protect the resource,” says Hamilton. “In my own situation, if I had received an infusion of cash as a young adult, there would have been a lot of family needs to take care of before I could begin thinking about self-investment like purchasing a home. Specifying what the money can be spent on may not guarantee an outcome, because people still choose the investment they engage in, but it at least ensures that the investment is an asset-enhancing endeavor which can help build wealth over the long run.”

Unlike some past proposals for child savings accounts, Baby Bonds are designed so that it doesn’t matter if your parents can contribute or not. Hamilton says this is done so that however good or bad or affluent or poor your parents may be, as a citizen you get some seed capital so that you can take part in the American economic mobility system.

Calling it a bond etc just makes it sound fancier. This is your typical redistribution schemes which have long been ridiculed in this part of the world.

What about the economics of the scheme?

But wouldn’t such a program be too costly?

Not at all says Hamilton. He notes that thire are about 4 million children born every year, so if the average account is at $20,000, the whole program might cost $80 billion. If you add another $10 billion, the very highest estimate for administering the program, it comes to $90 billion maximum. That might sound like a lot, but not when you consider what the federal government already spends trying to promote asset ownership through the tax code. He cites a report on all such policies (like the mortgage interest reduction and reductions in capital gains) by CFED, a Washington-based non-profit focused on expanding economic opportunities for low-to-moderate income Americans. All told, these programscost over $500 billion dollars. (The mortgage interest deduction alone is estimated to cost more than $405 billion for tax years 2014 through 2018).

Next to these figures, Baby Bonds looks like a bargain. They also have the advantage of distributing the capital where it’s needed most.  Federal programs already in place tend to funnel money towards the more affluent, says Hamilton, noting that the bottom 60 percent of earners get about 5 percent of that $500 billion, while the top 10 percent get well over half. He thinks that Baby Bonds could be fully funded simply by capping the existing mortgage interest reductions.

Really tough times ahead as the world we thought did not have these problems is beginning to fight these problems..

What wind, currents and geography tell us about how people first settled Oceania

Alvaro Montenegro, Professor of Geography at The Ohio State University has this really interesting research:

Just look at a map of Remote Oceania – the region of the Pacific that contains Hawaii, New Zealand, Samoa, French Polynesia and Micronesia – and it’s hard not to wonder how people originally settled on these islands. They’re mostly small and located many hundreds to thousands of kilometers away from any large landmass as well as from each other. As our species colonized just about every region of the planet, these islands seem to be the last places our distant ancestors reached.

A comprehensive body of archaeological, linguistic, anthropological and genetic evidence suggests that people started settling there about 3,400 years before present (BP). While we have a relatively clear picture of when many of the major island groups were colonized, there is still considerable debate as to precisely where these settlers originated and the strategies and trajectories they used as they voyaged.

In new experiments, my colleagues and I investigated how environmental variability and Oceania’s geographical setting would have influenced the colonization process. We built computer seafaring simulations and analyzed wind, precipitation and land distribution data over this region of the Pacific. We wanted to understand how seasonal and climate variability in weather and currents might lead to some potential routes being favored over others. How would these factors, including the periodic El Niño and La Niña patterns, affect even the feasibility of different sailing strategies? Did they play a role in the puzzling 2,000-year pause we see in eastward expansion? Could they have provided incentives to migration?

Findings? Yes wind patters played a role:

Overall, our results lend weight to various existing theories. El Niño and La Niña have been proposed as potential migration influences before, but we’ve provided a much more detailed view in both space and time of how this could have taken place. Our simulations strengthen the case for a lack of technology being the cause for the pause in migration, and downwind sailing as a viable strategy for the first colonization pulse 3,400 BP.

In the future, we hope to create new models – turning to time-series of environmental data instead of the statistical descriptions we used this time – to see if they produce similar results. We also want to develop experiments that would evaluate sailing strategies not in the context of discovery and colonization but of exchange networks. Are the islands along “easier” pathways between distant points also places where the archaeology shows a diverse set of artifacts from different regions? There’s still plenty to figure out about how people originally undertook these amazing voyages of exploration and expansion.

As this blog keeps saying. knowing geography is so crucial to understanding much of the world. Even economists are discovering the same as research of recent years has shown. Just that it keeps being ignored in curriculums…

What’s the Difference Between Liberalism and “Neoliberalism”?

These two words are a constant source of confusion. Most people who criticise liberal ideas are usually doing so for neoliberal..

Ryan McMaken of Mises Institute explains:

As editor, I have published more than one article here that makes distinctions between the liberalism of the Austrian school and the so-called neoliberals. Philipp Bagus’s review essay, “Why Austrians Are Not Neoliberals” explains many of these distinctions in detail. In another article, Guido Hülsmann describes Ludwig von Mises’s own battle against an early group of neoliberals at the Mont Pelerin Society. In Mises’s eyes, these neoliberals were relatively liberal — compared to doctrinaire socialists — but were interventionists who favored central banking and the bureaucratic, regulatory state. Then as now, the central problem with the neoliberals revolved around their blithe attitude toward inherently anti-market central banks and government-created money. 

To those of us who keep up with the details of the marketplace in liberal ideas, these distinctions are readily apparent. 

To anti-liberal leftists looking in from the outside, however, Austrians, Chicagoans, and neo-classicals all probably look like pretty much the same thing. These “neoliberals” all say nice things about markets and free trade, so they all must agree with those neoliberals at the International Monetary Fund. Or so it is assumed. After all, don’t we hear from the IMF about the importance of free trade and balanced budgets and limiting government spending? The fact that the IMF supports central banking, bank bailouts, and corporatist deals for the politically-connected is lost on those who only see the IMF’s ostensible support for markets. The anti-liberals then lump together IMF President Christine Lagarde and Ludwig von Mises. 

In the UK, for example, it’s easy to find articles that equate neoliberalism with the alleged free-market policies of Ronald Reagan and Margaret Thatcher. In this article at The Guardian, for example, George Monbiot views Thatcherism and Reaganism as the vanguards of a supposed hard-core free-market hegemony we groan under today. 

Blame it on near wash out of history of economic thought from economics curriculum across the world. All schools and thoughts look similar…

Taking monetary policy to the people may be the only way for central banks to remain independent…

Howard Davies argues how central bank actions and need to be independent is  being increasingly questioned. More ironically. most of these pressures are coming in economies which have lectured the other world on need for central bank independence.

He says reaching out to people is one way to keep pressures off:

There is a powerful argument to be made that central banks, insulated from short-term political pressures, have been careful stewards of price stability, and have served the global economy well. It is not obvious that returning to politically administered interest rates would have any benefits beyond the immediate term.

Still, we must accept that central banks’ large-scale quantitative easing takes them into uncharted territory, where the boundary between monetary and fiscal policy is blurred. In the UK, for example, the Treasury decides on the level of economic intervention, while the BoE determines the timing and method of implementation. So, the central bank’s independence is not absolute.

Central bankers must demonstrate that they understand the political pressures and unusual circumstances that zero, or even negative, interest rates create. Savers are bitterly complaining that they are being penalized for their prudence; refusing to debate this and other implications of current monetary policies is not an acceptable response.

Independence demands higher degrees of accountability and transparency, whereby policies are explained to the public. To its credit, the BoE has been showing the way forward with a series of open forums around the UK. Taking monetary policy to the people is time-consuming, but it is essential if the necessary political consensus to sustain independence is to be maintained.

First central banks make policies which increasingly hurt people and then reach them to keep pressures from government at bay. But how much can public understand what is really going on? Monetary policy has become so technical that even experts find it difficult to explain what they are doing.

Bank of England open forums are welcome though. It has led to some interesting pieces of information especially on history. They have acted as a good fodder for this blog…

What can regulators learn from behavioural finance ?

It is exciting to note that financial services industry is employing behavioral economics people. Sarah Newcomb a PhD in behavioral economics is working with Morningstar as a behavioral economist.

In her recent interview with Business Line she offers a basic primer on the field. One of the qs was What can regulators learn from BF?

For those creating policy, the important thing is to make sure that the incentives of people selling financial products must align with the incentives of people buying financial products. In the US, for instance, we are seeing regulations tighten to ensure that advisors sell products that are in the client’s best interest. If a client has a portfolio allocation that is fine to begin with, and there is a new product that the advisor is selling him, and if the only advantage of the new product is that he is paid to sell it, then you’re adding risk and transaction costs and higher fees to a portfolio that is already fine.

What about financial advisors?

One of the biggest barriers we found in behavioural science that keeps us from making good financial decisions is that we discount the future. When something is closer and immediate, we see those costs and benefits as disproportionately large as opposed to our mental picture of the costs or benefits of something in 10 years. So, we repeatedly, in academic studies, take small immediate rewards over large rewards later.

One thing that shows promise is using psychological distance to our advantage. We’ve seen that when people have a closer relationship with your future self, you make better financial decisions. One of the things you can do is age-progress your face, it puts clarity and detail in your own picture of you. It’s like a little brain hack that makes your future more real and the consequence of your saving or not saving feel more real. Another thing that financial advisors can do for clients is to get them to put a lot more detail into the mental picture of their lives in the future.

Hmm. Interesting bit..

How warranties were made in ancient times?

Elaine has a terrific post on the history of warranties. As there were little products at that time, we didnt have product warranties. So what were warranties for? Buying brides!

In the early days of exchange, humans mostly traded consumables like food or stone tools. There wasn’t much room for misrepresentation because what you saw was what you got.

The was one exception: Brides. In many ancient civilizations, families sold their unmarried daughters to prospective bridegrooms. Barbaric, I know.

A bride was often the biggest purchase a man would ever make (these days it’s a house). But there was no way to measure the quality of the good before buying. A bridegroom couldn’t exactly, uh, take a test drive. To further complicate things, the brides were selected and paid for before they reached marriageable age. It’s kind of like how Tesla Model 3’s require a reservation deposit two years before the expected delivery date.

To protect buyers in uncertain markets, tribes created procedures to prevent deceptive business practices that were eventually codified into law. 

We’ll start with Ancient Sumer.

From Sumer to Babylon to India, she covers variety of warranty regimes….

In the end:

As legal codes evolved, they mostly reflected what was already customary practice.

It would be another several thousand years before George Akerlof published his model on information economics in “The Market for Lemons”. Information asymmetry between buyers and sellers can create messed-up incentives that cause markets to break down, particularly in the case of one-time purchases. In situations where the quality of a good is uncertain at time of purchase, fraud protection laws can help make business practices fair for both consumers and providers, ensuring peace and prosperity for all.

 

The great Indian bank robbery of 2016

As we create huge noise about fintech companies, technology game changing finance and what not, is a big reality check.

First people did not understand finance and stayed away from banks/finance products etc. Now they will stay further as they do not understand technology either.

Dhirendra Kumar of Value Research calls it the great Indian bank robbery of 2016:

How come Bengaluru doesn’t have share-autos?

It is fashionable to talk about doing/changing big things in transportation and infrastructure without addressing the small issues. The government in Bangalore is hell bent on constructing a steel bridge despite huge opposition from all sources. Likewise most such large projects go with their similar issues of controversies. But as they generate media hype and creates publicity, the governments are more focused on the large.big picture issues.

However, it is the small issues that matter equally in these public transportation matter. One may have the best metro/bus service but till they figure how people will reach these stations, there is no point really. Called as last mile challenges but one could skip the entire miles due to this last bit headache.

City like Bangalore has so many of these challenges. It is shocking that autos do not ply using meters in a city like Bangalore barring in a few places. Each time one is negotiating the fare. If pushed to go by meter the driver will ask to pay something above the meter price saying we don’t get return passengers. It is still fine if one is asking the auto to goto a remote place but this amount is asked for even central places. This continuous auto nonsense is one of the factors that has led to mushrooming of 2-wheelers in the city. I don’t understand why can’t the auto association understand this bit that they lose customers by all such tactics.

Then another problem is lack of shared autos as pointed by Sarayu Srinivasan of News Minute. What is quite common in cities like Delhi and Mumbai, is just missing here. In Mumbai, shared autos help ferry many passengers to the local railway stations. Locals are called the lifeline but these shared autos play no less a role. One can argue about their arrogance etc but they atleast make you reach the place. It is only when these things are not there in other cities, you realise their value.

However on reading this article, you realise things are not as easy:

About a decade ago, there had been an attempt to introduce the system, but it had to be dropped for various reasons, says TV Raghavendra of the Federation of Karnataka Auto Rickshaw Drivers Union.

“The general commuter mentality in Bengaluru is focused on comfort. Even today, people prefer to travel in autos alone. The idea of three people being dropped off in random locations puts people off.” 

While he agrees that it could be feasible over short distances, he says passengers often make unreasonable demands. “They will say ‘You have come this far why can’t you drop me home?’ If we refuse they will approach the police. This is unnecessary for us,” Raghavendra says.

However, transport department officials and traffic experts dismiss the idea over claims of “safety” concerns and “illegal operations”.

Traffic expert MN Srihari told The News Minute that safety is a big concern when many autos across the city run illegally. 

“There is a huge safety concern because one does not know who is going to be the person sitting next to you and which route the auto would take. Unless there is a system in place to ensure the safety of the passengers, it is not a good option.”

I mean these are issues which are common across cities but still go ahead with shared autos. Let there be choices and let people decide. I have hardly seen passangers making unreasonable demands of asking to drop other than the shared route. Most likely, the auto person could just dump you if you are the lone passenger and others have moved out.

To decolonise maths, stand up to its false history and bad philosophy

There are multiple battles going on across disciplines to decolonise. One keeps hearing this in economics but to see the same in math too is something.

Chandra Kant Raju, Editorial Fellow at Centre for Studies in Civilizations has a piece rejecting the idea that much of math was developed by white men.

Just intrigued to read all this..

 

Is higher finance education beyond bachelor’s degree merely a sideshow?

The more you read financial history the more you would agree to the above question. How is it that people managed to do much of finance without any of today’s fancy degrees? Much of finance then was bouts of common-sense backed by some intuition which builds from work experience. Much of finance today is reduced to less common sense and more degrees. But what to do? You do not get a job based on common sense alone.

Lilia Mukhlynina and Kjell G. Nyborg show much of the above is true. People at work hardly care for the valuation exercises taught in finance:

What factors affect the professionals’ choice of valuation method? We frame this as a contest between educational background and professional subgroup (consulting, investment banking, private equity, or asset management). But we also investigate (and controlled) for other respondent characteristics, especially paying attention to the type of investment (project finance, listed firms, unlisted firms, real estate) and the type of transaction (mergers and acquisitions, investment decisions, going public or private). We also look at the purpose of the valuation – whether the respondent is on the buy side, the sell side, or in an advisory role.

We may expect valuers with a more advanced degree to use more sophisticated methods and make fewer conceptual mistakes. But sociology and social psychology also recognise that professions have identifiable cultures, and that individuals are influenced by peers and groups (Asch 1955, Greenwood 1957). Therefore, it is also plausible that cultural norms within professional subgroups affect the approach that members of the group prefer. Robert Shiller was an early proponent of some of these ideas (Shiller 1984).

Our comparison of the influence of education versus professional subgroup was motivated by Harris (1995, 1998), who demonstrated that children’s values and behaviour are influenced more by peers than by upbringing at home. Our hypothesis is that valuation professionals would adopt the ‘valuation culture’ of their professional subgroup, rather than the methods from their educational background. We rest this by examining differences in valuation approaches across professional subgroups, because there is no a priori reason why one profession should use more sophisticated valuation methods than another.

We find that there are distinct differences in several elements of the choice of technique across professions. Furthermore, these differences are not related to sophistication. Education has much less influence on this choice. The purpose of the valuation has little effect on the choice of technique.

This implies that there is a degree of arbitrariness about valuations in practice. They are influenced by where the valuation is carried out. Also, education is relatively unimportant in practice, which suggests that higher-level finance education may have more impact if is carried out in the workplace. This may well also be true for other business and management subjects where many theories and approaches flourish. We may ask what role finance education has beyond a bachelor’s degree. Is it merely a sideshow?

It is really interesting how much one has to unlearn at the finance workplace. The degrees just get you in and after that begins the game of learning how finance really works…

Telangana Chief Minister makes Cornwallis turn in his grave

Kingshuk Nag, a senior journalist has a superb piece in recent EPW.

He says how the decision to open 31 districts in the newly Telangana state has undone many years of history:

Charles Cornwallis, who became commander-in-chief of British India in 1786, was said to have been instrumental in initiating reforms in civil administration and land management practices for the country’s colonial rulers. Lord Cornwallis is today turning in his grave. Two hundred and thirty one years after he brought in the Permanent Settlement in the dominions of the East India Company and set up a new system of administration of India, Telangana Chief Minister K Chandrasekhar Rao (KCR) has taken it on himself to dismantle the system irreparably. He may not realise what he is doing to an administrative system that has lasted for centuries.

For those who came in late, Cornwallis, with the main objective of collecting of taxes for the rapacious Company, created the concept of a district—a nomenclature for a contiguous piece of land from where taxes could be collected efficiently—and with it, its administrative head, the district collector (DC). Most of the revenue collections would be from taxes on land taxes. Since many farmers could refuse to pay the harsh taxes, especially in times of drought, a law and order machinery was set up under the collector to ensure that nothing went out of hand. Thus came into the being the office of the superintendent of police (SP) reporting directly to the DC who was also the district magistrate. This was the bulwark of the Indian administration system that stood the British in good stead till it left India.

After independence, the system of administration should have changed. But the Republic of India that was the successor state to the British Indian state showed no inclination to upset the system. So the institution of the DC and the SP continued, never mind the fact that land revenue collections started shrinking over the years and the administrative duo had very little to collect in terms of agrarian imposts.

Madness or method behind madness?

Over the last 50 years, more so over the last two decades, competition has intensified among state governments of different political persuasions to provide various benefits, or doles, to people with a clear but unstated objective of creating an enduring political base, sometimes called a “vote bank.” No government in power has been an exception to these trends. But it goes to the credit of India’s newest and 29th state Telangana to refashion an administrative set-up geared to collection of revenues to one whose job is to deliver “goodies” to people.

On the day of Dasehra 2016, Chief Minister KCR—in a sudden and unprecedented move—increased the number of districts in Telangana from 11 to 31 at one go. As he himself stated, the average population of each district would now be a mere five lakh making the administration “compact” enough to deliver “welfare schemes” to the people efficiently. In an exaggerated manner, KCR said that under the new dispensation the collector would know all the people by their names.

Overnight, small towns in Telangana have become districts. One erstwhile district, Karimnagar, has been divided into six districts! Since there are not enough officers belonging to the Indian Administrative Service (IAS) and the Indian Police Service (IPS) to occupy the new collectorates, KCR has decided to post fresh recruits as DCs. In the coming days, non-IAS and non-IPS officers are expected to be posted as DCs and SPs (in bureaucratic parlance, they are termed “non-cadre” officers posted to “cadre” posts).

Some of the newly-appointed collectors and SPs are without offices and homes and are reportedly running around in circles in search of the bare minimum amenities that they require to fulfil their administrative responsibilities. In some places the new appointees have occupied guest houses of state public sector enterprises and some have even commandeered resources from private individuals and firms. In other places, the new officers have occupied living quarters reserved for their juniors leading to a game of musical chairs of sorts.

The head of the Congress party in Telangana, Uttam Reddy has labelled KCR as a modern day Muhammad-bin Tughluq, hinting at the “madness” that has marked the exercise to reorganise districts. Reddy could be wrong. There is a method behind the madness. By making junior officers—many of whom would be non-cadre officers—as collectors, KCR is ensuring that they are pliant and obedient to him. It is well known that junior officers have less spunk to take on ruling party politicians. In the last two years, KCR has stuffed his Telangana Rashtra Samiti (TRS) with defectors of many hues from various opposition parties.

Hmmm..

It is going to be a good natural experiment going ahead. Did this policy move lead to overall improvement in things in Telangana State is going to be an interesting q to answer…