Desicritics Category: BizTech: Recession

The Grand Bailout- Part 2

Blokesablogin — Thu, 12 Feb 2009 19:41:54 EST

The Senate and Congress haggled while Mr. President went public, spurring support for his Stimulus Bill. Mr. Bush's TARP has yet to be accounted for and we have gone ahead and approved yet another colossal spending bill. In Tamil we say- jaan pona enna muzham pona enna- meaning once you lost a foot who cares if you lost a yard? Right now in America we pass bills to pay bills with printed bills! Now here is a wonderful way to teach children homonyms.

What is interesting to me, being in California, is that our state budget also is on the floor of the house. Unlike Mr. President's gentle but firm arm wrestling tactics, using his powerful oratory skills, Mr. Governor is unable to budge the folks in Sacramento with his real muscle power! He threatened them with no pay if they did not approve the state budget by this week and they are still out until this Friday.

Mr. President will give us some money back, and if I went to college, some tax credit. Being a 1.2 income family, we certainly fall within the eligibility of being "middle class", as defined by the President.

Sacramento will take away my check from the President as we will pay 1% more sales tax and a 5% surcharge on personal income tax. DMV fees will double and gas will go up by 12 cents/ gal. The irony cannot be missed. The democrats in DC are lowering taxes while the republicans here are raising them!

While the local drama continues, the national drama has been sealed and delivered for Mr. president to sign. He is thrilled that this Stimulus Bill is ready by Lincoln's B-day, today.

The State should get some relief from DC. The rise in taxes here will wipe out the tax relief check we will get from the President. Oh well, life continues...

Innovation - That Strange Mythical Animal

Dr Bhaskar Dasgupta — Sat, 7 Feb 2009 05:16:13 EST

It was an interesting email that I got from Google Alerts. I have an alert setup for “innovation” as a keyword. The interesting thing is that I get the most interesting and curious hits on that keyword. As it so happens, on the same email, I got referred to a Businessweek article on innovation and another article on how Nortel could not save itself from bankruptcy despite investing heavily in innovation.

Innovation is a tough thing. What exactly is it? Something to do with new things? OK, lets run with it for now. But everybody and his dog wants to be known as innovative. Nothing wrong with it at all. But just like every buzz word, it needs to be treated carefully. People can get into all this innovation business too much and then forget about the basics of business. The two articles given above are interesting examples of this phenomena.

My son has been on World of Warcraft for the past 4 years now and has a good little business running there. So I have a fair idea of what is happening there. He has also managed to rope in my little princess as a magic maid, so that promises to be a good story one day. Anyway, I do appreciate the points made in the article about how WoW has managed to incorporate basic principles of innovation into its game so that it is doing brilliantly. I quote some of the main principles that the authors quote as lessons from the game:

Reduce barriers to entry and to early advancement
Provide clear and rich metrics to assess performance
Keep raising the bar
Don't neglect intrinsic motivations
Provide opportunities to develop tacit knowledge, but do not neglect broader knowledge exchange
Create opportunities for teams to self-organize around challenging performance targets
Encourage frequent and rigorous performance feedback
Create an environment that rewards new dispositions

But I have a bit of an issue here, and that is that the principles seems to be driven from the story and then generalised. To put it in another way, if I had to pick up these principles and plonk it into any other business, i can, very easily, but does that mean that my old business has suddenly become innovative? Or that innovation starts gushing from each pore? No, obviously not. None of these principles are wrong at all. But at end of the day, people have to keep a a laser eye out on the main business of selling profitably.

Which brings us to the second example, that of Nortel. Nortel did everything that these principles said should be done. It turned its attention to new products, it brought in imaginative thinkers, changed its investment policy, new products were gushing out, strategy was changed, people were let go and new people hired, and so on and so forth. But does this mean that they did wrong? No, just that their basic idea of migrating the firm into a new world of web 2.0 was simply not good enough. It just bombed. As a matter of fact, you could point towards its debt load but then again, they already had $2.6 billion in cash. That again was not enough to save it from going under provided its products were good enough to provide a good cashflow. Which it didn't.

Depending upon which product category you refer to, innovative products have a very high failure rate, ranging from 40% to 90% (as reported in the HBR – June 2006 edition). When you are talking about such a high failure rate, to maintain innovative capability is paramount. You have to dust yourself off and keep on working. In a recent research paper where innovation was studied with respect to Sun, what is normally held to be an innovative company. After one of their products bombed, the researchers coin what is called as Innovation Trauma. This manifests itself by disillusionment, cynicism and contagious demotivation.

So what do you do to improve matters? The researchers suggest that individuals who were championing and pushing innovative products should be given time to disengage from their previous work. Second, they need to conduct post-mortems on the failure to find out why that happened and if they can learn from the results. Third, this postmortem is best if its done collaboratively by the original team or a team of some sort, an innovation anonymous, if you will. Fourth, seed the failure aspects into a new project so that the old failure is uplifted by the excitement of the new project while the new project is calibrated downwards by the caution of the old failed project. Expectations management.

So what do you do? Here’s something that we are trying to do. The British Political system is pushing heavily on the idea that Britain has to become an innovative idea. Pretty good stuff, but how do you deal with innovation? I have recently been invited to join a group on Innovation which will assist in coming up with strategies to improve the UK innovation footprint. It is not easy. Actually, anybody can come up with a good idea. Ideas are dime a dozen, but to get from the idea stage to a company which is stand alone, has some cash in the bank, has a good order book with some good client companies, ah!, now that’s the holy grail.

So what we are hoping to do is to provide that bit of a helping hand from the corporate and government sides. If a small firm does have a good idea, we will get together and try to do two things, (1) try to assist in framing the new idea as something that is innovative in terms of resolving a business problem and (2) try to assist by championing it inside our firms. Obviously no money and all that stuff, but in my experience, innovators fall in love with the idea rather than how it will resolve the problem.

They forget that we are in business to sell (anything, potatoes, widgets, credit cards, etc.) to somebody who can pay for it. Do not want to go into detail, but the idea has to be something that somebody is willing to push his hands into his back pocket and put out money. So despite having great ideas, if you forget the basic elements of selling and making products that will sell, all those innovative ideas will be useless.

Technorati Tags: innovation

The Grand Bailout

Blokesablogin — Tue, 3 Feb 2009 06:55:03 EST

They say that the US is the capital of capitalism! Given the new numbers of Obama's bailout package, it certainly smacks of nationalization of banks - even if you do not call it that. The Congress has approved it and the Senate is considering it before more money can be printed and passed around.

The bailout tag is set at almost $900 billion. Let us divide this number by the US population. That gives us about $3000 per person (approximately), cash (if at all). But this will not help me pay my mortgage for more than a month, then what do I do for the next month? Let us say, each of my family member, 4 of them, get this, then, I can pay 4 months worth of mortgage and have nothing to eat, if I do not have a job. Already, the consumer debt per capita is an astronomical $38,000 (approximately).

I think this entire bailout business is very wise on Obama's part. He knows that the US economy can handle such a big bailout over and above the one burped down by Bush, before he left office. But there needs to be a new vision plan.

It may actually be better if America learns to pay its debts, stop all its war spending and learn to build a wise society based on educating its children and caring for its sick and protecting the environment. Enough of this macho game of being a "super power". Even the adoption of the fiat money accentuates this self-aggrandizement of self-worth. Let the feminine shakthi prevail until all this mess is cleaned up. That means getting down to WORK.

For too long, America has learned to "tell" others to work and stopped working themselves. Of course, they got paid by others to tell them how to work!LOL! Now it is time for America to roll up her sleeves and get to work- the way she has done every time she has confronted historical moments. Time for new barn raisings.

However, the time calls for human values of compassion, trust, hard work, sacrifice and service. There needs to be a return to bartering of skills and work. You clean my house for an hour and I will tutor your kid for an hour. Neither has to exchange "money". For a change, this valuable exchange will deflate the ridiculously high "salaries" of some people and certain professions.

(aside) The banks need to stop charging any fees for some transactions as long as you trust them enough to put your money in them. The CEOs and the rest can learn to make do with minimums (and return their gold waste paper baskets). The previous bailout that our friend Bush initiated ensured that the CEOs could redecorate their offices and order private jets with tax money. Oh well.

This can be taken as a great opportunity to clean up the inflated self-worthiness of "great" financial institutions who have gone around the world insisting on "their" way of business and "their" rules that furthered swindling across the globe with political support from those respective countries. Wow! Now the kid has cried, "The emperor has no clothes!"

HOWEVER, if we look at the amount of debt carried by America after WWII, the current debt seems paltry, when compared to its income. Of course, America exploited earth's resources the last time (after WWII) to get up and fly. Tis time around, she cannot afford to not be green. So, we have got to think "outside" the proverbial box.

Having heard stories from my neighbor, who is 82 and had lived through the depression as a child, I know the American spirit is unbeatable and can handle this mess. For an obese nation, eating humble pie for a while may be just the right diet ordered by the doctor for a healthy, wealthy life ahead. And I know she will soar up to the skies once more like her eagle.

Citibank - The New State Bank of America

Aaman Lamba — Mon, 24 Nov 2008 08:03:44 EST

The United States Government took a giant step towards nationalization of the American banking system by announcing a plan to fund and backstop Citigroup, the beleaguered financial giant that has lost over $160 billion in market cap. The guarantees being provided include an additional capital infusion of $20 billion, loss guarantees up to $306 billion in a layered manner between Citi, the Federal Reserve, and the FDIC.

In return, Citi would issue $7 billion of 8% preferred stock to the government and additional stock warrants of about $2.5 billion. It would also promise not to pay out more than 1 cent dividend on common stock for the next three years. Finally, and most notably, the government would have final approval over all executive compensation and bonuses.

This last point is perhaps the most far-reaching, and as we all know the adage about paid pipers and their tunes, Vikram Pandit is henceforth a Federal Government employee, with hopefully greater job security than he had before this weekend. This mechanism gives government regulators a greater say over banking operations, and potentially opens the door to similar measures being adopted for other banks, or even other industries.

President-elect Barack Obama might end up appointing an auto czar, a music supremo, and perhaps even look to employ Bill Gates as CIO. The corporatization of the state will have an impact on the way it is run, which could work positively, but states have been corporatized for a long time, and this will only accentuate the incestuous relationship between neo-liberalism, corporatism, and statism.

Unfortunately, the victim in this circle jerk will be liberalism. Friedrich Hayek put it well when he noted,

If we ever again are going to have a decent money, it will not come from government: it will be issued by private enterprise, because providing the public with good money which it can trust and use can not only be an extremely profitable business; it imposes on the issuer a discipline to which the government has never been and cannot be subject.... The monopoly of government of issuing money has not only deprived us of good money but has also deprived us of the only process by which we can find out what would be good money.

Consider a humble bank manager in the Midwest a year from today having to evaluate between a loan to a start-up promising to improve productivity by over 20% with more efficient outsourcing automation. He is about to sign on the dotted line when he gets a call or a buzz from his friendly neighborhood Congressman, suggesting it might be a better idea instead to fund the local chapter of the UAW.

Welcome to Citibank, the new State Bank of America.

Bubbles and The Current Financial Crisis

Ravi Kulkarni — Tue, 21 Oct 2008 14:36:55 EDT

"Bubbles! Bubbles!... My bubbles!"
-a cartoon character from Finding Nemo

Is there an end to the current financial bloodbath that is plaguing the world markets? Like a recursive nightmare, you wake up from one nightmare to find yourself in the middle of another. I am still in the middle of my productive career, and I don't find it amusing that my life savings go down 5% everyday. I just can't imagine what it must be for those who are staring retirement in the face or who have already retired. The only light I see at the end of the tunnel is the proverbial headlight of an approaching express train.

Folding banks, closing auto dealerships, collapsing companies, massive layoffs, government defaults; the looming specter is stunning. Many pundits are saying that this will be a mild recession and we should be back on track in a couple of years. In particular let me quote the following:

'Standard & Poor's chief economist David Wyss expects a mild recession that ends next spring. "Gradually we will regain confidence in the market. Lower oil prices and a falling trade deficit will help," he says. "This is a financial panic, not an economic one." '

I don't know what weeds these people are smoking. A lot more bad news awaits us. What we are seeing today is a result of 60 years of unbridled growth and reckless spending. The dominoes are falling and there is no telling when or where they will stop. They blame it on many factors: corporate greed, extreme leverage, wall street excesses, mortgage crisis and so on.

I remember reading this article by S Gurumurthy of RSS. Though the article itself has been ridiculed by the economists and intellectuals in various forums, and there are some factual errors in the numbers quoted, I felt there was an element of truth in it. This article was written in 2002 or thereabouts. Common sense tells me that I can not continue to spend more than I have. A day will come when the bill collectors come calling. This is true for individuals and also true for institutions. But there is a white elephant in the room everyone seems intent on ignoring.

I laughed out loud when President Bush doled out money to people as a stimulus package. The trouble with the economy was not that people were not spending enough; it was that people have spent way too much and they can no longer finance their profligate ways. During the last several years rate of personal savings by Americans has turned negative. The so-called stimulus package only inflated various bubbles a little more. Besides it encouraged people to be even more reckless with their money.

Since the 1940s, America has managed to build a huge economy based on consumer spending. It starts with how money is created (primarily through bank lending, see here). Every time someone borrows money (say to pay for a new car), the system creates a little bubble and new money is injected into the system. This money is supposed to be taken out at a later stage when the loan is paid off, but people keep spending money all the time so the money is never really destroyed except during serious economic contractions. This is not specific to the US economy, most of the modern economies have grown in this way.

This bubble creates other bubbles. Consider this: when there is more economic activity, the governments have more tax revenue and therefore bigger budgets. The current political wisdom tells us that the money should be spent immediately on populist and not-so populist schemes such as the earmarks. After all, one must get elected again in a few years. Once a particular expense head has been created by a government, it seldom goes away. Many economists argue that deficit financing is good for the economy. Wars and natural disasters have contributed by further expanding the budgets. Among certain quarters, there is almost a macabre glee whenever natural disaster such as an earthquake or a hurricane hits.

Without intervention this unstable system will seek some stability through cyclical economic downturns and many of the bubbles will gradually deflate. There have been downturns in the American economy, such as the recession of 80s and 90s, hyper inflation of 70s, stock market crash of 1987 and dotcom crash of 2000. Every time the government intervention has been short sighted with no attention paid to long term consequences of these actions. None of these events convinced the political leaders, financial leaders and individuals that they must spend less than they have or else...

If you remember the dotcom bubble of the 1990s, many people believed that the stock market will never go down. Ditto with housing markets of early 2000s. Similarly for too long, investors all over the world have nursed a belief that dollar is a safe haven and Americans will never default. This has caused them to send money to America in unrealistically large amounts of money through real estate investments, government bonds and lately purchases of assets of large financial institutions. This has significantly contributed to the financial bubble.

To keep this bubble inflated, governments and institutions have to spend more money and foreigners have to keep pouring their savings into American economy. To encourage these events, the lowest pillar that is bearing the weight of all these bubbles, our friend Joe, must keep spending. The trouble is that Joe can't spend any more money because his account is overdrawn. Nobody is willing to lend him either.

The credit crisis is a sign that people have understood the true nature of our economy. Money in my pocket is better than money in yours. Nobody trusts the bogus credit ratings of individuals and institutions anymore. At some level one can blame the banks for lending to one and all, but the blame must be shared by everyone; legislators for not providing enough oversight; bankers for not ensuring the borrowers have capacity to repay; borrowers for being greedy.

Americans have a total debt of about 120% of the GDP. The companies collectively have a debt of 160% of the GDP. Total American debt reached 53 Trillion dollars. That's about $176,000 of debt for each resident of the country. People and institutions have leveraged way beyond their means to pay back. To paraphrase Nouriel Roubini, now "the housing bubble, the mortgage bubble, the equity bubble, the bond bubble, the credit bubble, the commodity bubble, the private equity bubble, the hedge funds bubble are all now bursting at once in the biggest real sector and financial sector deleveraging since the Great Depression".

The casino culture has taken over the American financial markets. Short selling of stocks is the most obvious and glaring example of the gambling that savvy stock market players indulge in. There is also the futures market for commodities. For example the much maligned speculators who have presumably driven up the price of oil and other commodities. In the 1990s new instruments of financial trade called derivatives were created. These are the CDOs, the CDSs and many others from the alphabet soup, which Warren Buffet famously called financial instruments of mass destruction. That bubble is now worth 55 Trillion dollars. To put it in perspective, it is more than the annual gross product of the entire world. This is nothing but suicidal gambling by large financial institutions hedge funds, and wealthy individuals with no added benefit to the society at large. This is another bubble that is waiting to burst and who knows what happens then.

If my hypothesis about the economy is correct, then there are three ways this crisis will resolve itself. Firstly the obvious one, in which there will be a catastrophic crash of markets and institutions all over the world. This will be too chaotic for anyone to predict the sequence of events accurately. The consequences are too horrific even to contemplate, but humanity will survive. It may take a decade or two to recover to some semblance of normalcy.

Second way is that the current patchwork of interventions will work and somehow the world markets will be stabilize. However, I think this only be temporary and we will come back to the same situation sooner or later, perhaps with a bigger bubble, because we not really addressing the underlying causes.

Third way is when our leaders act responsibly, the markets respond in a sane manner and people correct their ways. Government will stop wasteful spending, wall street will stop being greedy and people will start saving more responsibly for their retirement and their children's education. If by some miracle this sequence of events comes to pass, then it will still take a couple of decades for us to come back to stability. The reasons are obvious, the the bubbles are simply too large and they can't be deflated in a short time. However the likelihood of this happening are extremely remote. Consider:

Law makers are short sighted and often ignorant
Government likes to keep borrowing to spend even more money and has zero credibility with the main street having spent all of its political capital waging pointless wars
Washington is full of wested interests, but none protecting Joe's interests
Wall Street has a short memory and within a few years it will retrace the history
Regulators have no credibility as they are either corrupt or ideological but almost never right

This problem is not unique to America. I am only using her example because I have lived here for the last 8 years or so and seen what is happening first hand. I am sure similar things are happening in many other countries as well.

The situation is rather bleak, but people change only when there are catastrophic events that overtake them, or a JFKesque leader guides them. Is Obama the JFK of our generation? I sincerely hope so, but I am very skeptical.

What are the lessons for India in this crisis? Unfortunately I don't believe India will escape it unscathed. The only silver lining is that India is not yet that highly leveraged that it will suffer as deeply as the US. However, India is following the path that US took in the '50s and '60s. We can yet avoid it by ensuring that the truly important issues are addressed and never compromised in the name of capitalism. These issues are, savings for retirement, ensuring universal health care and providing good education to all those who want it. Most importantly we should not build our future on bubbles.

The American Financial Crisis -- Dejà vu?

Moid — Tue, 7 Oct 2008 15:03:45 EDT

No sooner did signs of the crisis dawn upon the "market makers", the blame game started, and with more signs of an economic depression, the game only got messier. However, being a market outsider, if you ask me... who is really at fault, I would say that it is neither the Investment Banks nor the Financial Lending Institutions nor the Federal Government nor the average American nor the global citizen. WTH??? Who would it be then? The Aliens?

Nope, it is a vicious circle and all players in the market are to blame... collectively. So, what we see today as the crisis is a result of the greed and gambling of the investors (through I-Banks), lending institutions, borrowers (the average American) and not the least, the US Federal Government. The lending institutions created the environment. The investors took the bait with some help from the I-Banks - the average American saw his long-term dreams getting fulfilled, and the government decided to keep quiet and not even look their way.

This is precisely what in theory was defined as "neo-liberalism" - a concept which eliminates government regulation and oversight under the pretext of a free market economy with minimum federal intervention. Not that, this phenomenon took roots under the present US regime - it has been followed since the Nixon days but then Bush took it too far.

This economic crisis began in the real estate sector and spread its tentacles to the financial sector which was being its god-father. However, the cycle is not gonna stop there. In my judgment, these problems are gonna percolate into the actual economy - which will then break the insulation for every global citizen. And if u ask me, will the famous seven-o-o bailout stem the tide? NO! not at all. I think it is just trying to push the waste under the carpet.

So, for us as common middle-class people - what happens to our lives?

1. CAREER
Somewhere or the other, the uncertainty in our careers is gonna go up... either by our industry of work directly facing the ire of the crisis or pushing up job seekers in our sectors which are still insulated or worse still pushing the salaries down.

2. PERSONAL INVESTMENT
This is surely gonna be a big mess - after all, even a LN Mittal with his hawk advisers couldn't avoid 16Bn USD getting wiped off his balance sheet. It is high time you evaluate your investment - and best, if you can divert it into a low-risk, low-return bank deposit. However, one question worth asking the US Feds is... who will pay us for the loss we have incurred by investing in the stock markets for no fault of ours? I know what answer you will get - IGNORANCE / at best SILENCE.

3. FAMILY LIFE

The biggest lesson for us is to not rely on "fake" liquidity and always plan our lives based on the "real" liquidity we possess. This reminds me of my dad's advice when I joined IIM - and many banks realizing our future earning potential ran to us offering credit cards and loans - he said one thing, "Never fall into the trap of credit cards. It is not free money which you can use without any accountability. So better pay with what you have in your hand". I did heed his advice albeit having a couple of credit cards years later, but just to manage online transactions. Nevertheless, I would give the same advice to all - avoid credit cards as much as you can and also try to plan your asset acquisitions (house, car, etc.) based on what you can afford and not based on speculation.

As for the US economy, it is in a very dangerous situation - with no disclosure, no oversight, no transparency. The suspicion levels are so high that even a bailout approval couldn't keep the markets from falling. Because, behind the big facade of the financial sector is the real American economy which has been the lifeline for the financial sector and that itself is now reeling in pain.

The Fall of Capitalism

Blokesablogin — Fri, 26 Sep 2008 06:21:04 EDT

When the USSR fell, all the headlines screamed the Fall of Communism. Today, after a week into the mess that is Wall Street, the high priest of Western-style capitalism aka globalization, there is not a single headline that says so: Fall of Capitalism. Interesting observation, don't you agree?

Last month, a friend of mine emailed me a talk given by a Chartered Accountant (CPA, US style) and I promptly emailed him wishing that he wrote a book on the subject. He promptly emailed me a copy of his book published more than a year ago titled Global Imbalances and the Impending Dollar Crisis, published August 2007.

His premise was simple enough. He shows the ridiculous consumption of the US (consumer debt) factored with huge trade deficits. He explains the "Savings Glut" as described by Ben Bernanke and how Asian savings have fueled capital markets in the US as many Asians believed that they would get better returns from a "solid" bet like the US than their own countries. This prevented improved infrastructure in their own countries, rather supported US to improve Uncle Sam's. Uncle Sam built more homes than actually improve his bridges and roads.

My friend temporal from Desicritics referred us to a blog by Spengler; using the imagery of America being a huge casino. As much as that is quite valid, he errs in believing that the "locals" fund the casino. The Asians and others have funded it thus far. However, these very Asians saw the wastefulness of Wall Street and slowly removed their money from there. This has led to a severe crunch in available credit for the MBAs to play with and we are now seeing this "Crash".

The Japanese were happily buying homes, especially here in California, Southern California to be more specific and for the past few years, even they have stopped "investing" in the US housing markets.

Let us face it, capitalism promises a "higher quality" of lifestyle that is the greatest myth perpetrated in the world. Yes, it is true that more people are "enjoying" consumer benefits like Televisions and Computers today than ever before in human history.

However, when we see this "material prosperity" against the background of ecological stress and global warming, we need to revisit the "idea" of "higher quality" of life. Yes, the Ambanis of the world can afford to build multilevel fortresses and import their water supply from the Alpine region, but they still have to deal with the filth and squalor lining the streets of Mumbai when they go to their parties.

As for the outright swindling that was legitimized as salaries and bonuses in Wall Street for decades, much of it will be found safe in a Swiss account, no questions asked. Do check out the website www.transparency.org for greater details on how much of national wealth have been stashed away in tax havens around the globe.

The dumb taxpayer, is left with getting double whammed- once for "investing" and once again for "bailout". It does not matter where he or she is from. All these "international" investors have ensured that there is no "caste system" where money is concerned.

I am beginning to believe in a people's economy, aka black money.