Thursday, October 30, 2008

How Indians could have saved the financial system

Three reports including a brilliant piece by E. Ramachandran on how Indians could have saved Lehman from bankruptcy.

The issues are these:
1. All attempts seem to be to bail out institutions such as commercial banks and investment banks
2. Little attempts are being made to work out an index beyond ‘consumer spending’ and measures other than promoting ‘spending’ by consumers
The most incisive comment relates to the concept of GDP itself as a measure of wealth.

To what extent is the mother’s contribution worked into the GDP? Zero, zilch. In the Indian tradition, she is the tutor, guru who moulds a child and equips her child to realize his or her full potential. Every child is a prospective contributor to the wealth of nations. Unfortunately, economists, nerds and quarks (the so-called winners of economics nobel prizes) have no clue to measure this contribution of the mother.

Unless the financial system comes to grip with dharma detailed by Kautilya in his Arthashastra, this fetishism of money will continue to yield bizarre, recurring recessions. Governments have no clue, no solutions beyond palliatives such as bailing out banks of a number of money varieties. P. Chidambaram for example is the promoter of Participatory Notes which have substantially spelt the doom of the Indian stock prices while making some Indians rich through hawala transactions which are endemic in this Participatory Note act of treason, trying to loot the nation’s wealth.

The next President of USA may have to establish an international commission including Nanubhai from India to start eating khaman dhokla and enjoy life. Life is a lot more pleasurable when various forms of money are ignored and varieties of dhokla are tasted and enjoyed.


Banks borrow record amount from Fed (The Hindu, Oct. 30, 2008)

WASHINGTON (AP) : Banks borrowed in record amounts from the Federal Reserve's emergency lending programme over the past week, while investment banks drew loans at a slower pace.

The Fed's report, released Thursday, showed commercial banks averaged a record $111.9 billion in daily borrowing over the past week. That surpassed the old record, a daily average of $105.8 billion, from the prior week.

For the week ending Wednesday, investment firms drew $87.4 billion. That was down from $111.3 billion in the previous week. This category was recently broadened to include any loans that were made to the U.S. and London-based broker-dealer subsidiaries of Goldman Sachs, Morgan Stanley and Merrill Lynch.

The Fed report also showed that its net holdings of ``commercial paper'' came to $144.8 billion on Wednesday. The Fed created a first-of-its kind program, which started Monday, to buy mounds of this crucial short-term debt that companies use to pay everyday expenses.

Squeezed banks and investment firms are borrowing from the Fed because they can't get money elsewhere. Investors have cut them off, moving their money into safer Treasury securities. Financial institutions are hoarding whatever cash they have, rather than lend it to each other or customers. The lockup in lending has contributed to a sharp slowing in the overall economy.

Investment houses in March were given similar, emergency-loan privileges as commercial banks after a run on Bear Stearns pushed what was the fifth-largest U.S. investment bank to the brink of bankruptcy.

The identities of commercial banks and investment houses that borrow are not released. Commercial banks and investment companies now pay 1.25 percent in interest for the emergency loans.

Since the Bear Stearns debacle in March, the Fed has taken a series of unprecedented steps to get lending _ the economy's oxygen _ flowing more freely again. The central bank has repeatedly tapped its Depression-era authority to be a lender of last resort not only to financial institutions, but also to other types of companies.
Critics worry the Fed's actions could put billions of taxpayers' dollars at risk.

How Indians would have saved Lehman Brothers
E.R. RAMACHANDRAN writes: I happened to run in to Nanubhaion Dalal Street. He was eating Khaman Dhokla in a farsan shop.
“Khem cho, Nanubhai?”
“Saru che.”
He was looking glum but gestured me to join him.
As I bit into the tasty dhokla with tangy chutney on the Friday afternoon, which was fast turning into a ‘Manic Friday’ as per Dalal Street lingo, he was staring at the bull near the entrance, which overnight had become a Russian bear hugging everybody that passed the Street.
Nanubhai is a well-respected Dalal Street dada with an answer to every shareholder’s query.
“What went wrong with Lehman Brothers?” I asked.
“Lots of things. If the founder brothers, Henry, Emanuel andMayer were alive this wouldn’t have happened. Lehman Brothers were more than a 150-year-old company. But yet, it had no Lehman in the company. Such a situation can never happen in India.”
“Are you trying to tell me an Indian would have handled this differently?”
“Bilkul. If it was an Indian firm, Lehman Brothers would have fought as soon as their father died and divided in to three companies. They would have diversified into clothing, polystyrene, petrochemicals, vegetables, movie making, telecom, drilling oil, mobile phones, retailing, books, spectacles, gyms, wellness. In short, anything and everything under the sun. They would have made money for themselves and their shareholders.”
“But when there is massive failure there would be no option but to file for bankruptcy?”
“Fail-wail chance hi nahin! Even if they encounter tough times, they would have friends like Mulayam Singh and Amar Singh to bail them out. They could finish off competition by befriending the finance minister and getting duties levied on the imports of competition. They would fund and befriend ruling parties. Unfortunately for Lehman Brothers in 2008, without a Lehman on the board or some Indian business brothers at the top, they couldn’t open the survival kit to stay afloat.”
As we were sipping double khadak chai, I asked: “Did anybody anticipate this global meltdown?”
“Anticipate? Mazak chodo! I will tell you something. America has some 45 Nobel laureates in economics from 1970. From 2000 alone there are 15 Nobel laureates in econometrics sitting on company boards, treasury benches and in places like Harvard, Stanfordetc. Kisiko kuch patha nahin tha! How come none of these had any inkling to the disaster awaiting the banking circles all over the world? Even the finance ministers of G-7 talked of strong “fundamentals” of world economy around this time last year! Two months back the only topic they were discussing was the rise in oil prices.”
“What will happen if it goes all on like this?”
“Some American economist will study this, write a new a theory and get Nobel Prize next year, dekhna. Seriously, they forgot things like control, double check, systems-in-place etc and brought in vague words like Subprimes to give loans left, right and centre.”
“What will happen to the Indian market?”
“It’s already having the Lehman Brothers’ effect. Our finance minister seems to like the figure 60,000. While presenting the budget earlier in the year he pledged Rs 60,000 crore to write off loans given to farmers. Now he is pumping Rs 60,000 crore to help out the banks! I don’t know what he will do next. He is again from Harvard!”
“What is the lesson to be learnt from the Lehman Brothers’ episode?” I asked as we were leaving.
Nanubhai took a spoonful of saunf and said: “You know, we have an old elementary rule for keeping hisab-kithab. Divide a page into ‘Left’ and ‘Right’ with a line in the middle to denote Debit and Credit. In case of LB, as somebody said, nothing was right in the ‘Left’ and nothing was left in the ‘Right’,” concluded Nanubhai.

Whoever captures the White House seems certain to inherit a starkly challenging economic picture. Thursday’s government report showed that consumer spending — which makes up more than 70 percent of American economy activity — dipped at 3.1 percent annual rate between July and September, after growing at a 1.2 percent annual rate in the previous three months.
OCTOBER 30, 2008, 12:41 PM
Alternatives to the G.D.P.
In response to our coverage of today’s gross domestic product estimate, a reader who goes by the name “TheBookkeeper” writes:
Has the time come to consider a better way to measure our economic state than to use consumer spending? Bookkeeping is a science that measure equity. Equity is the efficiency with which a business entity is operating, be that business a person, a household, or an industry. Doing more walking and less driving helps my equity account and hurts the economist’s consumer spending account. Is my walking a good thing or a bad thing?
Consumer spending is the largest component of G.D.P., and was a primary driver in G.D.P. decline in the third quarter. But it is far from the only component of G.D.P., which also includes investment, government spending and net exports.
So, to answer TheBookkeeper’s question, the preferred “way to measure our economic state” is usually G.D.P., which covers areas of growth other than consumer spending. But that does not mean G.D.P. is the best way to measure the health of an economy.
G.D.P. measures the total market value of final goods and services produced in a country during a given period. Ithas long come under fire, though, for not measuring “that which makes life worthwhile,” as Robert F. Kennedy put it 40 years ago.
G.D.P. does not take into account some of the negative effects of economic growth, like pollution. It does not factor in leisure time, or parts of the “informal economy” (like parents’ unpaid care for their own children) that have value but not necessarily measurable, marketable value. It does not give any sense of how equitably distributed a country’s wealth is; a country could theoretically have both the world’s highest G.D.P. and the world’s highest poverty rate simultaneously. It also does not reflect quality of life or happiness in any given country.
Along the years, economists have suggested alternative ways to measure a country’s economic health, most of which focus on measures of well-being. China has recently tried to use a measure known as “green G.D.P.,” an index of economic growth that factors in environmental consequences. The United States Congress has alsocommissioned research on “green accounting” measures.
The Organization for Economic Cooperation and Development has studied its own G.D.P. alternatives that take into account leisure. Others have proposed the Index of Sustainable Economic Welfare, which factors in both pollution and income distribution, and the Genuine Progress Indicator, which tries to determine if economic growth has improved a country’s welfare. Alternative efforts try to supplement or supplant traditional income-based measures with happiness-based measures. These include the Happy Planet Index, a Gross National Happiness measure and work on National Well-Being Accounts, which our Daily Economist Alan Krueger has studied extensively.
It is not clear that any one of these competing measures of economic and societal health will replace G.D.P. anytime soon.
But while TheBookkeeper and the rest of us wait for a new consensus on how to measure economic health, we can also experiment with how these measures would apply to our own lives. The Happy Planet Index lets you measure your own personal happiness level according to the H.P.I. metric. this site allows you to create your own I.S.E.W. (for Britain only), depending on how you weigh different measures of well-being and economic growth, and see how it compares to G.D.P.

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