Irony of the situation

As I sift through tens of e-mails and reports related to the Mumbai terror attack, one of the stark ironies of a democracy glares in my face. It is not without much sorrow and pain, that I finally see the larger anti-thematic roles played here. The leaders divide a nation; the terrorists unite it. What an irony! And even more ironic is the fact that the "leaders" community gains a lot by dividing us and the "terrorists" community has nothing to gain or lose, anyway. While many of you may object on politicians being defined as "leaders", the fact of the matter remains that many of these politicians have a huge following.



May be, it is the pain and sorrow of this paradox overpowering me, when I feel that it’s the fear which unites people. The politicians and the terrorist are both using the same means, albeit for different ends. One tries to unite people by making them afraid of the person next-door and the other, of the person sitting across the border. Has love lost the power to unite people or it never was meant to unite people? Either way, love can never garner as much votes (and as easily) as hatred can. And that’s the reason why politicians use it. Terrorism can not co-exist with love and hence, terrorists have nothing but hatred to use, although for a losing cause



While we can continue to point fingers towards politicians and towards the Islamic terrorism, there is hardly anything anyone of us will do to attack the root cause. Neither can any white-collar manager among us enter the dirty pool of Indian politics, nor will we try to check the spread of hatred across the border. Practically, this leaves us with only one option, which is to check the spread of hatred inside the country. And just like other times, apart from igniting unity amongst the well informed liberals, this attack has also ignited some hatred amongst many others. I was shocked when a cabbie told me “Inke to khoon mein hi aisa hota hai”, referring to the radical Islamic view of this world being a “jihad” between the follower and the infidel. I had known this cabbie for some time now because he had dropped me home many a times over the last year. And on those 15-20 minutes long trip from Nariman Point to Worli (only possible post 11 PM), we had spoken a lot. Sometimes, it was about technology (while looking at the Bandra-Worli sea-link), sometimes religion (while passing Haji Ali), or politics (during MNS attacks on poor north-Indians), sports and music amongst other subjects. He is one of the well-informed guys who understands dirty politics, enquires about technology and knows the importance of religious co-existence. No wonder, he knew about the Islamic ideology relating to Qaafirs. What shocked me more was his attempt to not discuss my explanations relating to the Islamic ideology. As if, he had made his mind about the conclusion he had reached. I will try again to discuss the Islamic ideology with this cabbie whenever we meet again. Let’s hope that I am successful this time in bringing him back to being the liberal Marathi Hindu that he originally is

Crisis and Regulation

You would have noticed that most of the economic / financial crises in the interlinked global economy can be strongly linked to one or more of the following three factors:

(a) An asset bubble (mostly real estate), due to artificially suppressed interest rates e.g. current US crisis, to a large extent

(b) Mismanagement of the currency e.g. Russian financial crisis

(c) Regulatory systems being inadequately or wrongly interlinked e.g. Japan in early 1990s (with an asset bubble too) and current US crisis

The fourth factor, which many people point to, is the extent of leverage in an economic system. While the leverage is itself not a problem, it amplifies the problem; just like it amplifies the wealth in merrier times.

With this background, if we do a comparative analysis of the regulatory systems in India vis-à-vis US and Europe, my belief is that we would have withheld it (with the same set of actions and same set of players). Apart from the benefits associated with a mixed currency (as opposed to floating or pegged currency) and with a mixed capital account convertibility (both of which are directly linked to point (b) above), our regulatory system is very strong on points (a) and (c) mentioned above.

RBI showed immense regulatory foresight on the real-estate asset bubble (in 2005, 06 and 07, much before the crisis), by increasing provisioning requirements, increasing risk-weights and other such measures. It made sure that banks required more capital if they went ahead with financing real-estate and mortgage (high-value). Also, it indirectly discouraged lending to these sectors, by increasing the cost of capital for financial institutions. These measures may be associated with point (a) above and my view is that RBI was as successful as any central bank can be, without hardening the interest rates substantially.

On systemic inter-linkages (point (c) above), India has a distinct advantage of being a developing economy and having a developing financial market :D. These linkages are either not present or if present, they are suitably monitored (e.g. financing to and by NBFCs) and if not monitored suitably, then arcane tax-laws and legal systems limit the risk migration from one point to another. For instance, the book value of a real asset in India is rarely close to its actual market value, thanks to various taxes and duties. There are various other linkages whose base-units (unlike Japan) are functional (e.g. foreclosure) and various linkages whose base-units are not strong (e.g. individual credit history/rating). However, in its entirety, I feel that we are in very sound regulatory hands.

And, we acted smart before the crisis started in US too. Though some people call it risk-aversion, instead of regulatory foresight ;)

Against this backdrop, the strength of financial systems in US is questionable, given the following facts:

I. Interest rates on home-loans being really low for more than a decade

II. More than 44% (estimated) of GDP in bank-loans to mortgage and real-estate.

III. Significantly under-supervised and high-leveraged securities firm with bank-finance linkages (compare that to large NBFCs in India)

Conclusion - RBI may be risk-averse, but it is one of the best regulators :D

In my entire working life, this is THE first day, when I have done almost nothing in one half of the day. And the reason, as you may be aware, is my post just before this one.

And to add insult to injury, my near and dear vella friends are also not online. These two friends of mine are the only people I look forward to meeting online, everyday. One of them is a currency/rate trader and another, an HR Manager (Hetch-ARR Manager, if you are from South India ;) ) . Markets bore the trader friend these days, though outsiders find it very "exciting and volatile". And when short-term interest rates swing like Waqar Younis' toe-crusher, the toe-crushed friend of mine comes online and we curse the markets in unison. I do the same with the HR Manager friend too, though we curse the job markets then. She is a smart lady and has not invested in shares yet. And to make her commiserate with me in future, I try to persuade her that investing in shares is a good idea. But I guess she has already heard the phrase "Never buy what an American investment banker sells you". Though I am not American and my firm is also totally desi now, she plays the role of a smart Indian investor to perfection and tells me "We will see".
All this because of a central bank which kept the interest rates artificially low. It happened with Japan in early 1990s but nobody learnt anything. An asset bubble led to a recession, correction 4 recessions, in 10 years for Japan. Lets see what it brings for Uncle Sam. And yeah, where the heck have the real-estate prices fallen ? In Bombay/Mumbai, I used to curse the high prices of real-estate coz it had become unaffordable. Now, everyone says the prices have corrected by 40% odd, but where the heck? And even if it had corrected by that level, my bonus must have corrected by a whooping 80% - 100%, leaving me poorer in real asset terms.
Enough cribbing for a day, I guess. See this is what happens when two of your best friends do not come online and you don't have much work to do either. Damn the speculators, damn the foreclosures. But first of all, damn the regulators for not learning anything from Japan. And yeah, RBI is a great regulator. Just like my dear HR friend ;)

What is Risk

My second debut on blogging could not have been at any other time, thanks to the market conditions. Using all the freedom of time that I have got, I composed a few lines on the markets. Special thanks to a junior in college, who posted a question on risk management on the college notice board.

"What is Risk"

You can ask the Bear, what Risk is,
For it might have been Stern and healthy,
But Morgan Chased it to the Reserve,
And Fed on it, to be more wealthy

Lay Men thought if they had heavy books,
which no-one can read through,
it will pass the risk of Bears and bulls,
but not everyone is lucky too.

Thinking makes one grow,
so as I think, As I Grow,
I wonder, who is next in row,
coz risk is like a comic show;
the ones who sell this dough,
got sold for less than a burrito.

- Composed by me, who had only 2 sub-prime risks: shares of ICICI Bank and a job with an I-Bank