The IMF's usual dance

The IMF has done it yet again. Pakistan, not being able to gain support from former friends like US, China and not even from their brethren Saudi Arabia, has finally & reluctantly approached the IMF and got a $7+b bailout.

And the IMF as usual has attached its strings to the bailout and imposed all standard conditions to bring inflation down, even at the cost of development faltering. This is not the first or last time IMF has undermined the democracy of the nation it tries to support.

And yet, after all the recession, sub prime, economic meltdown, G-20, developed economies faltering and all that, there is ONE institution which will never mend its ways - the IMF. Isnt it just about time they wake up?

Rescuing Big Three of Detroit

Off late, the MoTown three have been spending money in pursuit of more money. If we to follow the Op-Eds of NYT or other leading dailies, we can see everyone from Michigan senators to right wing Nobel prize winning economist talk about why Detroit need to be rescued. And why this has to be done in spite of the fact that there has been no innovation, careless spending, wrong investments and arrogant/extravagant attitudes of the auto companies. We have been threatened that closure of even one of the auto companies, will start a downward spiral, bring all three down, bring their suppliers down followed by dumping of all their existing unsold cars - causing a further $400b loss. So bankrutcy is not an anwer because it will ultimately lead to liquidaiton unlike in airline sector.

This is all true. And yes. I am dead against rescuing the Detroit guys. After all, their irresponsibility, lack of care for climate change, arrogance in spending - even after Honda & Toyota started dominating - is simply mind boggling. But let me keep my prejudice aside for a moment. After all, these car companies were just serving American dream. It is not that they didnt innovate, but there werent that smart. And I believe that the bailout package given to them is not to just continue with their status quo, but to reorganize and re-energize their operations. If the Fed is willing to rescue Bankers with hundreds of billions of dollars, a $25b bailout for GM/Ford/Chrysler is not that bad at all, if it could save employment.

The bailout could come with very strict terms and in phases. Chrysler need to be sold to GM. And GM has to stop producing all the various models which the company itself is probably not aware of. Ford needs to given an ultimatum to return to profitability within a year or massive restructuring and downsizing by 50%.

Yes, socializing losses is harmful. But the car companies are more of victims right now as their death has been hastened, though it was imminent. It is not the time to treat them different from the bad Bankers, who have brought about this meltdown with unnecessary innovation.

Will the IIMs please stand up

If one were to look abroad, most of the macroeconomic think tank is populated by Professors from various Universities. This is more true in the case of US. Harvard, Columbia (where Prof. Sachs sits), Princeton (home of Prof. Krugman), Michigan (Prof. Prahalad), Chicago (Prof. Rajan) and several top notch Universities house these think tanks, draw from the wealth of their experience and are ready to provide advise to various institutions including Fed and Treasury and even to the Office of the President on economic affairs. While the MBAs from these schools do make millions and at some point contribute to the meltdown directly or otherwise, the teachers do stand up to provide advise and support or at least make their voices heard.

In India, we have the IIMs - quasi-government controlled age old institutions. The IIMs, particularly A, B & C are guilty of identifying some of the smartest brains in India, arm them with business skills and help fast track their careers by providing opportunities via placement cells and excellent pay packets running to crores of rupees. All this for a paltry fee. Obviously the immediate RoI for someone who walks into IIMs is a gazillion times more than doing a similar course in US Universities. And yeah, these smart IIM grads have grown to greater heights and as said before contributed one way or other to meltdown.

But contrary to US, where are the IIM professors advising the nation at the time of the need? These are guys who educate the smart brains of the country. Where are their opinions? Why is it that they make a rare apperance in Economic Times or any other leading public daily advising or giving opinions to Indian government and Indian citizens. Is the government controlling their views too? Are they not being allowed to express opinions through blogs & columns? Does the IIM institution prevent its staff from talking about real world problems? IIMs continue to make news only regarding CAT, placements/internships, director appointments or OBC quotas.

While I do understand that this comparison comes with its own bunch of flaws, the core question of why are the IIM Professors absent in a Indian think tank still remains. Come on IIMs, you have a duty to this nation. We have serious problems and we need smarter and serious people to solve them.

Savings wont save us!

Given today's grim scenario, one thing that definitely wont save us is savings!. When economy is on a downward spiral, companies stop producing, stop making profits, start firing people.. Now people stop spending, that leads to lower demand and companies stop producing ... this is the vicious circle. We have been through this in an earlier post.

Now what governments need to do, as advocated by the reinstated master Keynes is to put money in people's pockets. This is to ensure that people spend more. No matter how the government does it - by slashing interest rates, by creating new projects (read jobs), by cutting sales taxes - success will come only when that money is being spent by public. Spending will create demand that will boost supply, increase profits, create jobs and go on..

So if we start tightening our purse strings to spend on a rainy day, well.. this IS the rainy day. As governments start doing their job to support the falling economy, public has to do its part by spending enough. This is not a time to listen to old middle-class tales of how savings will save us eventually - it is in fact the right opposite. It is time to break piggy banks and buy that stuff you have always wanted. Buy a house, dress, stocks, chocolates, gift items, jewelery. Tour the nation. Stay/Eat in hotels. USE THE MONEY. Our recovery is dependent on our spending no matter what the government does or intends to do.

Maybe the FM should tax people who save more and boost spending. Lets spend and save the economy!

Bullish Market!

And so why should I talk about Bullish market when we pass Life in the time of Bears.

I am referring to the Indian IT Service companies. Almost all of them - TCS, Wipro, Infosys, Satyam, CTS, HCL and even smaller players like MindTree, Patni are all sitting on excess reserves of cash. A quick glance would tell you that the range is between $250m - $2b!! This is the time to strategize, target and buy over troubled companies in Europe or US so that the toplines can be impacted positively as the meltdown melts down.

Almost all companies are now gung-ho for M&As. However the aggressive purchases could well determine who will be in the forefront for next 5 to 7 years. This is an opportunity in a platter.

I have been against the Indian IT Service companies sitting on cash pile, neither utilizing it on investments nor returning it to shareholders. But now these companies are offered with a golden opportunity to make hay with this cash pile. And those companies which keep sitting on the pile without realising value for it, might as well be clear that they would be left behind.

Buy, buy, buy!! It is bullish market to buy IT Service companies in EU/US!

Predictions and Investment Analysts

Economists are much better. They don't claim to predict future. They study different scenarios, conjure interesting theories and see if they can help the world grow.

Investment analysts on the other hand - no one knows what they do. They have complicated formulas, jazzy excel spreadsheets, floating tickers and they issue some advise. Most often arbitrarily is my guess.

Look at this Merrill Lynch statement. We all know that the markets are down and future is uncertain. So what is so great about ML making a comment about a gloomy future?

Why is that these overpaid highly greedy super egoistic investment analysts not able to predict the bubble bursting? Or the fact that their loans and their own instruments will go under?

Why is that Merill, which is predicting grave market scenario for next 12 months, not able to predict that it itself was en route to its grave?

Stop it Merill. You got Lynched.

What should Microsoft/Yahoo! do?

Now that Yahoo's irrelevance in the internet industry is more or less certain, Jerry Yang has come back asking Microsoft to buy his company out. Yahoo!'s shares are at $13 range currently. Microsoft's original bid was $33/share and Jerry didn't want to take it. After Google has walked away from the advertising deal, Yahoo!'s board is now currently left with no option but to seek Microsoft's help by buying them out.

What should Microsoft do? Microsoft itself is on the verge of irrelevance in Internet industry. Except for the infamous browser called Internet Explorer, anything that Microsoft has done (copied from someone) hasn't been even a moderate success. Acquisitions like Hotmail and borrowed ideas on cloud computing and other developments have kept Microsoft afloat in the web world. If Microsoft were to acquire Yahoo! eying Search consolidation, it might not be such a bad decision after all. However, considering that Google is well over 65% of the market today, an acquisition on its own will not help Microsoft in any way. First the merged company will need to trim itself and leverage the power of each of the products it owns. And knowing Microsoft, the big bully might find it tough to change its bad habits of acquiring something, making changes to that successful system so that it becomes unusable and buggy.

What should Yahoo! do? The best course of action is to add Icahn to its board so that a decent negotiation can take place with Microsoft. Next, remove ineffective board members without any severance pay. Third, really focus on getting the maximum value for Yahoo! shareholders instead of just focusing on packages for top management and board.

Too sad to see you go Yahoo!. The end could have been better.

The WEMF - Worldwide Emerging Markets Fund

2008 is making history of all sorts, the most radical one being that America, where racism is still in living memory, has chosen Afro-American Barack Obama to lead her for the next 4 years. 2008 is probably when the US will start standing to the left of even former USSR. And 2008 is probably when, US should officially shed its status as the leading economic superpower and dollar stops from being the lone international currency.

Maybe 2008 is when we hold another Bretton Woods conference, only that it wouldn't happen at Bretton Woods, but this time it will be within the borders of East Asia excluding Japan. Maybe 2008 is where we will get to replace the Washington consensus with a New Delhi consensus. And for all the cynical folks, we are not talking about a typical socialistic or communist package out there.

The reality is that the American dream, has ended; Informally founded at Regan era, continuing its spree under Clinton, going to peak during the Bush years , the dream has run its course and has shaken people awake as Obama prepares to enter office. It is as if all of us have slept for last 20 years and we are getting back to where we originally were. During this sleep, many have become wealthier, spent quite a lot and finally are back to being poor.

And hence maybe we need to reinvent the international institutions at stake here, primarily the International Monetary Fund. It is about time that we hold a Chindia conference somewhere between Beijing and New Delhi, declare that the IMF in its current shape and form is highly irrelevant and propose formation of a WEMF - the worldwide emerging markets fund.

• This fund is where real emerging markets will have more voting shares than the so-called leading economic superpowers.
  
• This fund will respect democracies of nations to which it lends/advises.
  
• This fund will not force liberalization down the throats of countries that simply dont lack the capacity to withstand such a open economy.
  
• This fund will not stress creditor interest alone.
• This fund will have a genuine interest to pull people out of poverty and not act on the interests of giant free market capitalist countries.

Professor Jeffrey Sachs rightly says "Low taxes and deregulation produced a consumer binge that felt good while it lasted, but also produced vast income inequality, large underclass, heavy foreign borrowing, neglect of environment and infrastructure and now a huge financial mess. The time has come for a new economic strategy- in essence a New Deal".

And so let us work towards this New Deal.

Capitalism & Socialism - Lecture Series - Part V - Notes

Today's post is about the infamous liquidity-trap. When I gave the lecture, this part was very well discussed with lots of interesting questions around this subject. If you are a fan of Prof. Krugman, you dont have to necessarily continue reading this post, as he has been too vocal about this for the past many months. 

But before stepping into the trap, let us look at one important factor - savings. Generally savings is a virtue and people are encouraged to save more. If there were no government intervention in the world (a free market capitalist dream), then this is what would happen - consumers will save more, which means they will spend less. This will automatically result in lower production of goods which reduces efficiency as well as workforce numbers and profits for companies. As a result, salaries will get lower for consumers and in turn, because of this, consumers will start saving even more. This will only detoriorate the situation further, giving rise to a vicious circle. 

However in reality, there are governments. And when there is lot of savings trying to pull down the economy, governments lower interest rates thereby boosting investments. These investments ensure that there is sufficient liquidity in the markets. Thus even though consumers save, the situation is not all that bad, as government tries to balance the act from supporting the investment angle.

Now let us come to the crux of the topic. What if consumers are continuing to save, there is little liquidity in the market and the interest rates are too low that they cannot be cut any more (or cutting them down wouldn't make much of a difference)? Such a situation is called the liquidity-trap. This is what Japan has found itself in; this is what the US is probably heading towards. The interest rates in Japan are already hovering around 1%. The US interest rates are also similarly at 1%. Even if Ben Bernanke of the Fed decides to cut the interest rates, how much can he? If he makes it to 0%, will that be sufficient to boost the economy?

This is a trap as we can see, which gives no clear traditional routes to help the economy bounce back. In such situations, bailout packages become clearly necessary and that is when socialization of losses occurs. (The free market capitalists do believe in these kinds of socialistic principles as it suits them!). Remember that we are not talking about a third world impoverished country here. We are talking about America, the world's superpower. And this is a nation that will not hesitate to initiate a World War III if it only means that it will boost their economy.

The advocates of free market capitalism fail to address clearly such complex situations. While in theory, everything is a resource and can be scaled up and down as the situation demands, it is just theory. In reality, such corrections do not occur so easy and so fast. An example is wages. While wage increase is a demanded norm (in any market), wage decreases to support the economy are not and they tend to be sticky. And I think this may be a good time to start thinking about what Keynes said.