How was financial system destroyed?

Here is very informative, accurate and readable paper about how did the financial system brake down. You must have read many analysis and news reports but they mostly leave out some important technical details. So, it becomes very hard to pin point who and what was responsible for the crisis.

Beware of the technical financial jargon appears in the paper . You might have to do googling for usage of dozens of words. To get some basic definitions read Appendix A from this another paper. This another paper is written by a computer scientist to demonstrate that evaluating the quality of “structured financial deal”  was EXPTIME hard therefore it is not so bad that the finance guys couldn’t see the crisis coming.

Let me talk a bit about structured finance.  A definition of “structured finance”:

The essence of structured finance activities is the pooling of economic assets (e.g. loans,bonds, mortgages) and subsequent issuance of a prioritized capital structure of claims, known as tranches, against these collateral pools.

[Bold faced phrases are either jargon words or jargon usage of common word. You have to do a bit of wok to understand them.]

The natural question arise that why someone likes to engage in such complicated financial activity.  Many people couldn’t have bought into this if it was simply a greedy move by the bankers. Actually, there has been a strong argument in favor of structured finance. The argument was that structured finance reduces cost of asymmetric information between buyers and sellers. Usually, seller knows more about his product than the buyer. So, both will assign different price of the product. The difference in the assigned prices is the cost of asymmetric information. This cost is also known as lemon cost. The term was introduced by economist George Akerlof.

This asymmetry mostly happens when market is full of look-alike fake products. In this situation,  buyer naturally thinks that the product may be fake so he assigns less price to the product compare to actual worth. This leads to less efficiency in the market. As, seller will not sell the object at lower price and buyer will not pay the higher price. At the end somehow, the deal happens and seller agrees to sell his product at some-what lower price than he expected. So, seller is suffering therefore inefficiency in the market. Sometimes, buyer also suffers when he ends up buying look-alike fake product.

I don’t fully understand how this phenomenon works.  Moreover, how structured finance solve this inefficiency? May be! this phenomenon is result of mental gymnastics of economists and has least connection to reality like many economics theories. May be! That is why whole structured finance thing collapesed.

Combodiaization of Pakistan!

Remember Vietnam! At some point of time in the frustration of war in Vietnam, Americans started blaming Cambodia for providing logistic support to Viet-Cong(North Vietnamese) forces. They were not accusing the Cambodian government, not the people but just the land where viet-cong soldiers can walk through. So, American’s have to bomb Cambodia to teach a lesson to the land. Nixon called it ‘a mad man theory of war’. When bombing stopped, a communist army, led by Pol Pot, came out of the jungle. And the year zero begun.

I fear if the history is repeating itself in Af-Pak. Is the next pol pot coming? I have heard Pakistani Taliban are much worse than Taliban.

Conversations with history

Conversations with history is an interview series done by a UC Berkeley prof Harry Kreisler. They also have YouTube webpage. They have more than 100 interviews with very eminent people (academics, politicians, and public servants) of US and also outside of US. I am currently addicted to it. The selection of people is so diverse such that you can get into all sorts of political and social opinions and get to know the people who are behind those opinions.

Here are some samples

The Noam Chomsky: The sophisticated Left

Christopher Hitchens: The ex-left. Now! He defends Iraq invasion. Outspoken atheist

Robert Fisk:  Journalist for a UK news paper, He says “Yes! middle east people need freedom. They need freedom from us (western powers).”

David Harvey: A Marxist

Shashi Tharoor:  Ex-UN diplomat, minister in current govt of India.

There are many other gems in the list. Find yourself.

Passive Invasion of Goa!

I found following video on youtube. A news report of invasion of unarmed Indians into Portugal occupied Goa. Alas, it didn’t succeed and in this attempt 22 dead and 120 wounded. Later, India invaded Goa militarily and Portuguese surrendered. Start watching from 2m07s

It shows depth of the following of Gandhi then, which is very hard to imagine today.

Why don’t some people like Arundhati Roy?

Her sweeping generalization and oversimplification of the problems.  Here is a link to her interview with democracy now.

In her review of the recent conflict against Naxalits, She begun her narrative just before the MNCs started showing interest in the natural resources of the conflict region. She says MNC came in the region and start displacing local people. Local people are resisting this. So, Government is labeling them Maoist. This will give government an excuse to suppress the resistance with the military force. Her analysis strongly suggests a direct causal connection between MNC activities and the rise of Maoist resistance. Therefore, Globalization is bad. She didn’t mention the whole history of Moist resistance in India, which is a key point to understand the conflict. I guess not every problem is straight away reducible to ‘Globalization’.

This makes some people accuse her misrepresenting the reality. Sadly, I have to agree with them. Even though, I agree with general framework of her thought.