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.

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.

Complex, Imaginative Indian

Here is a business article “Negotiating with the complicated, imaginative Indian” about behavior of Indian businessmen.  I wonder if it is simply a stereotyping or there lies a profound analysis.

Paper starts with example of failure of Enron project. Paper proposes a conjecture that it failed because Enron managers couldn’t understand Indian counterparts. As I understand, that project failed not because of mis-understanding but careless analysis of the issues by both the sides and the probable corruption revolves around the project. Even if, it is true that the project failed due to some cultural mis-understanding then paper should have shown the alternative way Enron could have behaved in concrete instances.

The paper is written in very bad mode. It explains to a “North American Manager” the behavioral characteristics of an “Indian Manager”. Indirectly, It assumes that North American is the reader.  The paper explains the points over which the Indian manager deviates from an ideal behavior, as some kind of character flaw.  For example, paper says that Indian manager demands all sorts of ‘unnecessary’ information. The reason for this demand North American manager fails to understand. The paper suggests American Manger to be patient but no suggestion for Indian Manager to clearly state the reason why he needs certain information.

Paper states that Indians are most nationalist people in the world. I find it hard to believe as there are so many separatist movements going on. The paper connects this to Colonial era. May be there is some truth in it but I don’t think Indians, who are exposed enough to western world, are having inferiority complex all the time.

Paper says Indians are blend of East and west. Indians are individualist at the same time collectivist. Due to this duel attitude, it becomes hard to predict Indian manager. I find it a strange observation. I guess everyone is somewhat composed of both the attitude. An American may be more individualistic than a Japanese or other way round. How can one make such a concrete claim?

It seems like a masters thesis of a complex imaginative HR Guru.

Pakistan vs. Algeria

Latest events of Pakistan are so reminding me the history of Algeria. I have a limited knowledge of Algerian freedom struggle. My analogies may not be entirely accurate or may be grossly generalized.

Algeria was boiling in 1960s against French colonial occupation. It was the  last front of old school colonial occupation. FLN—quite Islamic and nationalist group—was carrying out violent insurgency against French. Eventually French suppressed this uprising with extreme brutality. After few years of this violent attempt, the people of Algeria took matters to the streets with massive protests. Finally, French political climate did change and they saw the wisdom in leaving the country. Then ex-terrorist became the freedom fighter and took charge of the country. This new government didn’t turn out to be just enough. Military became powerful and yielding influence over politics. Democratic process failed to run fluently. In 1990s, an ultra Islamic group won the elections and military refused to recognize their election. The usual justification behind this move was that the Islamic group is not civil enough to understand the modern concept of running a just state. The ultra Islamic group didn’t take it very lightly and took up arms. So, it started a bloody decade of brutality. It was vicious loop. More Islamic group rebelled. Military got more justification for brutal repression. This makes rebels more angry and more violence. Algerian government took very horrifying strategy to fight with these rebels. They committed massacres themselves and blamed it to the Islamic groups. Mainly to defame the rebellion such that population start hating them. Slowly, rebellion became week due to their internal clashes and slowly died.  Now Algeria is trying to recover from this bloody history.

Now! Pakistan, quite similar history. Pakistan, which used be part of British India,  born when British left India.  Their creation struggle is lead by Muslim league, a quite Islamic and nationalist group. In Pakistan, democracy could never establish itself. Soon, Army was in control. Military coups has been regular in last 6o years. The government has not been effective in delivering the needs of population. Now! Ultra Islamics are taking hold of the country. Similarly as it was in Algeria, the Pakistani government is coming into direct confrontation to these Islamic groups.

Now! what is the route Pakistani government going to take? Try to kill them all? From Algeria case, we learn that it will be bloody specially for civilians. Is there another way, for example talking to them? It does not seems great idea as their demand is not to get justice but to deliver justice(Sharia law) at their will.

There are some questions whose answer can lead to the solution. How do they get sophisticated weapon system? Who is selling them? Why can’t they be stopped from getting weapons? There must be some genuine demands of locals. Why don’t pakistani government tries to address them?

Is following a valid argument?

Whatever Israel does is wrong regardless of the fact that so many other countries do worse.

When I raised this concern in a recent debate, my opponent accused me of changing the subject. He said we are talking about Israel now, not Chechnya or Darfur. This reminded me of a famous exchange between Harvard’s former president, Abbott Lawrence Lowell, and the great American judge Leonard Hand. Lowell announced that he wanted to reduce the number of Jews at Harvard, because, “Jews cheat.” Judge Hand replied that “Christians also cheat.” Lowell responded, “You’re changing the subject. We are talking about Jews.”

-Alan Dershowitz on JPOST

“Jews cheat” is a statistical claim and if you want to make a policy based on that then you have to show specifically  that  “Non-jews don’t cheat” so often. This is the meaning of the reply of the judge, “Christians also cheat”.  In the case of war crime of Israel, no one is saying that “All jewish states does war crimes” more often then others. But, they are pointing at specific incidents of crimes.

If you respond to an accusation, which is not statistical but an specific crime,  by saying that others also have done it then you are certainly changing the subject.

Will there be a ‘war crime’ tribunal?

Yesterday, Ban ki moon, UN head, called for war crime investigation against Israel for attacking UN compound in Gaza. Other human rights watch groups are calling for wider investigation. I don’t know how UN functions. I guess there would be a vote in security council or in general assembly for creation of investigation. Lets see how US reacts to this proposition.

This will be a litmus test for Obama!

(If you have not been following horror’s of Gaza then you should!)

What is new in Obama?

Victory of Obama is celebrated all over the world. Euphoria is also felt in India. As I understand Obama’s position on issues, it makes little sense to me that people should be wishing Obama to win. At least the people in India shouldn’t.

Obama is a bad news for India. He has been arguing for bringing laws that curbs outsourcing. He wants to bring a taxing model which will discourage outsourcing. He has threatened to attack Pakistan and Bush has already started attacking Pakistan. He wants to pull out from Iraq not because it is an illegal and criminal war but because it is a fiasco. He has positioned himself very strong with Israel. Alignment with Israel put US in a situation where it left with very little space to adjust its policies. This almost fix general framework of Obama’s foreign policy.

So, Why such a euphoria? Answer- Obama is not arrogant.

At the start of this century, It has been a decade since the fall of Soviet Union. There was no serious challenger of American power. There has been little trouble here and there. As someone said, “Americans have been sleeping with snake for 40 years. One day they wake up and found that snake is dead. And they found lots of mosquito flying around.”

Another observation is the growing economic strength in places where America does not have a direct control, such as China and India. This must have caused some American policy makers to think that American position can be challenged. So, American vision for 21st century was to maintain world dominance of America.

Combination of above two factors gave way to the hawkish side of American foreign policy advisers. They mocked the cautious voices. They took control the white house along with Bush. They thought they will clean up this planet from “mosquitoes”. 9/11 happened and they got their chance. After Iraq war, It turns out that America is not almighty and not that powerful to fight multiple wars in parallel and contain the conquered population.  It is time to take a step back for American power. Rethink and reshape or, we should say, re-package American foreign policy.

Obama is a new face of the American vision but vision is almost same. He doesn’t speak with arrogance. He doesn’t reflect American power in his speech. That gives him an appeal in rest of the world that now America will become a humble and just power.  For some it always been a just power and in Bush times it just went off the track.

People are already saying that if he tried to modify the fundamental nature of American power then he will face an enormous resistance from all the power centres. All the way from “John Bolton” to “The Economist” are threatening in their meek wordings. It seems to me that Obama is not even is a mood of doing any of it.

A letter

“So as my promise, I am writing this letter to you & expect a similar response from you. Life is okay here. The city is beautiful. Infact, It is known as the ‘Paris of India’ – both in terms of beauty as well as culture. So that way, this city is a bit of cultural shock for us – the conventional , traditional north Indians. The attire here is entirly western. Jeans, T-shirts, tops skirts & what not. People are pretty rich here. You see Karizmas & Pulsurs & CBZs hopping around in the city. Incidentally, this city has max taxi density in the entire asia as per the stats. But despite all this, sadly, localits have a very poor image of army in their minds. Infact, they are so much anti army. Some attribute it to the much rumored atrocities committed by army regiments during the times of active militancy(1970s). They’re rude to army personal. Men here drink and smoke most of the time. Its the women who run households as well as shops. But mind you, they are pretty. Every commodity is easily available here, though the costs are usually high. Much interestingly, They take us as “Indians” i.e. foreigners for them, They are bloody thankless people,Yaar… (Rest is personal stuff).”

-Above letter is written by a military officer who is posted in somewhere in NE India to another officer.

When, I almost killed a child

It was time when I was preparing for JEE. I had passed matriculation. I was already in a college but then entering in IIT was a must aim of my life. It was a hard time. My so called career was nowhere. I had to work hard to find my way in some engineering college. I had joined coaching to coach myself for my better understanding of Mathematics, Physics and Chemistry. There was nothing much in life other than going to coaching and studying syllabus of JEE Exam. There was very little of any fun element. But it was interesting to me one way. I was learning things in detail. This preparation specially helped me grasping the basic ideas in Physics.

I used to wake up in the morning around 5 O’clock and used to go to meet a mathematics teacher. I can’t believe now that I was that person who was doing that. It was 15 kilometer drive from my home to teachers place. In the drive, there was 3-4 kilometer long stretch of a wide 4-lane road with divider. On one side there was a dairy factory. It provided a long wall along the road. It happened to be a very little activity of people on that side of the road. So, this stretch was perfect for the high speed motor biking with out a fear of traffic coming from opposite direction, pedestrian or cattle. It was my favorite drive. I had a 2-wheeler machine which people call scooter. But I call it machine*. My machine had the top speed of 95 Km/h. At that speed, that machine was totally unstable. Above 80 it used to start badly vibrating, so I rarely achieved that speed. At the center of that drive stretch there was entrance for the factory. Near the entrance, there were few shops and near those shops some poor people were living in huts. Some children from those huts used to play around and once one child was at wrong time at wrong place.

On that day, It was a cold winter morning of January. I woke up as usual and went on. I entered in that starch. I wasn’t driving very fast. Must not be more than 60 km/h. It was calm and silent morning. For a movement I looked on the meter panel to checkout the oil level and speed. And then I turned my head to look at the road. And suddenly, I saw a child was running across the road. He was coming from one of the huts. He was not more than 30 meters away. No chance to avoid hitting him. I had to do some thing and failure was not the option.** I turned my handle completely to left. This made my machine tilt and started turning. But its direction of motion didn’t change. Then It completely fell on the road and start skidding towards the child. I fell apart from the machine and start skidding on my face and solder. Form down there I saw sparkles coming out from under the machine due to skidding on the road. A thought went across my head that if that was happening with the machine what was happening with me. I wasn’t wearing helmet. So, my face was scratched at few points. Before everything stopped machine hit the child and he was thrown 4-5 feet’s away on road divider. Luckily, divider was made of metal grid. So, it acted as net for his landing.

After rolling 2-3 times on the road I stood up. I checked out that each and every part of my body is working or not. Then I saw that child. He was also standing and crying and quite full of blood. I was myself quite an 18 year old child. I didn’t thought of helping that child. For me the first thought came to me is the explanation which I would have to produce to my parents. I gathered all broken parts of the machine. Meanwhile people came around. Some of them were angry at me. Some were making point how dangerous the road had become. One was asking money for that child’s bandage. Some were angry at the parent of that child. As my situation was no better, I found sympathy among them. I simply said It was my mistake but I had no money to give anybody. And in a minute a friend passed by on a bike, He stopped and asked if I am fine. I nodded and had little conversation with him. This gave me chance to start my machine again and move out before crowd can guess it. You never know what can happen in this situation in India. You can be beaten to death by public.

I slowly drove back home. My father investigated all dimension of the event to check if I am not lying. One very weird thing happened, my machine had skidding marks on left and plastic parts were broken on right. This caused suspicion on the cause of accident. But I never knew why it happened that way. It is still a matter of discussion with my father.

Yes, I was bad. I shouldn’t drive fast. But, fast driving is a pleasure which nothing else can give you. I have a kind of lust of it. I did many accidents since then. I always avoided driving a car because it could cause more damage not only to me but also to others.

And, I feel that my lucky days are now over if I will meet another accident I will certainly die.

*Calling a machine as machine is a very realizing fact. Many people tend to love their computer, car or television. They take care of their machines as a child. They keep its use in limits such that it doesn’t go bad. Sometime they suffer themselves to take care of the machine. But if you refer them as a simple machine all that love seems to disappear. You can save that love for humans and you can be brutal with the machines. You can experiment with them without any compassion. You can use them as you want. If they go bad you either fix them or throw them away.

**As They say it in US movies. 

Let them fight!!

Today, I attended a lecture of a Philistine scholar who was studying planning and city management during the conditions like wars. He told us lots of difficulties they are facing in managing the cities. Military officers of Israili army are not co-operative. They implement such rules such that people suffocate in their own cities. How people are not allowed to do construction in their own land? Then this guy showed how they work around in always changing situations.

Israeli army is highly aggressive. They have occupied lots of areas in Philistine. so map of Philistine is full of Israeli occupation holes. Now, some call it as swiss cheese. At some places they have penetrated from the both side of the border. This way they have divided philistine land in three parts and they are connected only by a single road which Israeli open and close any time as they wish.

After the lecture, I went and introduced him myself as no identity. I asked this guy that which kind of occupation is done by Israeli army if they capture the city and control the administration or they push you away from the city. He said that it is of both kind.
Then i asked “ why are u want to be remain as philistine if this much trouble is there then just convert to Israeli.”

He replied “Who are you?”

I said “I am Indian!! Don’t take me prejudiced towards Israelis. I am worried on your behalf. In India we are facing 100s of such conflicts and all of them because of same reason. Everybody is fighting for their identities such as Hindu, Muslim, Tamil, Kashmiri. My country has no less problems.”

He said “You said you are an Indian. Lets say if ….”

“Yes! but i earlier said i am no one, My passport says i am Indian but i would like to be No One. My query is what if we can drop our identities and learn to create a unified place. No matter in what name or religion.” I clarified.

He interrupted me and said “Its not normal to be no one. Where do you live?”

“In a student hostel.”

“If caretaker of the student hostel say that he would not let you in because you are noone then what will you do??”

“I will ask him just let me know that he want me to be which kind of person. If he want me to be Jew, Christian , Muslim or whatsoever i will switch to that identity and then he will happily let me in”

He smiled and said, “I understand your point but it wouldn’t work.”

I said“I am sure if you will admit my idea then it will work. Why it wouldn’t work?”

Now, he laughed and said “Just write a letter to Kofi Annan! He will propose this solution in UN”

Then I stressfully said “if i can’t convince a person right here who is not defying this idea and also not accepting it. Then how whole world would listen to me”

“I am saying write a letter to Kofi Annan”, He pressed my solder and smiled.

“Thank you for listening to me!!”said I with surprise.

“Thank you, for coming here!!” said he and he walked away.

-Ashutosh