Should they change the accounting rules?

The financial turmoil has brought a lot of attention on the accounting rules and how derivatives, specifically the now famous credit default swaps , are accounted for and how they shoudl be accounted for etc. Trust the primary culprits i.e. the banks who lent money indiscriminately to home owners who couldnt afford it to now come back and say they want to have some of the rules changed to suit them - changing to mark to market will allow these guys to improve their balance sheet and get back to lending - it will be a sleight of the hand - they are looking for ways to cover their tracks - I am not against mark to market in principle, but the timing of these changes is just not right. There is another issue with mark-to-market - guidelines around how to value them and frequency of valuation will need to be drawn up and be acceptable to all.

Yes - it is necessary to be in line with international accounting standards, but the the timing is not great and any changes should not be self serving. Changes to the accounting rules around teh definition of assets and to include sophisticated new products is critical and necessary.

The US is still the most reliable economy in the world.

That's what the exchange rates are telling us - the US $ is strengthening while the other currencies are weakening. This means that the rest of the world still has faith in the US economy.

Now today there was a piece of news that housing sales were up for September by 2.7%. Thursday we will see more data. But I think the this increase is going to be temporary. Banks are still not lending, consumer demand is going down - credit is difficult to get in these tough times and the bailout package is likely to be inadequate.

But US treasury bills are still risk free - the bills are backed by the government and the US government is not likley to go bankrupt. And hence investors dont mind buying them. Wondrous how the greenback is still strong even though the economy is showing signs of major weakness.

Wish you all a very Happy Deepavali

Today is the Indian festival of lights, symbolizing the victory of good over evil, of light over darkness. Today is one day when everyone in the the country tries to be happy, generous and with family and friends. The country is alit with small lamps or "deeps", (every doorstep and window has one), people burst firecrackers and make walking on the street an impossible activity. The air is full of gaiety and cheer. Let there also be more peace and love.

"Waste Not Want Not"

That was written on the drums strategically kept on the corridors of the high school I attended in Calcutta. The Don Bosco School at Park Circus is and continues to be one of the finest in Calcutta if not in the country. I was there from grade 4 to to grade 12. I hated it then because of the academic workload (not that I studied much) but now when I think back on my experiences there, I remember the school very fondly. I do remember the missionaries there were dedicated to teaching and the development of the boys. And the teaching was well rounded with adequate opportunities for academic and extra-curricular activities, along with trying to instill a sense of social committment among the students.

One of the small ways in which they did was by setting up these drums on stands. The drums were green in color and the words "Waste Not Want Not" were written in white paint across the drums. The words were self explanatory, and often students would bring stuff from home to deposit inside the drums. There were also some morons who would throw food leftovers inside the drums. I dont recall ever having contributed to the drum either way, but I remember think that this was a nice thing to do.

I got thinking about this recently because of the amount of food that was being wasted in my household. Everyday we have some leftovers which never gets used up even after a few days in the refrigerator. And then the food gets rotten and thrown away. Let's imagine that we waste about 50 grams of all food every day. That's not a lot - less that half a tea cup. Now let's imagine about 50 million family equivalents in the US cook every day and waste that much food every day (a very likely scenario). This amounts to 2500 million grams of food every day being wasted. Or about 2.5 million Kgs of food being wasted every day. Or about 913 million kgs of food every year. With an approximate of 250kgs of food being consumed by residents of the western hemsiphere, this means we can feed another 3.2 million people in the West every year. Or about 5.1 million people in the developing world. And if the whole world wasted less food, we can probably feed 142 MILLION PEOPLE AROUND the World every day!

When I shared this with my wife, we both almost jumped. Now my wife and I have a rule that we will cook a bit less than we need every day - We hope that with this, we wont let food get wasted, and hopefully will save some energy.

Why I like National Public Radio

Because the hosts are not shrill, they are very well informed, curious, balanced to the point of being polite, respectful and know how to facilitate a discussion without being rude. And the topics they pick to discuss are ecletic - from the merits of building a suicide barrier on the Golden Gate Bridge to politics, to the art of writing novels and the short story, the human genome project and the level of the water table in California. The hosts are very well informed and explore different dimensions of an issue in a very even keeled manner.

I wish the other channels both on radio and TV were like that. CNN, MSNBC, Fox - all of the channels are shrill, noisy and annoying - Wolf Blitzer runs the "Situation Room" on CNN - Wolf is a good host but to call the discussions he has the "Situation Room" is frankly hyperbole of the extreme and annoying at times. And Fox News is rabid. I have stopped watching it. And the number of ads between progams is such a pain. We have stopped watching most TV these days.

Will it be like the great depression?

I wasnt there and hence I cant say from experience. But data and current conditions suggets that No but we are in for tough times. A little commented on note is the impact of the financial crisis on the real economy. Where is the real economy right now? What is happening to real demand and real supply? The truth of the matter is that real demand is slowing down. Retail sales are slowing down. Housing investmenst are slowing. Demand for IT investments from the financial sector has been dramatically cut. VC funding is going to slow down. We can expect actual demand to be far lesser than potential demand. And actual supply will follow suit. The economy is likely to contract for the next 15 months.

Why will this be not like the great depression?
a) The economy is far more diverse than it was in 1929 – hence sources of demand are not concentrated in manufacturing
b) The Fed and the Treasury are moving very rapidly to shore up the financial system – liquidity continues to be available albeit in smaller quantity. The recapitalization of banks is going to help alleviate the liquidity problem.
c) The Chinese continue to buy US Treasury bills
d) A large portion of US corporate income comes from overseas – hence the ability of US Corporates to carry out investments, while diminished, has not been entirely stopped
e) The housing market was artificially inflated – this brings houses to their true value (whatever that may be!) and hence more people will be able to afford houses in the medium run future
However there is more that needs to be done. This is the time for some Keynesian economics - the government will need to increase public spending on items such as infrastructure to motivate more investment and create jobs. Richer people will need to pay higher taxes. And the government cant afford to wage another war.

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Sean Astin (Samwise Gamgee) 's book "There and Back Again" is an interesting read. I just read it today very quickly. Its a very refreshingly honest book and gives an interesting insider view on how the LOR trilogy was made. The book rambles on a bit with some general philosophical streams of consciousness. But some of the vignettes are poignant and interesting at times. People will either like it or will probaly feel sorry for Astin.

State Bank of America?

Not yet. And probably unlikely in the forseeable future. But the recapitalization of banks seems to be the right move. Will the banks pay dividends? And what happens in the case of capital gains by the government? Will it pay income tax to the IRS? Trivial but pertinent in some ways. $250 billion is not chump change.

How do we know we will not see anybody else fail? And what time frame do we give banks to fix their incentive systems, one of the root causes of this problem. And where deos this leave the VaR formulae and calculations? I wonder? During my work with IBBM, the banks in Malaysia said credit risk has been beaten to death, particularly the foreign ones. Guess who is having the last laugh?

Glad Krugman won

I have been a big fan of Krugman ever since he predicted the fall of the Asian tigers and wrote about how inefficient IT usage was in the 90s. The man is sharp, thoughtful and more often right than wrong.

Now we we have to see if Romer will win. Then I can say I had lunch with a Nobel Laureate!

Are we really rational?

Yesterday morning I walked around Chestnut street off the Marina looking for a barber. My locks had grown unwieldy refused to remain in place. Like all true Indians I had tried applying coconut oil, but of course I now ended up looking like "gangu teli" instead of the brown James Dean I had always envisioned myself to be! My wife refused to put up with my smelly mop and pushed me off to get my head shorn.



So I decided to shop around a bit - being a true brown Indian I needed a bargain - no walking into the first salon i saw - and I am glad I did not. For the first one I saw said "$40 for scissors and razor cut". Like hair was cut with something also, apart from scissors? I would rather spend $40 on a nice bottle of wine or a few mugs of beer or some delicious food or better some books - but for getting my hair cut by a half man - no way!!! $40 for 15 mins of work - that's $160 an hour - close to a fresh associate's billing rate in a medium size law or consulting firm. Do people care so much about getting their mane organized? And yet people will pay. We all know Wily Billy got a $400 hair cut while in office! Good for the economy - any exchange of this sort causes GDP to increase!

I ended up paying $ 15 eventually. My Indian thirst for a bargain was quenched somewhat, but I could not get the lady on the other side to give me a discount. All that i had learnt in negotation class about BATNA and MESOs was of no use. I was reminded of comedian Russell Peters's joke about Indians and Chinese - The Indians always want a bargain - and the Chinese will never give you a bargain!

But is paying $40 of $400 for a haircut rational behaviour in a true economic sense? Why would a human pay 10 times more for a service, where the end effects are the same? My hair at the end of a $15 hair cut looks exactly the same as at the end of a $40 haircut as the end of $400 haircut. So what's rational here? Nothing - except that some misperceived sense of satisfaction that causes people to be willing to pay more even though the outcomes are the same at the end of the experience.

All this made me think of another experience where I believe awe are truly not rational - tipping. The tips that people leave are not driven by the nature of the service itself or the quality of the service in most cases - but by the value of the bill of the primary service offered. So if we drank the exactly same orange juice at a restaurant that charges $5 for a glass versus anotherthat charges $3 for a glass - we would end up paying a higher tip in the former instance. Even though there' no difference in the quality of service or the orange juice in itself. So which is rational behavour - to value the same service differently depending on different environs or to value it constantly based on the nature of the service?

The West will drive the economy out of recession.

Why must the bailout plan be passed? Because if not, then banks will be saddled with non performing assets and will not be able to lend. If they are not able to lend, then how will businesses fund their activities? How will they meet working capital needs? How will they pay their suppliers? It will take them a long while, many, many years possibly, for most affected banks to generate the capital required for them to become profitable again.

But a few questions still need to be addressed. What will the Treasury do with this assets? How will they sell the assets? What will make these assets profitable enough for these to be sold off? When will that happen? How will those profits be transferred to the tax payers? How will this bailout plan help banks and the economy specifically i.e. will banks be able to get back to business as usual? What is business as usual?

What does all this mean for the future?
Asset values will take time to recover. The housing market will rebound in two years. People in the US will continue to live off cedit and borrowings. While the Dow will not reach 14,000 yet, it will cross 13,000 by the end of 2009. Banks will grow slowly. Their loan portfolios will be more carefully managed. Compensation of executives in the financial markets will be linked more closely to performance, with a larger portion coming through variable pay. Overall economic growth will be slow.

But the position of the US as the hotbed of innovation around the world will not change. VCs and entrepreneurs still see opportunities in this country. The west will continue to drive growth. The country's universities are thriving with innovators, entrepreneurs and visionaries. As long as these young people remain foolish and brave, America will be rebounding very soon.