Chandrayaan: the opportunity cost for India's poor

Chandrayaan has just been launched. News articles, stories and much more have spoken that India is sending a satellite to moon, on a shoe-string budget. The budget may be less in comparison to global projects, but $80 million on a project that does nothing to alleviate poverty, reduce deaths, and improve living conditions of destitutes in our streets in India???

But then I'm reminded that if India has to become advanced and developed, it must achieve technological superiority in addition to other financial strenghts, so such a spacecraft mission will bring in immense research, and insight into outer life. We'll be free to analyse our own data, and should expect to benefit from this space launch.

But with inequality on the rise, poverty is becoming wide-spread, and who should not know more about it than India, which houses the most number of poor people in the world(among countries).

The graph on your left shows the income distribution among the population of the earth.

I'm still confused. What do you say?

Can we afford to spend $80 million (Rs. 3.86 billion) on improving technology, when the majority of us suffer from immense hardships?

Comments, votes, suggestions....keep them going!!

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A Commodity bubble is waiting to burst

The WSJ reviews another bubble bursting, just after the subprime one last year :

Credit markets have started to thaw, yet stocks and the larger economy keep sliding. What's going on? Among the problems are the reality of recession and the uncertainty over Barack Obama's policies. But the larger story is that the global economy is fast popping its latest monetary bubble, the one over the last 14 months in commodity prices and non-dollar currencies.

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Its origin. Not decades ago, but this started in 2007, with Ben Bernanke in the top job as Chairman of Federal Reserve :

This is Ben Bernanke's creation. The Fed chose to confront the credit crunch as if it were mainly a problem of too little liquidity, not fear of insolvency. To that end it flooded the economy with money, while taking short-term interest rates down to 2% from 5.25% in seven months. The panic only got worse, and this September's stampede finally led the Treasury and Fed to address the solvency problem by supplying public capital and numerous guarantees to the financial system.

Understanding the chart on the right :

The Fed created a commodity bubble of record proportions, with oil doing a round trip in a single year from $70 up to $147 and back down to $69 yesterday. The dollar also plunged along the way against most global currencies, notably the euro, as the bottom chart illustrates.

The worst part definitely is that oil remained high throughout the year, compelling auto-makers to make huge investments in clean/alternative technology, only to realize oil slump back to $69, and SUVs again in demand.

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Warren Buffett: Be greedy when others are fearful

When all stockowners, mutual fund managers, and hedge funds are turning to cash instead of equities, Warren Buffett takes the contrarian view and says that such a time is fit for buying oversold stocks .  His view :

Be fearful when others are greedy, and be greedy when others are fearful.

The unemployment rate may be rising, and banks faltering by the dozen, recession hitting us from all angles, but Warren Buffett seems to put it straight:

So ... I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.

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The Oracle of Omaha also makes a few points clear :

I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over...

Towards the end, Warren Buffett paints a good picture for the future:

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

Comments, Votes??

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$250 billion injection in banks is a good idea!!

Update on previous post.

Mr. Charles Schumer, a Democrat and U.S. senator from New York wholeheartedly supports the new move by Henry Paulson to inject capital into various banks in return for partial control, and says that this is "likely to be the most effective way to deal with the economic crisis."

Who better to say that than a member of the Senate finance and banking committees? Charles Schumer has written a good piece on "The Treasury secretary is now on the right track" and also mentions a few more demands like receiving senior equity positions in the respective financial institutions, hold on extravagant spendings like executive compensation and dividends among a host of other opinions. A good read...

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Uncle Sam to invest $250 billion in US banks as part of $700 billion bailout plan

U.S. Investing $250 Billion in Banks, NY Times:

The Treasury Department, in its boldest move yet, is expected to announce a plan on Tuesday to invest up to $250 billion in banks... The United States is also expected to guarantee new debt issued by banks for three years — a measure meant to encourage the banks to resume lending to one another and to customers.......

........The preferred stock that each bank will have to issue will pay special dividends, at a 5 percent interest rate that will be increased to 9 percent after five years. The government will also receive warrants worth 15 percent of the face value of the preferred stock. For instance, if the government makes a $10 billion investment, then the government will receive $1.5 billion in warrants. If the stock goes up, taxpayers will share the benefits. If the stock goes down, the warrants will be worthless......

This isn't the first time its happened. During the World War, in 1917, Washington did seize the railroads and transport so that goods, soldiers would move freely. This proved to be helpful in the smooth flow of defense requirements. As the war ended next year, railroads were restored to private ownership (they were actually returned 3 years later, and the stockholders were compensated in 1920).

Though this recapitalization of banks will prove beneficial for the whole financial system, here is what Mike "Mish" Shedlock has to say:

To stimulate lending, the bailout plan will attempt to recapitalize banks. The method of recapitalization is best described as robbing Taxpayer Pete to pay Wall Street Paul. In essence, money is taken from the poor (via taxes, printing, and weakening of the dollar) and given to the wealthy so the wealthy supposedly will have enough money to lend back (at interest) to those who have just been robbed.

What are your comments? Let out your smart opinions too......

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Thats the way the cookie crumbles!

Thanks Rajesh, Chirax and Adarsh for suggesting apt titles. I'd urge other readers to please send in more.....

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Lehman Brothers accelerates cascading failures on Wall Street

Its often said that one bad apple spoils the whole basket. Very true indeed, as it turns out that Lehman Brothers' story didn't end with just a bankruptcy. Severe repercussions are to follow :

Many investment funds and financial institutions took on insurance policies on Lehman's debt. This meant, that if Lehman were to default on its payment (which it already has), its insurers are to step in and pay approximately $600 billion in claims.

The chances of payment of such a huge sum seem grim, as these insurance products were 'Over-the-counter' products with no or little regulation. This may just prove to be the last straw for the unregulated market for CDS (Credit Default Swaps). Even if they were to pay the claims, they'll be paying billions of dollars for assets that have considerably reduced in value, and will eventually color their balance sheet red with losses.

The latest auction on Friday, 10th October, saw Lehman's bonds diminish to 8 cents on a dollar. This effectively means that 8 cents will be contributed by Lehman and the other 92 cents by various counter-parties and insurers that had placed bets against the debt of Lehman.       A paradox : High value of credit default swaps, but the low price paid by Lehman in the bond's auction mean that the other players in the financial markets (counter-parties and insurers) have billions of dollars in obligations.

Moreover, these swaps are highly intricate and private contracts between the bank and a counterparty so no regulator or clearing house keeps track of them. The real estimate of the CDS Market is therefore not known, and we can just guess the magnitude of Lehman's undoing in this financial turmoil.

Keep the comments rolling in......

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How to save the the weakening financial/banking system

Harvard Professor Greg Mankiw proposes the idea of recapitalizing the financial system :

The question for the moment is, How can we get capital back into the financial system? Ideally, it would be great if more Warren Buffetts would step up to the plate and recapitalize financial firms with private money. Unfortunately, that might not happen fast enough to prevent a major economic downturn.

And the solution :

The government can stand ready to be a silent partner to future Warren Buffetts. Here's how it works -  Whenever any financial institution attracts new private capital in an arms-length transaction, it can access an equal amount of public capital. The taxpayer would get the same terms as the private investor. The only difference is that government’s shares would be nonvoting until the government sold the shares at a later date.

I like the idea very much because it helps all 3 parties : the beleangured banks hungry for capital, private firms (like that of Warren Buffettt) seeking good investments, and safe use of taxpayers money.

Furthermore solves three problems :

The private sector rather than the government would weed out the zombie firms. The private sector rather than the government would set the price. And the private sector rather than the government would exercise corporate control.

Towards the end, Professor Mankiw also stresses Alan Greenspan's point that immigration be increased which will lead to higher demand for housing. In turn, houses will get filled up, raising the lowly house prices. Consequently subprime obligations would rise, reducing the bailout needed and providing higher skilled workers to the US .

But I don't like this last idea much because America will simply rely on other countries for their skilled workers, and shift the burden of the housing mess on these new immigrants.

What are your thoughts on the same. Keep the comments rolling in........

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Grameen Bank vs. Wall Street : Case studies in contrast

Both the Grameen Bank (of Bangladesh) and the investment banks on Wall Street give cheap loans to poor and subprime borrowers, charging high interests and pretty much a few more similarities. But what makes one successful and the other result in a banking crisis??

Salil Tripathi does a little research :

Grameen’s apparent success and the Wall Street’s cataclysmic failure are intertwined in two simple concepts: viability and transparency.....

Some may argue that there is no change of return of loan, and that increases the mortgage defaults in the US, but this doesn't apply to lendings from Grameen Bank due to :

Moral peer pressure compels the borrower to continue repaying his debt; the possibility of rolling over debt, or swapping credit cards, simply does not exist. That makes the loans viable, but they are relatively risk-free.

And contrasted with the American model:

Subprime lending for housing is different. People whose income levels are so low that it might take them decades, if ever, to buy even a modest home, are shown tantalizing images of neat, cookie-cutter houses in a new development in the farther reaches of suburbs. Sometimes, the borrower doesn't even need not provide proof of income.

And moreover, the founder of Grameen Bank, Mohammad Yunus gets a Nobel Peace Prize but the CEOs of the investment banks and other institutions get sacked from their jobs! Truly a contrast... What are your comments for the same? Do post your smart opinions too!!

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