Desicritics Category: BizTech: Economics

Swiss Bank Accounts

Blokesablogin — Wed, 12 Nov 2008 09:57:02 EST

This small article in the Washington Post brings yet another angle to the economic crisis that the US is facing. Hopefully, part of the money salvaged from these accounts can reduce the bailout money put up by taxpayers.

According to Transparency International, an anti-corruption agency, the estimated value of Indian individuals' worth of "funds" stashed away in Swiss Banks are to the tune of over $ Trillion. It is not surprising that the poor and rich divide has increased in the past few decades.

Reading these articles makes me wonder what anyone can DO with these "ill gotten" wealth? We all have an expiration date invisibly stamped on us. So, we cannot carry any material wealth along with us. The Reliance story is one of many that shows how money, left behind, creates schisms amongst the most cordial of relations.

Why, then, the insecurity of wanting to stash funds away for whatever purpose? Like the story of Tolstoy reminds us, at the end of the day, all we need is 6 feet of land (not even that if you are cremated!).

I sincerely hope that people who have these mysterious accounts put that money in circulation. If auction houses like Christie's existence are to be validated, many of these account holders use grand sums to buy art and such that have very little value in the "real" world and are "dead" investments. A vacation, on the other hand, would help support the tourism business including travel, stay, food and other activities.

Sometimes, when I see the pro-rich agendas of law and policies, I wonder if it is not a bad idea to ensure the demise of the poor by starving them or working them to death and the few remaining rich can have the earth to themselves- It sounds like a good plan. A perfect epilogue to the small-scale genocides we are reading about world-wide. And someone like me will not be there to write such a blog either!

Ending Coercive Land Acquisition - Creating Options

Somik Raha — Sun, 9 Nov 2008 05:37:45 EST

The reaction by India's industrial titans to the Singur crisis has been unanimous. Big guns like Mukesh Ambani, Narayana Murthy, Azim Premji and others have supported the Tatas and warned that the state would become a desert for investment if the Tatas had to leave, which is now a reality. Even the Prince of Calcutta, Sourav Ganguly, has supported the Tatas. Mamta Banerjee seemed to be the lone voice in support of the farmers whose land had been acquired forcefully without adequate compensation. People have called her stupid and an enemy of the state. Her own party supporters have voiced their disagreement with her opposition. In this backdrop, I am going to take on the perilous task of finding logic in her stubborn stance and also to suggest a long term solution for the future. I ask the reader to bear with me and let me explain my position.

Not our problem alone

Land acquisition issues are by no means limited to India. In the United States, there exists a law called "Eminent Domain," which in plain speak says that Uncle Sam can throw you out of your property if it sees a public good that requires the use of your land. Imagine this: a Civil Engineer (from a reputed university) contracted by the government to come up with the most optimal road plan figures out that such a road would need to pass through your grandmother’s house. The authorities send her a notice that she will be paid a certain amount, which would probably be a little lower than the market price. She refuses. Even after the compensation is hiked some more, she refuses. The authorities invoke Eminent Domain and send the cops to throw her out. As the cops arrive, the poor old lady holds on to whatever she can to prevent being dragged away, all the while crying out that this is where she has all her memories, this is where she lived with her husband until he passed away, and this is where she wants to die. She wants to be left alone. But that cannot be allowed, and the official tells her, "Ma'am, you don’t understand. The most optimal road goes through your house, and therefore, for public good, we must have it." And her cries go in vain (unless civil rights groups get into the game and sue the government for doing this). This story plays out in every society in the world (see box 1, box 2).

People all over the world are generally nice and compassionate, and most people feel bad about a story like this, but they ask desperately, "What alternative do we have for building YOUR-FAVORITE-PUBLIC-GOOD?" There is an alternative that ought to be taught in high schools for its utter simplicity. It has to be understood that the only legal power of a government is the power of coercion. And every single time coercion is used for public good, it has unintended consequences. Note all the controversies of land acquisition that have come to light, from the Narmada Dam project in the West, NanoCity in the North, Singur in the East and now Reliance might make the same mistake in Maharashtra. In India, the police knows no better than to use their guns on protesting people, often killing many. The legal costs rise and big businesses get discouraged by the reaction. In the United States, as business after business got stung by the backlash to eminent domain, a path-breaking and simple alternative emerged.

Create Options

This alternative has its roots in one of the most powerful insights that the wise have shared about decision making: you can always create OPTIONS. Taking this insight literally, let us try creating options for land acquisition (not the unrealistic't know a financial meltdown until the train hit them but the decision analytic variety whose math is simple enough to be understood by an English major with a minor effort). Let’s say Reliance plans an oil pipeline that needs contiguous areas of land. If any one of the landowners in the path of the pipeline hold out, the project will not take off, leaving Reliance with several non-contiguous pieces of land and a large hole in their pocket. In an alternative scenario, instead of buying any plot of land, Reliance could choose to buy an option from the landowner. The option will give Reliance the right to buy the land at the prevailing market (or agreed upon) price within a period of three years (for instance). This option can be valued easily using simple decision analysis tools and would be an order of magnitude cheaper than acquiring the land itself. Reliance could then plan multiple pipeline routes and try to acquire options on each of the routes. The moment they have all the options on a particular route, they can exercise the options on that route and acquire all the contiguous pieces of land.

There are several benefits to this approach. First, as Reliance is a private party, they are not required to reveal the purpose of the acquisition. They can send out agents who don't even need to reveal that Reliance is behind the acquisition. The government, on the other hand, is required to reveal the purpose of their acquisition, resulting in landowners realizing that they can make a lot of money if they hold out. The cost of acquisition will now be based on a good deal between the private party and the landowner. Second, as exercising the option is a legal right, there is no necessity for state coercion on the individual landowner. If someone holds out even after selling an option, that will be considered contractual fraud, and we have a legal framework in place to deal with that. The government no longer needs to deal with mass protests, the police no longer needs to open fire on hostile crowds, and entrepreneurs no longer need to sink large sums of money in legal costs. Third, if some people (tribals/farmers/middle class people) have a strong connection to their land and don’t want to leave it, all they have to do is not sell the option to their land. There should be no legal authority on the part of the government or the industry to force them to do so, and any forcible or fraudulent activity on the part of the entrepreneur would be subject to our existing legal framework that prohibits fraud and coercion. Human rights organizations can shift their focus from protesting to educating the tribals/farmers, while respecting the choice of these communities to accept or reject the education.

Creating options is not a new idea, and you have likely already used it in your life. We shall define an option as "the right to a future decision." A little consideration should reveal that insurance is a very good example of an option, where you buy the right to a lower medical expense should an emergency arise. The price of the option here would be the insurance premium you need to pay each year, which is a fraction of the coverage cost that the insurance company is legally obligated to pay should the situation arise. If you have played in the stock market, then you might be familiar with "call/put options" which is the right to buy/sell a stock at a predetermined price.

Who's Doing Non-coercive Acquisitions with/without options?

If this method is so simple, why hasn’t it been tried already for land acquisition? Strange as it may sound, this has been tried – it just hasn’t been spoken about as most private firms don’t want to talk about their land acquisition strategy. I’ve heard from a reputed professor at Stanford that Disney used options to acquire most of the land they needed for their theme park at Anaheim, California, after which people got wise to the purpose behind the acquisition and hiked up the selling price. Even then, Disney saved a fortune in legal fees by using this method. (For other companies in the US, see Box 2)

The intelligent reader may point out that what works in the United States may not necessarily work in India. To which I wonder what is so special about the Indian DNA that it would not like to save lives and lower costs when it could. In any case, options has been in use in India for a long time, without us explicitly recognizing it. If you've tried buying land in India, chances are you've been asked to pay a "roka" as North Indians would call it. The "roka" is an advance that a buyer would pay a seller after which the seller would stop showing the land to others. The "roka" is an option, a right to buy the land within a specified time. "Roka" options are quite common in the real-estate market and are probably referred to with different words in different parts of the country.

Finally, I have anecdotal evidence that after Larsen & Toubro (L&T) had completed acquiring land for the third Howrah Bridge in (hold your breath) West Bengal, neighboring land owners who had been skipped were upset at missing the pie, and begged L&T to consider buying their land too. It seems that landowners in West Bengal also like good deals, like landowners anywhere else.

Challenges

There are some legitimate challenges to applying this solution, especially in places like West Bengal. The business climate in the state is highly interventionist, with entrepreneurs unable to operate without the blessings of the prevailing local political party. In such a situation, talking about free markets is a travesty. The current government needs to realize that it cannot replace coercive prevention of industry by coercive adoption of it. It needs to start with the fundamentals and shrink to a minimal form of government. But then, what will happen to the party ranks? Instead of employing cadre into what amounts to an organized land mafia, they can be encouraged to become social entrepreneurs who combine the best of capitalism (freedom) and communism (caring for the community) while leaving the worst out (greed and coercion respectively). While this might take some time, a first step for India would be people from all walks of life coming together to demand the revoking of Article 300-A so that no government has the right to take away private property through any argument of public good. In today's society, we should realize that governments claim almost any economic activity as a public good, and eminent domain laws become a vehicle for individual abuse.

While economists would welcome the strengthening of property rights, they may raise several objections to entirely scrapping Eminent Domain laws in India. First, they will point out that there are "actual public goods" that a government must provide (e.g. roads, wildlife reserves, forested lands). How is the government to do so without laws that resemble eminent domain? Second, private parties cannot freely purchase agricultural land in India. We would need laws that allowed for land use changes, and we still need to consider if such a change is in public interest. Third, individuals sitting on vast natural resources ought not to have the right to refuse their commercialization - this is an argument for eminent domain laws. Fourth, there are thousands of land holders who have title to a small amount of land. This makes it infeasible for private parties to negotiate with so many, hence, the government is a good intermediary. Finally, you would need a sophisticated buyer and seller to be able to use options.

Lets take these arguments one by one. First, it is a 20th century idea that governments are responsible for public goods. There is ample evidence of societies that did fine in the past without government intervention in every sphere of life. As evidence in our present time, look at all the public goods in India and you will find those are the services that are most lacking in creativity and innovation. In the United States as well, the government builds roads as a public good. This is one sector which has seen so little innovation that you now have cars that are built to touch 200 miles per hour and roads that can only handle 65 miles per hour. Think about all the private toll roads you've been on in India and compare them to the government maintained roads, and the difference should immediately be apparent to you. India is full of examples of social entrepreneurs who have given up on the government's ability to provide public goods and provided solutions themselves, either as a for-profit or as a non-profit. Sulabh International builds public toilets(shauchalayas) that are financially sustainable and pay for their construction cost quickly, while generating employment. See Box 3 and Box 4 for further examples. Second, I agree that private parties should be allowed to freely purchase agricultural land and the land owner should have the right to decide how the land should be used. If the current land owner feels it is important that the land use should not be changed, this can be specified in a contract at the time of sale. The argument is often made that good agricultural land should not be used for non-agricultural purposes. If we truly believe that, then we should immediately proceed to demolish all the government (and other) buildings in Kolkata, which has some of the best agricultural soil you could find being on the banks of the Ganga. Third, it is possible to grant an individual the right to their property while one could also construct rights for what lies below the property and separate the two. Once this is done, there is an incentive for entrepreneurs to find ways to drill for oil or a similar natural resource without disturbing the landowner who is at the surface. Fourth, the argument of "too many land owners" is a terrible one, as the government does no better, and arguably worse, than a private negotiator. In fact, a private negotiator would not have the advantage of guns and would have to be polite and stay within legal boundaries. Perhaps, this is an area where an entrepreneur could provide negotiation consulting services. Finally, the argument of sophisticated buyer and seller is an argument for education, although the Indian market is already using "roka" options without doing sophisticated decision analysis. Companies that need help modeling options can hire decision consultants just like they hire tax consultants. I admit that companies will have an advantage in pricing methodology over individual landowners. However, this is a good reason for the creation of a friendly social venture that offers pricing services to individual land owners. On the topic of decision education in India, there is much that needs to be done. (See Box 5)

Philosophical, Economic and Traditional Reasons

Options should be used for both philosophical and economic reasons.

Philosophically, even if everyone around me says that murder and theft is the best way to get what I want, I refuse to do it, and I will argue that India, with its deep spiritual tradition of acceptance of all religions, systems and ideas, should stand firmly behind non-coercion. Just as the tool of coercive land acquisition is the use of a police force with guns, the tool of smart non-coercive land acquisition is options. Economically, let us be clear that while using options has lowered the cost of land acquisition for many, the method itself is not going to guarantee that industrialists will get the land they want, which is no different from the case of using coercion as we have just seen the Tatas getting thwarted even with government support. If both methods cannot guarantee success, and the coercive one consistently creates more headaches, takes lives and increases costs, then we ought to throw our weight behind the non-coercive methods.

Finally, traditionalists might point out that in the Indian tradition, the individual must sacrifice for the family, the family for the community, the community for the state and the state for the world (a maxim approved by Sri Krishna). While this is a noble spiritual idea, it is not what is followed today. On the other hand, a more accurate maxim for the practice of the modern day is, "the individual must be coerced to sacrifice for the family, the family for the community, the community for the state for the world." Every spiritual tradition in India recognizes a supreme internal freedom asks its followers to acknowledge and become aware of it. It is but natural that India lead the world in giving expression to this internal freedom in our external environment. We can start by recognizing that individual sacrifice is a decision to be made only by the individual, and coercion has no place in a society that wants to call itself free.

Almost every country in the world has a legal mechanism that resembles Eminent Domain laws. In the United Kingdom, New Zealand and Ireland, these laws are referred to as "Compulsory Purchase," while Canada and South Africa call it "Expropriation." India used to consider right to property as a fundamental right under Article 19(1)(f). This meant that your land could not be taken away except under the Land Acquisition Act of 1894, or a similar state law, which allows the use of forcibly acquired land by the Government "in the interests of the general public or for the protection of the interests of any Scheduled Tribe". The Land Acquisition Act of 1894 empowered the Central and the State Governments to acquire lands that they felt was necessary for a "public purpose". Public purpose was defined so broadly that even land use by state-owned corporations was included, thus turning this law into an all-powerful mechanism for the British. While this British baggage continues to this day, in 1978, the right to property was shifted out of fundamental rights so as to make it harder to challenge land acquisitions by the government, and Article 300-A was introduced which said that "no person will be deprived of his property save by authority of law." In other words, the state/central government can take your land away if Parliament or State Legislatures make a legislation/order/rule to do so, in exchange for compensation determined under the Land Acquisition Act by the Collector. You can challenge the action of the government in a court if you think the government has acted unfairly, and in most countries (except authoritarian ones like China), this leads to protracted legal battles, civil rights headaches for the government and spiraling legal costs for the industry involved. The Land Acquisition Amendment Bill (2007) is an effort to reform the 1894 law, but how much band-aid can one put on a gaping wound? Senior Advocate Bishwajit Bhattacharyya recently outlined in the Statesman (Oct 29, 2008) how even passing a law under Article 300-A has been successfully challenged in court. How many people have the resources to take on the government when their rights are violated?

At this time, the United States probably has the worst eminent domain laws on the planet. In 2005, a controversial Supreme Court ruling upheld (by a 5-4 vote) the government's use of eminent domain powers to take private property from one owner and transfer it to another owner under the pretext of economic development. This ruling was criticized publicly by many noted people, including Bill Clinton. Justice Sandra Day O'Connor, who voted against the law in the famed Kelo v. City of New London case, warned that this new addition would "wash out any distinction between private and public use of property." For the first time in US history, governments could use eminent domain powers to declare ordinary private use of property as a "public use." In a report by the Castle Coalition (a network of homeowners and activists in the US determined to stop the abuse of eminent domain), there have been more than 5,000 instances of abuse since the Kelo decision. This figure includes cases where private property owners have threatened the use of eminent domain on reluctant sellers to agree to their price or risk having their property taken away by force. This situation is quite comparable to India where the government acquires lands for private parties under the argument of "economic development."

The report also goes on to debunk the myth that eminent domain laws are needed for economic development by citing several projects that did not use eminent domain. Walt Disney's construction of Disney World, The Rouse Company's construction of a new city in Howard County, Maryland and Focus Property Group's creation of a 3000-acre community called Mountain's Edge are some of the examples. Disney World is particularly interesting to us as they used options quite heavily. Further Reading: http://www.castlecoalition.org

Box 3: Social Entrepreneurs in India, a powerful force for public good
Arvind Eye Hospitals in Madurai (and other cities in South India) treats patients who cannot pay; free of cost and make up their money from people who can. Exnora in Chennai (and now several other cities) has created a system of garbage cleaning where an erstwhile scavenger now collects garbage from each home and dumps it in the proper place, for a fee. LaserSoft Info Systems in Chennai employs "disabled" people and puts them to work in the field of banking software. The Sangini Mahila Seva Cooperative Society is for, of and by sex workers in Kamathipura, Mumbai's oldest red-light district, where sex workers gain access to banking services and rise out of destitution. A similar and older initiative has been quite successful in Kolkata's Sonargachi district. The popular Lijjat Papad is made by a social venture, Shri Mahila Griha Udyog, founded by Sarvodaya members. This is an organization focused on creating a dignified work environment for women in a decentralized manner, and its success should inform case studies in any serious business school. Most Indians are familiar with "utterly, butterly delicious" Amul butter. Amul stands for Anand Milk Union Limited, a social venture inspired by Sardar Vallabhai Patel, which is privately run as a cooperative to give milk farmers a good deal and provide high quality milk products to society. Anandwan is a social venture in Maharashtra founded by the late Baba Amte, and run as a self-sufficient rehabilitation center for people afflicted with leprosy. Anandwan has incorporated environment-friendly processes into the local lifestyle without your tax money.

Box 4: Environmental Social Entrepreneurship in the US
The Nature Conservancy (http://www.nature.org/) is a US charitable institution that acquires forested land using existing land acquisition laws as a private party in order to conserve it. Aimed at preserving bio-diversity, this organization has been voted as one of the most trusted national organizations in the US in online polls. Their work has led to the creation of several national parks. The Proactive Carnivore Conservation Fund is a private initiative by an organization called Defenders of Wildlife that finds innovative solutions to prevent people from killing wildlife (such as compensating farmers for the livestock they lose to wolves in return for sparing the wolf's life). The Property and Environment Research Center has an instructive article by the founder of this project, Hank Fischer, at http://www.perc.org/articles/article319.php

Box 5: Decision Education
It is a pity that most business schools in India either skip Decision Analysis or teach it as "Decision Tree Analysis," which is like stripping all the philosophy from yoga and teaching it as a bunch of stretching exercises. There is only minimal benefit in doing so. This is not just a problem in India but also in the United States (as you can see from the massive financial crisis). What is even more pitiable is that people need to wait till they get to a university (there are only a few that teach this as a philosophy) to learn good decision making. To remedy this, the Decision Education Foundation (www.decisioneducation.org) teaches high school children the basics of good decision making. Perhaps it is time to start a chapter of the foundation in India.

Here is a very brief introduction to the philosophical foundation of decision analysis (DA). DA does NOT help you predict the future or maximize the chance of the best outcome. For that, you are better off going to an Indian astrologer or a financial engineer (though I wouldn't trust the financial engineer - I recommend the book "The Black Swan" for people who call themselves statisticians or financial engineers). DA is an amoral method that helps you stay consistent with your preferences, information and alternatives. DA disabuses you of the notion of "objective decision making," making it clear that you can only judge the quality of your decision, not someone else's. Even more fundamentally, the quality of your decision must be judged before the outcome, as you cannot judge a decision from the outcome. If you knew the outcome, you wouldn't have a decision to make. Another fundamental tenet is the principle of sunk cost - the past matters only for learning, not for accounting.

Chandrayaan-I: Money Down the Drain or Time to Celebrate?

B Shantanu — Wed, 22 Oct 2008 12:56:56 EDT

A few hours ago, ISRO put “Chandrayaan-I” into transfer orbit around the earth, heralding its “Mission to Moon”.

This is a proud moment for the team at ISRO working tirelessly for the last several months, sometimes right through the night.

It is also be a proud moment for India’s indigenous space research programme and more broadly, India’s indigenous R&D efforts - the seeds of which were planted barely a few decades ago.

But questions are being asked…and doubts are being raised.

“Was this the best use of the country’s limited resources?”, “What will this mission really achieve?”, “Will it have any impact on the problems that we are facing today e.g. poverty, hunger, malnutrition?”

At a fundamental level, such questions assume that this is a zero-sum game and there is a constraint on funds for developmental projects. I do not agree with that…India’s main developmental challenge is inefficient (I would even go to the extreme of saying extremely inefficient) utilisation of resources rather than lack of funds.

Having said that, the answer to these questions is neither simple nor straightforward.

While the launch will cost money (although relatively speaking it will be a small amount: Rs 386 cr./~$80m), the benefits are more difficult to compute. How do you put a value on India’s credibility and prowess in R&D research? How do you put a value on the indirect gains that will accrue (in terms of geo-politics)?

How can you quantify the benefits and the advantages of being at the vanguard of space research and exploration? and how can you emphasize the importance of R&D and activities targeted at the next decade?

Many would remember that the same - and similar - questions were asked of ISRO’s focus on remote sensing satellites in the past two decades… The question - and the “answer” - was eloquently articulated in this article in the New Scientist:

But why is India, a country that still has so many development problems on the ground, aiming for the heavens? To Indian scientists, the question is not only patronizing of their scientific aspirations, it betrays an ignorance of the Indian space program’s greater purpose and successes against the odds….

Take, for example, India’s six remote-sensing satellites — the largest such constellation in the world. These monitor the country’s land and coastal waters so that scientists can advise rural communities on the location of aquifers and where to find watercourses, suggest to fishermen when to set sail for the best catch, and warn coastal communities of imminent storms. India’s seven communication satellites, the biggest civilian system in the Asia-Pacific region, now reach some of the remotest corners of the country, providing television coverage to 90% of the population. The system is also being used to extend remote health-care services and education to the rural poor.

In addition…

The “super-cyclone” that hit India’s eastern coast on Oct 29, 1999, could have killed thousands but for an INSAT satellite that tracked its course every half hour identifying areas that needed to be evacuated.

What does ISRO have to say about the benefits of the Mission to Moon? In their own words:

The Study Report of the Task Team was discussed in April 2003 by a peer group of about 100 eminent Indian scientists…After detailed discussions, it was unanimously recommended that India should undertake the Mission to Moon, particularly in view of the renowned international interest on moon with several exciting missions planned for the new millennium.

In addition, such a mission will provide the needed thrust to basic science and engineering research in the country including new challenges to ISRO to go beyond the geostationary orbit.

Further, such a project will also help bringing in young talents to the arena of fundamental research. The Academia, in particular, the university scientists would also find participation in such a project intellectually rewarding.

Needless to say, “If you want to do space exploration, the Moon is where you have to start.”

Asked about the relevance of the Mission to Moon for a “poor nation” like India, G Madhavan Nair had this to say in a recent interview:

How do you handle criticism from a section of the people that a poor nation like India shouldn’t be wasting money on projects like Chandrayaan?

We have faced this question in the early phase of the programme. We are convinced that we are doing more service to the society than the money spent on the programme. But to doubly assure ourselves, we asked a school of economics in Chennai a couple of years back to make an assessment. The report they submitted was really mind-boggling. They found that what we have given back to the society in terms of products and services is something like one and half times more than the cumulative investment made on the entire space programme. Leave alone the infrastructure, the technology, the human resources and the various laboratories we have developed, if we add all that it is certainly more than five times spent on the programme.

Plus there are clear commercial gains.ISRO already has a subsidiary called Antrix (from “Antariksha” = space) which provides services for commercial launch of satellites and payloads into orbit. These services leverage ISRO’s “frugal engineering” to provide a compelling cost advantage in the market for satellite launch services. Last year’s Antrix’s turnover was shy of $240m on which it made a profit of ~ $35m. Chandrayaan itself is carrying 6 payloads for other agencies which would explore the lunar surface over the next two years.

A successful launch will help further commercialisation of these services and add to our credibility. It will increase our launch and space mission capabilities and help us play a prominent role in international negotiations and strategic discussions on space related matters. It would also help ISRO recruit talented engineers and scientists.

There may also be spin-off benefits in related areas of defence research (e.g in development of ICBM capabilities). Besides the cost of the Mission (of ~$80m) is only a fraction of ISRO’s annual budget, is spread over mutliple years and some of the investment is in facilities that will be re-used for other services and launches (e.g. the Indian Deep Space Network at Byalalu, near Bangalore, established at a cost of $20m - which will also serve future satellites). And all this is done within an annual budget that is less than a tenth of NASA’s (according to this report, in 2006, ISRO’s annual budget was less than 3% of NASA!).

All in all, the Mission to Moon gives great bang-for-the buck.

Yes, it would not directly put food in hungry mouths…yes, it would not directly put any money in the pockets of the impoverished…but the gains that accrue have a huge geo-strategic significance and will help India’s ascendancy on the world stage – not to mention providing a booster shot to indigenous R&D efforts.

We would do well to cheer it.

From the Rig Veda:

“O Moon! We should be able to know you through our intellect. You enlighten us through the right path.” Today, Chandrayaan has set out on this right path.

त्वम सोम पर चिकितॊ मनीषा, त्वम रजिष्ठमनु नॆषि पन्थाम ॥

Tvam Soma para chikito manisha. Tvam rajishtamanu neshi panthaam. Rig Veda (Hymn 91)

For the more curious amongst you, here is the link to the home page of the Mission, link to FAQs and an informative booklet [~700k pdf file]. There is even a YouTube video on the Mission (I don’t think it is by ISRO though)!

To close, here is an uplifting extract from Newsweek on how India’s vision might just show the way for mankind’s next giant leap:

India’s investment in Earth observation satellites over the years comes to only about $500 million per satellite, about a tenth of the cost of its Western counterparts. After introducing a satellite service to locate potential fish zones and broadcasting the sites over All India Radio, ISRO helped coastal fishermen double the size of their catch. For the government’s Rajiv Gandhi National Drinking Water Mission, begun in 1986, satellites have improved the success rate of government well-drilling projects by 50 to 80 percent, saving $100 million to $175 million. Meteorological satellites have improved the government’s ability to predict the all-important Indian monsoon, which can influence India’s gross domestic product by 2 to 5 percent.

Next, ISRO plans to roll out satellite-enabled services to hundreds of millions of farmers in India’s remote villages. In partnership with NGOs and government bodies, it has helped to set up about 400 Village Resource Centers so far. Each provides connections to dozens of villages for Internet-based services such as access to commodities pricing information, agricultural advice from crop experts and land records. ISRO’s remote-sensing data will also help village councils develop watersheds and irrigation projects, establish accurate land records and plan new roads connecting their villages with civilization as cheaply and efficiently as possible. One ISRO partner—the M.S. Swaminathan Research Foundation—has used satellites to conduct 78,000 training programs for more than 300,000 farmers in 550 villages, teaching them about farming practices like drip-and-sprinkle irrigation, health-care awareness programs for diseases like malaria and tuberculosis, and information about how to access government services. Using satellites to guide reclamation of 2 million hectares of saline and alkaline wastelands is expected to generate income of more than $500 million a year.

…and here is a great account of how far we have come in 45 years:

The launch of a US-made Nike-Apache Sounding Rocket from Thumba, near Thiruvananthapuram, on Nov 21, 1963, marked the beginning of India’s space odyssey…

…Recalling the incident, R. Aravamudan, who has been associated with the Indian space programme from the very beginning, says: “There were no buildings yet in the range (Thumba Equatorial Rocket Launching Station -TERLS). Our first office was in the bishop’s house and the St. Mary Magdalene church building there.”

“Once the rocket was launched, there was no telemetry or radar tracking, only photography from three stations of the vapour cloud. The orange vapour trail was visible from all over Kerala and parts of Tamil Nadu. This created great excitement. Since the common public had never seen such a sight before, it also gave rise to some hilarious newspaper reports.”

…”We had to make use of public transport as there were no official vehicles yet and no canteen. So, our day began with a quick breakfast of idli sambar at the Railway Station Canteen, which was the only place where we could get food to our taste.

We would then pack some snacks and lunch from the same canteen and go to the bus stand to catch a mofussil bus to Kazhakkutam. We would get down at the bus stand there and walk about a kilometre or so to the range. The whole trip took about an hour.

“The range (TERLS) was quite large in area and the only means of transport within the range was by bicycle. Those like (A.P.J. Abdul) Kalam, who could not cycle, had to hitch rides with others.”

*Somewhat* Related Post: Of Vimanas and Time Travel

Recommended Reading: G Madhavan Nair’s interview in Outlook.

Bubbles and The Current Financial Crisis

Ravi Kulkarni — Tue, 21 Oct 2008 14:36:55 EDT

"Bubbles! Bubbles!... My bubbles!"
-a cartoon character from Finding Nemo

Is there an end to the current financial bloodbath that is plaguing the world markets? Like a recursive nightmare, you wake up from one nightmare to find yourself in the middle of another. I am still in the middle of my productive career, and I don't find it amusing that my life savings go down 5% everyday. I just can't imagine what it must be for those who are staring retirement in the face or who have already retired. The only light I see at the end of the tunnel is the proverbial headlight of an approaching express train.

Folding banks, closing auto dealerships, collapsing companies, massive layoffs, government defaults; the looming specter is stunning. Many pundits are saying that this will be a mild recession and we should be back on track in a couple of years. In particular let me quote the following:

'Standard & Poor's chief economist David Wyss expects a mild recession that ends next spring. "Gradually we will regain confidence in the market. Lower oil prices and a falling trade deficit will help," he says. "This is a financial panic, not an economic one." '

I don't know what weeds these people are smoking. A lot more bad news awaits us. What we are seeing today is a result of 60 years of unbridled growth and reckless spending. The dominoes are falling and there is no telling when or where they will stop. They blame it on many factors: corporate greed, extreme leverage, wall street excesses, mortgage crisis and so on.

I remember reading this article by S Gurumurthy of RSS. Though the article itself has been ridiculed by the economists and intellectuals in various forums, and there are some factual errors in the numbers quoted, I felt there was an element of truth in it. This article was written in 2002 or thereabouts. Common sense tells me that I can not continue to spend more than I have. A day will come when the bill collectors come calling. This is true for individuals and also true for institutions. But there is a white elephant in the room everyone seems intent on ignoring.

I laughed out loud when President Bush doled out money to people as a stimulus package. The trouble with the economy was not that people were not spending enough; it was that people have spent way too much and they can no longer finance their profligate ways. During the last several years rate of personal savings by Americans has turned negative. The so-called stimulus package only inflated various bubbles a little more. Besides it encouraged people to be even more reckless with their money.

Since the 1940s, America has managed to build a huge economy based on consumer spending. It starts with how money is created (primarily through bank lending, see here). Every time someone borrows money (say to pay for a new car), the system creates a little bubble and new money is injected into the system. This money is supposed to be taken out at a later stage when the loan is paid off, but people keep spending money all the time so the money is never really destroyed except during serious economic contractions. This is not specific to the US economy, most of the modern economies have grown in this way.

This bubble creates other bubbles. Consider this: when there is more economic activity, the governments have more tax revenue and therefore bigger budgets. The current political wisdom tells us that the money should be spent immediately on populist and not-so populist schemes such as the earmarks. After all, one must get elected again in a few years. Once a particular expense head has been created by a government, it seldom goes away. Many economists argue that deficit financing is good for the economy. Wars and natural disasters have contributed by further expanding the budgets. Among certain quarters, there is almost a macabre glee whenever natural disaster such as an earthquake or a hurricane hits.

Without intervention this unstable system will seek some stability through cyclical economic downturns and many of the bubbles will gradually deflate. There have been downturns in the American economy, such as the recession of 80s and 90s, hyper inflation of 70s, stock market crash of 1987 and dotcom crash of 2000. Every time the government intervention has been short sighted with no attention paid to long term consequences of these actions. None of these events convinced the political leaders, financial leaders and individuals that they must spend less than they have or else...

If you remember the dotcom bubble of the 1990s, many people believed that the stock market will never go down. Ditto with housing markets of early 2000s. Similarly for too long, investors all over the world have nursed a belief that dollar is a safe haven and Americans will never default. This has caused them to send money to America in unrealistically large amounts of money through real estate investments, government bonds and lately purchases of assets of large financial institutions. This has significantly contributed to the financial bubble.

To keep this bubble inflated, governments and institutions have to spend more money and foreigners have to keep pouring their savings into American economy. To encourage these events, the lowest pillar that is bearing the weight of all these bubbles, our friend Joe, must keep spending. The trouble is that Joe can't spend any more money because his account is overdrawn. Nobody is willing to lend him either.

The credit crisis is a sign that people have understood the true nature of our economy. Money in my pocket is better than money in yours. Nobody trusts the bogus credit ratings of individuals and institutions anymore. At some level one can blame the banks for lending to one and all, but the blame must be shared by everyone; legislators for not providing enough oversight; bankers for not ensuring the borrowers have capacity to repay; borrowers for being greedy.

Americans have a total debt of about 120% of the GDP. The companies collectively have a debt of 160% of the GDP. Total American debt reached 53 Trillion dollars. That's about $176,000 of debt for each resident of the country. People and institutions have leveraged way beyond their means to pay back. To paraphrase Nouriel Roubini, now "the housing bubble, the mortgage bubble, the equity bubble, the bond bubble, the credit bubble, the commodity bubble, the private equity bubble, the hedge funds bubble are all now bursting at once in the biggest real sector and financial sector deleveraging since the Great Depression".

The casino culture has taken over the American financial markets. Short selling of stocks is the most obvious and glaring example of the gambling that savvy stock market players indulge in. There is also the futures market for commodities. For example the much maligned speculators who have presumably driven up the price of oil and other commodities. In the 1990s new instruments of financial trade called derivatives were created. These are the CDOs, the CDSs and many others from the alphabet soup, which Warren Buffet famously called financial instruments of mass destruction. That bubble is now worth 55 Trillion dollars. To put it in perspective, it is more than the annual gross product of the entire world. This is nothing but suicidal gambling by large financial institutions hedge funds, and wealthy individuals with no added benefit to the society at large. This is another bubble that is waiting to burst and who knows what happens then.

If my hypothesis about the economy is correct, then there are three ways this crisis will resolve itself. Firstly the obvious one, in which there will be a catastrophic crash of markets and institutions all over the world. This will be too chaotic for anyone to predict the sequence of events accurately. The consequences are too horrific even to contemplate, but humanity will survive. It may take a decade or two to recover to some semblance of normalcy.

Second way is that the current patchwork of interventions will work and somehow the world markets will be stabilize. However, I think this only be temporary and we will come back to the same situation sooner or later, perhaps with a bigger bubble, because we not really addressing the underlying causes.

Third way is when our leaders act responsibly, the markets respond in a sane manner and people correct their ways. Government will stop wasteful spending, wall street will stop being greedy and people will start saving more responsibly for their retirement and their children's education. If by some miracle this sequence of events comes to pass, then it will still take a couple of decades for us to come back to stability. The reasons are obvious, the the bubbles are simply too large and they can't be deflated in a short time. However the likelihood of this happening are extremely remote. Consider:

Law makers are short sighted and often ignorant
Government likes to keep borrowing to spend even more money and has zero credibility with the main street having spent all of its political capital waging pointless wars
Washington is full of wested interests, but none protecting Joe's interests
Wall Street has a short memory and within a few years it will retrace the history
Regulators have no credibility as they are either corrupt or ideological but almost never right

This problem is not unique to America. I am only using her example because I have lived here for the last 8 years or so and seen what is happening first hand. I am sure similar things are happening in many other countries as well.

The situation is rather bleak, but people change only when there are catastrophic events that overtake them, or a JFKesque leader guides them. Is Obama the JFK of our generation? I sincerely hope so, but I am very skeptical.

What are the lessons for India in this crisis? Unfortunately I don't believe India will escape it unscathed. The only silver lining is that India is not yet that highly leveraged that it will suffer as deeply as the US. However, India is following the path that US took in the '50s and '60s. We can yet avoid it by ensuring that the truly important issues are addressed and never compromised in the name of capitalism. These issues are, savings for retirement, ensuring universal health care and providing good education to all those who want it. Most importantly we should not build our future on bubbles.

Pakistan's "Macabre" Economics vs. Micawber's Economics

Desh — Mon, 13 Oct 2008 13:25:42 EDT

Ali Khan recalled: "General Beg called me for a cup of tea. He said, 'Don't you realize we are on the brink of economic collapse? I can change that by selling what we are good at. I can offer this country a lot. Six, eight, ten billion dollars.' I laughed. I said, 'You can't be serious.' The general said, 'I am very serious.' He then mentioned selling our bombs to Iran. He said, 'Nisar you can argue with me but that's not your job. You tell Nawaz Sharif that this is a good idea. It's the prime minister's position to decide.'
[ Deception: Pakistan, the United States and the Secret Trade in Nuclear Weapons by Adrian Levy]

It was 1988. The US was leaving Afghanistan and dollars were drying up quickly. Pakistan had almost completed the Nuclear acquisition and perfected the technology. With nothing much to export, General Aslam Beg now had set his sights on what was Pakistan's greatest achievement hitherto - the Nukes.

Iran did not however get the Nukes directly though - because it was after all a radical Shia regime (it did get the P1 and P2 class reactor technology subsequently).

The beneficiary and the payer became Saudi Arabia. It could not bother with the technology, so to arm their Chinese CSS-II missiles, Pakistan gave them what was required and saved the country from economic collapse.

Aid was Pakistan's "monetary and fiscal policy". When it was absent, then it was Nuke and military sales.

THAT is the reason why the Army has never let a democratic government last in that country.

2008 - twenty years since Beg decided to sell nukes to escape the begging - now the situation has turned full circle! But in the last few years, Iran and North Korea have become hot places and in full glare. For the last few years, the US was feeding the Pakistani coffers so the market saturation of countries who wanted Nukes on the sly did not matter. Now even the US doesn't have enough to give. Afghanistan's poppy sales is also no longer feeding the coffer of the Army. The breakdown is virtually total!

Such is the economic turmoil in Pakistan that it’s inflation has shot up to 25 per cent, and forex reserves are plunging to an all time low. With a total of $8.1 billion forex by September, the real reserves are estimated to be just $3 billion after accounting future liabilities.

Reports suggest that it is barely enough for Pakistan’s one-month imports, and if assistance is not provided immediately, the situation would turn for worse. There is a huge gap of $7 billion to cover in a projected current account deficit of $14 billion for the financial year ending June 30, 2009.

The rating agency Standard & Poor has cut the rating on Pakistan’s sovereign debt rating to CCC+, which is barely above the default level.

Now, barring these "Sources of Income" - Pakistani leaders and Army had never planned for other sectors to become any replacements! But even these are now under strain and almost non-existent.

The worst nightmare of the world is now unfolding - a nuclear state is going down and the extremists who planned and executed the most spectacular terrorist act in the history of modern world are bold and unflinching in their mission - to prevail. US is on the border and executing more and more missions in to the territory of Pakistan and bombing as well.

At such a distance and lacking any knowledge it is difficult to predict or even say for certain - but my instinct says clearly that at this very moment a fight is going on in stealth-mode and it is for identifying and "securing" the Nukes of Pakistan.

Pakistani leaders meanwhile are back to their old game - asking for aid. Obviously the question before US and others is - is another round of aid the best way to deal with this situation. Should more money be given - knowing it will be wasted on the generals and on infrastructure that is and was planning the next move. Or should the world buy time?? Until nukes can be secured.

In the coming months, the world will deal with many difficult variables - financial collapse of the world's economic system will be just one part of the entire deal. International warfare - military and economic - will be FAR more significant a misery to face our generation.

Meanwhile, in South Asia, Pakistan's masses will pay for the private passions and hatreds of their leaders. As the economic misery unfolds, many new reasons and villains will be created by the current lot of Pakistani political, religious and social leaders - but none would even look at the most obvious - to ask a simple question:

For all that I consume, what do I sell to the world?

Mr. Micawber says in the classic David Copperfield on economic wisdom:

"Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery."

The next world war (or its variation - "Clash of Civilizations") will not be won with bombs but by sheer economic expertise. Economics is not rocket science. Then why put it in the hands of your rocket scientists?

Cops, Drug Smugglers, and Picturesque Himachal

B Shantanu — Thu, 9 Oct 2008 13:04:08 EDT

As I chanced upon this news-item yesterday, “Five cops suspended - nexus between cops and the drug mafia“, I was reminded of this article from earlier this week: Vulnerable India faces a new threat by Ramtanu Maitra in which he wrote, “…India is becoming increasingly unstable…(and) the latest source of instability is the growing inflow of drugs and the establishment of drug-trafficking networks inside India…”

Sh. Maitra cited the latest report (March ‘08) of the International Narcotics Control Board which mentioned (that): “…the use of courier services for drug trafficking is on the rise in India, and the country is increasingly being used as a major transit as well as destination country for smuggling of banned substances…”

While the International Narcotics Control report did not go into any details about drug trafficking in India, the increasing prevalance of drugs in the border areas and rise in drug trafficking is well documented…

Alongside Goa, Rajasthan and Himachal are fast becoming major transit areas for movement of drugs within and outside India.

In pristine Himachal, the roots of drug smuggling can be traced to the aftermath of the Soviet invasion of Afghanistan which led to “settlement of displaced Afghans in Kullu” and consequently “…to the first planned business in trade and cultivation of narcotics in that area. Afghan settlers preferred the hilly terrain of Kullu-Manali for climatic reasons. They gradually developed links with local youths, and soon heralded the era of “smack, heroin, and brown sugar” in that region…” [ link ].

Manali’s links with the drug trade have been known for at least a few years now as is the heavy presence of Israelis in the region. According to this report in The Hindu, the Israeli government …”has established a camp in Manali town of Himachal Pradesh to rescue their citizens from becoming drug addicts and educate them about their religion.”

Alongwith Manali, Kullu too is becoming increasingly popular with foreign visitors (again, mostly Israelis) - a vast majority of whom come their in pursuit of cheap and easy drugs. Harsh Thakur’s report (cited earlier) mentions that “Cannabis took root in the area after 3,000 Israelis made Kasol their home…“. This report mentions that almost 70,000 Israeli’s visit the region each year.

In McLeodganj alone, the number of Israelis staying in and around the town is more than 4,000. [ link ]. This is predicatably causing local issues but more worryingly, this large semi-transient population of foreigners is both - a distribution network as well as a consumer of cheap, local drugs.

It is not clear to me precisely how these foreigners have managed to “settle” here… I need not mention the ineffectiveness of local administration in handling this problem (- or worse their possible collusion in this activity which lets it continue unchecked). To get a sense of how bad the situation is, read this extract from Harish Thakur’s first-hand report from Manali:

An Israeli revealed some interesting facts about the trade. Kutla, a remote village in Parvati Valley, is the hub of charas cultivation. Police have little access here and people work fearlessly. Foreigners hire one acre of land for just 10,000 rupees (about $223), and raise about 40 kilograms of charas. Cheap Nepali labour makes things easy, as villages such as Malana, Kasol, and Tosh compete for higher production.

The drug mafia has set up “headline fields,” which can be sacrificed if the police carry out a raid. But fields in the higher slopes of the mountains have been left untouched, and production there thrives. The trade here is mostly controlled by drug cartels from Israel and Italy. About 90% of the Rs. 900-crore trade is controlled by foreigners. Police protection is secured – at a price. For good charas people trust Italians more and a gram of Kullu charas that costs about Rs. 25 locally can fetch as much as Rs. 3000/- in Holland.

According to a State Narcotics Report, over 3,000 acres of mountain land in Himachal Pradesh is under illegal cannabis cultivation, run by the Italian and Israeli drug mafia through local residents.

The government is well aware of the illegal cultivation as well as reports which indicate that “drug syndicates are trying to spread their operations in the country by joining hands with poachers…” but is hampered by political compulsions and socio-economic circumstances…

Last month, efforts by an NGO to encourage villagers to grow herbal alternatives in place of cannabis did not yield much results:

The Himalayan Phyto-Chemical Growers Association (HIMPA), an NGO that came here on Sunday with a proposal to provide a viable economic alternative to cannabis cultivation in the Malana area, faces a huge task as around 2,100 villagers remain a divided house over its proposal.

…Narcotics smugglers remained absent from the seminar on alternative crops that was held here on Sunday

Not surprisingly, at least part of the reason why this trade flourishes here is poverty and general under-development:

Extreme poverty usually compels many poor villagers in far-flung hinterland to accept the offers made by smugglers to cultivate cannabis. Its cultivation has affected a major area of the State which is major tourist destination for its spectacular view of Himalayan peaks and picturesque valleys.

Lured by the chain of drug traffickers, small local farmers and villagers grow cannabis to earn a fast buck. Officials say villagers are advised by the drug traffickers to cultivate cannabis in the forests to avoid police cases…Local cannabis usually make its way to adjoining States of Punjab and Haryana besides capital New Delhi and far off Goa, a popular destination for foreign tourists on the western coast of India. [ link ]

…but the really worrying thing I found was the evidence of links between drug trade, terrorism and hawala transactions…Last month:

The district police…recovered 450 gm poppy husk and Indian and foreign currency from two vehicles intercepted at Kandwal barrier on the Pathankot-Kangra road.

The Kangra SP Atul Fulzele while talking to The Tribune said the objectionable material was recovered from two Scorpios at the naka. … The police also recovered Rs 3.30 lakh in Indian currency, $ 2500 and a truck engine and a generator from the vehicles.

The SP said that during interrogation the accused told the police that they purchased American currency from a person in the Kashmir valley. The police is suspecting the accused might be involved in hawala trading…

Laments aside, what can really be done? When I began thinking about this, I realised that there are no easy answers (e.g. a zero tolerance policy - which will only end up getting the smallest fish in jail or hanged)…

What may work are these suggested steps…

1. Increasing skills-based training, better (and more facilities for) education with an emphasis on female literacy

2. Developing new local industries; in particular, hydel power generation (and possibly solar/wind)

3. Creating alternatives in the established tourism sector (adventure tourism), high-end tourism

4. Stricter law enforcement…E.g. read this extract:

I was shocked when I saw the scene of the mela to find cannabis being sold openly. There was a shop where shake made of marijuana was freely available and local police was doing nothing. Gambling was also openly played. Its pertinent to mention that according to law sale of cannabis is banned and gambling in public places is also banned. However when I spoke to gambling vendor, he said he paid Rs. 1000 to local mela committee and around Rs. 1500 to local police. So there was no chance of him getting stopped by law or by local community. Not to mention the local MLA was chief guest of this mela (fair). I brought the CD and photos as evidence and would happily share them with government if they plan to take any action. [ link ]

5. And finally (as always), “better” local leadership which translates as clean, efficient and genuinely committed to public welfare…

But I am sure there are other, better ideas out there….What do readers think? How can Himachal be pulled out of a vortex of drug cartels and mafias?

Comments and thoughts welcome as always…

Find of the Day: Malana

The American Financial Crisis -- Dejà vu?

Moid — Tue, 7 Oct 2008 15:03:45 EDT

No sooner did signs of the crisis dawn upon the "market makers", the blame game started, and with more signs of an economic depression, the game only got messier. However, being a market outsider, if you ask me... who is really at fault, I would say that it is neither the Investment Banks nor the Financial Lending Institutions nor the Federal Government nor the average American nor the global citizen. WTH??? Who would it be then? The Aliens?

Nope, it is a vicious circle and all players in the market are to blame... collectively. So, what we see today as the crisis is a result of the greed and gambling of the investors (through I-Banks), lending institutions, borrowers (the average American) and not the least, the US Federal Government. The lending institutions created the environment. The investors took the bait with some help from the I-Banks - the average American saw his long-term dreams getting fulfilled, and the government decided to keep quiet and not even look their way.

This is precisely what in theory was defined as "neo-liberalism" - a concept which eliminates government regulation and oversight under the pretext of a free market economy with minimum federal intervention. Not that, this phenomenon took roots under the present US regime - it has been followed since the Nixon days but then Bush took it too far.

This economic crisis began in the real estate sector and spread its tentacles to the financial sector which was being its god-father. However, the cycle is not gonna stop there. In my judgment, these problems are gonna percolate into the actual economy - which will then break the insulation for every global citizen. And if u ask me, will the famous seven-o-o bailout stem the tide? NO! not at all. I think it is just trying to push the waste under the carpet.

So, for us as common middle-class people - what happens to our lives?

1. CAREER
Somewhere or the other, the uncertainty in our careers is gonna go up... either by our industry of work directly facing the ire of the crisis or pushing up job seekers in our sectors which are still insulated or worse still pushing the salaries down.

2. PERSONAL INVESTMENT
This is surely gonna be a big mess - after all, even a LN Mittal with his hawk advisers couldn't avoid 16Bn USD getting wiped off his balance sheet. It is high time you evaluate your investment - and best, if you can divert it into a low-risk, low-return bank deposit. However, one question worth asking the US Feds is... who will pay us for the loss we have incurred by investing in the stock markets for no fault of ours? I know what answer you will get - IGNORANCE / at best SILENCE.

3. FAMILY LIFE

The biggest lesson for us is to not rely on "fake" liquidity and always plan our lives based on the "real" liquidity we possess. This reminds me of my dad's advice when I joined IIM - and many banks realizing our future earning potential ran to us offering credit cards and loans - he said one thing, "Never fall into the trap of credit cards. It is not free money which you can use without any accountability. So better pay with what you have in your hand". I did heed his advice albeit having a couple of credit cards years later, but just to manage online transactions. Nevertheless, I would give the same advice to all - avoid credit cards as much as you can and also try to plan your asset acquisitions (house, car, etc.) based on what you can afford and not based on speculation.

As for the US economy, it is in a very dangerous situation - with no disclosure, no oversight, no transparency. The suspicion levels are so high that even a bailout approval couldn't keep the markets from falling. Because, behind the big facade of the financial sector is the real American economy which has been the lifeline for the financial sector and that itself is now reeling in pain.

Why Don't we Get Help for Depression?

Kavita Chhibber — Tue, 7 Oct 2008 14:46:50 EDT

At first it was just a headline - Unemployed man kills five members of family, then shoots self.

I was talking to a couple of friends on a conference call, when the news flashed before my eyes. As I read the headline out aloud, one of them said, "Must be one of those lower middle class Americans behind on payments. The other said, "Or maybe he lost a lot of money in the stock market."

As I clicked on the link to open the story, it turned out that the man, Karthik Rajaram, had an MBA in finance, had worked for Sony and Price Waterhouse, and lived in a house worth just under a million dollars in a gated community. He had been unemployed for a few months, and in a premeditated plan, killed his 19 year old son a Fulbright scholar and Honors student at UCLA,who was home for the weekend, two younger sons aged 9 and 7, his wife and his mother in law before turning the gun on himself. And he was from India.

India? Both my friends gasped- What? India?

Indeed, this so called model minority that is known for its super achieving academicians and is among the most affluent in America, also has a dark side-that of struggling to keep up a pretence, of always worrying about what would people say, and not seeking help.

There is denial - What? I'm not mad. Why should I go for counseling? There is fear - What if anyone finds out?

Evidently Rajaram, too did not seek help. Instead he bought a gun last month, wrote three detailed notes, see sawed between killing himself and killing every member of his family. He chose the latter. Perhaps he thought he would have peace of mind if they all went with him.

I looked at the story and felt incredible sadness and anger. What right does a human being have, to snuff out 5 other lives against their will? Why should they pay the price of one man's anguish and depression.

But it's not an easy question to answer. The close ties that bind an Indian family and the responsibilities that come with it can often be back breaking. Add to that the time bound expectation that it's the man who is the main bread winner. In trying times, when a crisis sweeps you off your feet, the sense of failing all those expectations are over whelming and can result in such tragedies.

I also realized as I sat thinking-it's really not just an Indian problem. The sense of shame and inadequacy someone feels when they don't meet expectations-of others close to them or their own cuts through barriers of color, race and cultures.

Another thing that is a continuous refrain is the sentence that I read-it said, the family kept to themselves and seemed like nice people. This lack of inclusiveness that I see in society today seems to be a big reason while people are lonely and depressed-angry and frustrated.

I remember growing up in India and the entire sub division was our extended family. Every one knew how everyone else was. People chipped in to help each other in times of need and joined the revelry on every happy occasion.

Do we have to face such extreme tragedies to really appreciate what is truly important in life or will we all continue to run helter skelter popping sedatives to sleep, another pill to wake up, and chew anti depressants like candy to just get through each day?

Something is really really wrong with the way we live today.

Wall Street - Cold, Flat, and Broke

C R Sridhar — Mon, 6 Oct 2008 11:40:33 EDT

“Dreamed about AIG and the stock market, woke up with the urge to stock up on canned goods and shotguns.” - Michele Catalano of Long Island, an angry blogger.

The month of September was cruel for Wall Street. Stormy winds blew away the venerable institutions of Wall Street and they collapsed one by one like a pack of cards. Lehman Brothers, the 158-year investment global investment bank, went belly up. Merrill Lynch was swallowed up by Bank of America. American International Group (AIG), a $1 trillion insurance company, had to be rescued by $85 billion dollar deal by the Federal Government on the ground that it was too big to fall. Capturing the mood of panic in Wall Street Mike Whitney, a widely quoted freelance writer, wrote ‘Lehman gone; Merrill Lynch swallowed up; AIG Going… Who’s Next for Madam Defarge?’¹

Madam Defarge and the tumbrels were kept busy while heads rolled in the basket in a grisly fashion. Fannie Mae and Freddie Mac, the biggies of Mortgage lenders, became terminally ill requiring a massive bail out at a cost estimated to be in the region of $5.3 trillion. Washington Mutual went bust followed by Wachovia. Earlier in March, Bear Stearns became insolvent after bad bets turned into bad debts requiring Fed intervention. The concept of Wall Street investment banking was blown sky high when the remaining Goliaths Morgan Stanley and Goldman Sachs haemorrhaged sustaining huge losses and took the unprecedented step to covert themselves into low risk and tightly regulated commercial banks. The pervasive mood of despair and anger of Main Street was reflected by the black humour on Wall Street, one of the most popular being-“Question-What is the difference between a pigeon and an investment banker? Answer- Only a pigeon can make a deposit on a BMW.”

The dour looking, Harvard educated economist Nouriel Roubini was one of the early sceptics to predict the financial meltdown in Wall Street when he dropped the bombshell way back in 2006 that US would be heading towards the most serious financial and banking crisis since the Great Depression. His dark prophecies were met with derision and disbelief earning him the epithet- the prophet of doom. But Roubini had the last laugh when the US financial system melted down as he had predicted and he became an instant celebrity on media channels.

A bipartisan blunder

One of the contributing factors for the financial meltdown was the reckless financial deregulation that led to financial concentration and inefficient markets. The perception of regulation as hampering the animal magnetism of Wall Street bankers was a dangerous delusion that fostered the irrational drive to take unacceptable risks. As the economist Arthur MacEwan explains-“When financial firms are not regulated, they tend to take on more and more risky activities. When markets are rising, risk does not seem to be very much of a problem; all—or virtually all—investments seem to be making money. So why not take some chances? Furthermore, if one firm doesn’t take particular risk—put money into a chancy operation—then one of its competitors will. So competition pushes them into more and more risky operations.”²

Moreover, the extent of deregulation reached dangerous levels with the repeal of Glass- Steagall Act of 1933, which was passed after the financial debacle of 1929. This act separated investment banking from commercial banking and protected the investors from risky speculation of investment banking. Thus a commercial bank could not be in both insurance and/or investment business.

Hectic lobbying for Wall Street by Phil Gramm -the Republican Senator from Texas and the economic advisor for John McCain - and Robert Rubin in the Clinton administration were the guiding forces for the repeal of the act. This repeal became law when it received President Clinton’s assent in 1999. In 2000 another nail was driven in the regulatory coffin when Gramm introduced the Commodity Futures Modernisation Act, which excluded the scrutiny of counter derivatives, credit derivatives, credit defaults, and swaps, by regulatory agencies. Many economists hold the view that the repeal of the Glass –Steagal Act was instrumental in causing the 2007 subprime mortgage crisis.

The crucial point is to note that Wall Street enjoyed the support of both the Republicans and the Democrats for the repeal of the act. Even today both the presidential candidates Obama and McCain receive campaign money from Wall Street bankers and executives. This prompted Ralph Nader, the consumer activist, to acidly comment that there are no significant differences between Democrats and Republicans on major issues pertaining to Wall Street.

A flawed business model

The reward system is skewed in favour of brokers who make money for their Wall Street employer and not how well the client portfolios perform. As Pam Martens, an insider of Wall Street, says “A Wall Street broker receives remuneration that rises from approximately 30 to 50 per cent of the gross commission based on their cumulative trading commissions with zero regard to how well the clients’ accounts have done.” This attitude is responsible in her words for “ the industry to be irreconcilably incentivized to corruption just as brokers have been socialized to silence.” This is on account of the fact that the broker receives more commission on investing junk bonds in client portfolios rather than investing in safe treasuries.

The other questionable practice is housing a trading desk inside the same company that is supposed to give unbiased research to the public. As Pam Martens points out “For example, let’s say that XYZ Brokerage buys a big stake in ABC Company on its proprietary trading desk (the desk that trades for profits for the firm) on Wednesday afternoon. On Thursday afternoon, it could almost guarantee profits for itself by issuing a research report upgrading the stock. Conversely, it could short the stock on Wednesday and issue a negative report to drive down the price on Thursday, also guaranteeing itself a profit. Other than a fictional Chinese Wall, there is absolutely nothing to stop this type of public looting.”³

Perils of a casino economy

While greed, corruption, and an excessively deregulated financial market offer interesting explanations about the systemic collapse of Wall Street, they remain unsatisfactory as they not explain or explore the deeper malaise afflicting the US economy. For a rigorous and conceptually sound analysis, one must turn to the series of extraordinary essays written by Harry Magdoff and Paul Sweezy in Monthly Review during 1970 and 1980’s.

The main thrust of the articles was to show that the general economic tendency of mature capitalism is toward stagnation. The main challenge of capitalist economy is surplus capital, which has diminishing opportunities for profitable investment. Deploying investment in the mature productive economy yields fewer returns as the markets are saturated. A number of strategies such as military spending, government spending, consumer spending, exploitation of third world economies as sources of cheap labour, raw materials and markets are used to counter stagnation in capitalist economies but do not resolve the problem of stagnation. As the authors point out “The tendency to stagnation is inherent in the system, deeply rooted and in continuous operation. The counter-tendencies, on the other hand, are varied, intermittent, and (most important), self-limiting.”⁴

The problem of surplus capital finding suitable avenues for profitable return is sometimes solved by key inventions and technologies, which provide economic stimuli. The invention of automobile in the “early twentieth century led eventually to huge developments that transformed the U.S. economy, even aside from the mass ownership of automobiles: the building of an extensive system of roads, bridges, and tunnels; the need for a network of gas stations, restaurants, automotive parts and repair shops; the efficient and inexpensive movement of goods from any location to any other location.” But the new information technologies such as computers, software, and the Internet do not appear to provide the same epoch making long-term economic stimuli as automobiles did.⁵

In the productive economy, money is used to purchase raw materials, machines, and labour to produce commodities, which are sold, with the capitalist receiving back money (M-C-M). While in speculation, money makes more money directly, represented as M–M. A significant change in the way banks and financial institutions operate today as opposed to the past lies in the fact that the massive borrowed money goes into speculative finance and very little is invested in the productive economy. There is practically no stimulatory effect on the economy as there are few jobs created as there are relatively fewer people employed in the speculative economy. The profits generated by speculation are rarely invested in factories or the service sector but finds its way for financing more risky financial schemes creating speculative bubbles.

This sorry state of affairs is evident when one examines the failed financial institutions of Wall Street. One common denominator linking these institutions is that all were under capitalised and over leveraged. As Mike Whitney points out “when Bear Stearns went down, it was levered at a ratio of 26 to 1. When Carlyle capital blew up, it was levered at 32 to 1. And when Fannie and Freddie were finally taken over by the US Treasury; the two behemoths were levered at 80 to 1, which is to say that they had a one dollar cushion for every $80 they had loaned out.”

With huge quantity of money sloshing around the world and being invested into financial speculation there has been an explosion of speculation. One mind-boggling figure is “the daily trading on the world currency markets, which has gone from $18 billion a day in 1977, to the current average of $1.8 trillion a day! That means that every twenty-four days the dollar volume of currency trading equals the entire world’s annual GDP!” Moreover, “Today financial analysts frequently pretend that finance can levitate forever at higher and higher levels independently of the underlying productive economy. Stock markets and currency trading (betting that one nation’s currency will change relative to another) have become little more than giant casinos where the number and values of transactions have increased far out of proportion to the underlying economy.”⁶

This flight of investment from the productive economy to the casino economy is made worse by the availability of easy credit to persons who are least credit worthy. Many Americans who had little financial stability to buy houses took on mortgages, which were attractive on the face of it but carried a heavy debt burden. As real wages declined for the American household, it took on more debts for meeting the consumption needs. Total household debt stood at the end of March 2006 at 11.8 trillion.

Prudence in lending money to credit worthy persons was thrown to the winds as the banks encouraged people to borrow more and spend more. As the report in Wall Street Journal says “The banks are more aggressive because they rarely keep the loans they make. Instead, they sell them to others, who then repackage, or securitize, the loans and sell them to investors in exotic-sounding vehicles, such as CLOs, or collateralized-loan obligations. Every week brings announcements of billions of dollars in new CLOs, created by traditional money-management and hedge funds, which then sell them to other investors.”⁷

The toxic power of optimism

The belief in alchemy led mankind in the futile quest of converting base metal into gold. The bankers and traders in Wall Street were the practitioners of the alchemy of finance, which was the elusive quest of converting junk bonds into real wealth. There was an incorrigible optimism and conviction that ordinary people were meant to be rich. There was also goodwill for the captains of finance whose investment schemes were magic wands to transport investors to prosperity. Such a feeling of trust, as Galbraith reminds us, is essential for the boom.

The media played its role by lulling us into a false feeling of comfort by assuring that the fundamentals of the economy was strong and invincible. Critical views were suppressed in debates as the effusions of malcontents. A financial disaster was merely technical correction and there was more money to be made in depressed stock prices. As the financial pillars collapsed in Wall Street last month, a pie hit the glum faces of the financial analysts. The malcontents were right. As Galbraith again reminds us wisely-“when people are cautious, questioning, misanthropic, suspicious, or mean, they are immune to speculative enthusiasms.”⁸ In the aftermath of the melt down, the sceptics were rehabilitated quickly and became instant celebrities on talk shows. They taught us an important lesson, which the financier Bernard Baruch learned during the Great Depression: “ Any one taken as a individual is tolerable sensible and reasonable- as a member of a crowd, he at once becomes a blockhead.”

Plus ça change, plus c'est la même chose.

From the financial bubbles of the Mississippi scheme and South-Sea Bubble to the delusions of Tulip mania and the Great Depression nothing much has changed. As Charles Mackay says in his book Extraordinary Popular Delusions & the Madness of Crowds, “Money, again, has often been a cause of the delusion of multitudes. Sober nations have all at once become desperate gamblers, and risked almost their existence upon the turn of a piece of paper.”

But there is very little that one learns from speculative disasters, as human memory is short and unreliable. The Great Depression taught the American public the perils of unregulated market and the elected representatives passed the Glass- Steagal Act to protect the ordinary investors from financial ruin. The Act was repealed in 1999 when the memory dimmed about the Great Depression. Then another financial disaster hit Wall Street. Now there is talk of imposing controls on financial markets again.

“Wall Street”, a cynic once said, “ is a Street with a river at one end and a graveyard at the other.” Perhaps it would be appropriate to inscribe on the tombstone the words, Plus ça change, plus c'est la même chose. The inscription in French simply means, the more things change, the more they're the same.

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1 The Tumbrils Roll at Dawn- Mike Whitney
2 The Greed Fallacy- Arthur MacEwan-Dollars & Sense.
3 The Wall Street Model: Unintelligent Design- Pam Martens- Counterpunch.org
4 Stagnation and the Financial Explosion- Monthly Review Press.
5 The explosion of debt and speculation- Fred Magdoff- Monthly Review
6 The explosion of debt and speculation- Fred Magdoff- Monthly Review
7 Wall Street Journal, March 3, 2006.
8 The Great Crash 1929-J.K.Galbraith- Pelican Book.

Tata Leaves West Bengal, Blames Mamta Banerjee

Ashish — Sun, 5 Oct 2008 14:53:50 EDT

The Nano project was a dream for Ratan Tata, and he was wooed by many states eager to get this prestigious project to their state. Besides the prestige, the project was also expected to generate jobs (the main project plus ancillaries are expected to be big business). Of course, there was the expectation that land needed to be sought for this purpose. And therein lies the problem. When a project needs a major amount of land, the land acquisition is a problem, and given the increase in industrialization in the country, we will continue to face more problems.

Land fragmentation is so high that to get the required amount of contiguous land for a factory or a major project means negotiating with a large number of farmers. And this is where the state steps in - the state, in situations where it is a question of industrialization, can actually acquire land at the market rate from farmers for 'public purpose'. There has been doubt in the past about whether acquiring land for a private company is a public purpose, and a recent Supreme Court judgment has sanctioned this - the court makes clear that public purpose need not mean that land only needs to be used for a Government need, but any project that generates employment and is beneficial for the local economy can be termed as a 'public purpose' project.

For the romantics who worry about a loss of village life, about the loss of land from farmers, and so on; one should ask them to live in villages for some time, especially with fragmented holdings; then they will realize that a village life is not so romantic. The known path for economic prosperity is where an economy moves up the path of industrialization, away from an agricultural focus and more into manufacturing and services where the value added is much greater. This is not meant to say that farmers land should be acquired just like that. Acquiring land for a project needs careful study; I believe Gujarat has a policy whereby there is an evaluation whether waste land can be used for this purpose, and only after that, is land taken from farmers. Farmers and others (landless laborers, sharecroppers, etc who are not compensated for land acquisition) affected by land acquisition all need to get a stake in the project, whether that be through granting them a mechanism like shares in the project, making sure that locals get enough jobs, etc.

Education is also an important part of the whole acquisition ball game. Typically, political parties don't take it very kindly when their policies are opposed by another political party. One way to avoid this is through educating villagers about how this will be beneficial to the local economy and to them (you can only do this if there are actual benefits).

Onto the current case. This is a mystery; you have a Communist Government trying to enforce a industrial project, and you have an opposition maverick politician using the acknowledged Communist methods of protest - use propaganda, rally people, block the local economic movement by blocking the main road artery, and so on. She succeeded to such an extent that the West Bengal Chief Minister could not even question the locus standi if Mamta Banerjee ? Nobody even attempted to ask as to how the Trinamool Congress claimed to be a representative of the local farmers and others. Mamta quite clearly sees this as a way of depicting the CPM as anti-poor and anti-farmer and try to rally the rural votebank behind her. In the short run, this has caused a crisis of confidence in West Bengal's ability to attract businesses:

West Bengal's worst fear has come true. Ratan Tata announced on Friday that he was leaving Singur, taking with him the Nano car project and the state's dream of an economic revival and leaving it with a tattered image in the investor's eye. The Nano project will also take with it all vendors despite the huge shifting costs, leaving a 1,000-acre black hole in the lush green Singur farmlands where Buddhadeb Bhattacharjee had hope to reap a huge political dividend as well.
On Friday, a ''distressed'' chief minister heard Tata Group chairman Ratan Tata's message, loud and clear. He made fervent pleas to Tata to stay back and keep his Rs 1,500 crore investment, even argued with Ratan Tata that his decision wasn't correct but couldn't change the industrialist's mind. The Tata Group chairman said he wasn't the one to blame for things coming to this pass. He squarely blamed Mamata Banerjee for pushing him to take the pullout decision, two years after his tryst with the Nano car factory in West Bengal.

What Ratan Tata says is quite correct. If he is setting up an industry, he would want to do it in an environment which is conducive to business; this is a basic need for having a healthy and prosperous business. The fact that Mamta Banerjee did all sort of things, including tacitly encouraging physical attack on the plant's workers would have terribly shaken Ratan Tata's confidence about the reception his factory is likely to get on an ongoing basis.