Thursday, December 31, 2009

How Rumsfeld bungled the War in Afghanistan

The equivalent of the Pentagon Papers on the Vietnam War will be published in 2010. As usual, the New York Times got an unauthorized advance copy excerpts of which are here.

The arrogance of Rumsfeld and the disasters from invading Iraq based on false pretenses reverberate to this day. Thanks for the memory, folks.

Wednesday, December 30, 2009

Incompetence pays on Wall Street!?

As this Washington Post report here documents, probably the first of many to come, AIG internally began to doubt as early as 2007 the risk profile of its own derivative products put on by its derivatives unit based in London. Yet, all the time the company presented a "don't worry" united front to the public until the dam broke.

The most pertinent and interesting issue raised by this report is this: when does incompetence or wishful thinking at AIG cross over to become criminal? In other words can we charge the principals with a crime when they were being merely stupid?

Lawyers will have a field day on this.

I am no lawyer. I do know when I park at the wrong place even though I didn't know it was illegal, I violated a law and have had to pay a fine. Ignorance, I am told time and again, is not an excuse to do something illegal.

If I killed a person without knowing what the heck I was doing, I would be charged with manslaughter or else plead insanity. If I were a teenage geek hacker having fun breaking into a Federal government server, maybe even the Pentagon's, I would be hauled into prison even if I were a certifiable red neck patriot ready to die for my country anytime of the day.

So, I guess if I were to play with the shareholders' money and then burned billions, the court would find me innocent as long as I had "agonized" over my strategies as the court did with 2 hedge fund managers let free? And if that were a precedent the responsible AIG guys would also be able to continue to enjoy their already received multi-million dollar compensations in their retirement in the south of France. It pays to be incompetent on Wall Street, it seems.

Interesting issue for a good law school.

Good Luck in Afghanistan, Mr President And a Happy New Year

Huntington Post

DECEMBER 30, 2009

Afghan Army Rife With Corruption, Incompetence, U.S. Military Report Says

On the "Rachel Maddow Show" Tuesday night, NBC's chief foreign correspondent Richard Engel discussed a new Pentagon report that paints a sobering picture of the state of Afghan's security forces. The report, intended for military commanders and not for public distribution, concludes that Afghanistan's National Army is rife with corruption and incompetence, and that it will take far more than a year to rehabilitate the country's security forces.

"The main mission of the United States Army, all the different forces that are there, is to train the Afghan security forces so that American forces can ultimately leave," Engel said. "This report says that this priority is facing serious, serious problems, and the military knows it."

Engel goes on to say that the report would seem to call into question Obama's plan to begin "dialing back" the surge by the summer of 2011, given that it looks to be extremely unlikely that the Afghan security forces will "up and running and in place" by then.

Tuesday, December 29, 2009

Hong Kong Property Prices

Anyone who wants to understand why property prices in Hong Kong are sky high and that the bubble is not necessarily about to burst should understand at least the following 3 factors:

1) New land is solely supplied by the government which likes to keep prices high by not releasing any meaningful amount of land for some years.

There is a long story behind that, but a hint: 5 property developers, all controlled by individuals who are now among the world's richest, are also sitting on enough land to meet the needs of new housing needs for the entire economy for at least 6-7 years. They are the de facto tax collectors for the government for which the latter ignores any possible anti-trust collusion practices. High government officials routinely get lucrative compensation packages after retirement working for the same developers they used to regulate, in theory.

2) Any mainland Chinese with HK$8 million (slightly more than 1 US$ million buying a property gets permanent residence. After 7 years the property owner is entitled to a Hong Kong passport. Unlike that of the PRC, a HK passport holder can travel to nearly all countries on this planet without a visa.

3) The latest NY Times report here scratches the surface of sources of funds for most of the mainland buyers of properties in Hong Kong.
Note the amount in the report referred to the first 11 months of 2009 only. "nuf said.

How Does One Destroy Hatred?

The latest bomb incident in USA involving Al Qaeda raises fundamental questions, as if necessary, as to whether bombing Afghanistan or even killing Osama bin Laden is sufficient or even necessary to destroy the hatred among fundamentalists to hurt USA.

Let's look at the facts of the case described in this short report here:

Saudi Al Qaeda Wing Claims Responsibility for Thwarted Christmas Attack

Umar Farouk Abdulmutallab.Photo: U.S. Marshals Service
Even though it appeared at first that aspiring terrorist Umar Farouk Abdulmutallab acted alone when he tried to detonate a device on a Northwestern Airlines flight on Christmas Day, a terror group says they supplied him with materials. The Saudi wing of Al Qaeda posted notices on militant Islamist websites today stating that they gave him the explosive technology and boasted of his success. The group has organized attacks on Americans within Yemen and Saudi Arabia, and beheaded American Paul Johnson in 2004. Meanwhile, President Obama just spoke from Hawaii, where he is on vacation, and said that his administration "will not rest until we find all who were involved and hold them accountable." He added that "this was a serious reminder of the dangers that we face."
Qaeda-Linked Group Claims It Was Behind Bomb Attempt [NYT]

Read more: Saudi Al Qaeda Wing Claims Responsibility for Thwarted Christmas Attack -- Daily Intel

The inept suicide bomber is from Nigeria. Materials, know-how, money from Saudi Arabia and Yemen. Where is Afghanistan in this equation?

Put differently. Suppose you wanted to destroy Catholicism. Would bombing Vatican city do the "job"? How does one destroy Protestantism? Where does one bomb?

I am not equating Christianity with fundamentalist Islamic terrorism. The point remains that the terrorists are moved by an idea, however flawed, sick, self-destructive it maybe.

In the dark days of Chinese Communism between 1949 to 1979 roughly, the government supplied a daily dose of "hate America" propaganda. Yet, America's Chinese name "Beautiful Country" remained the name the Chinese people used. They knew America was a better and the country a beautiful country.

The only way to fight a bad idea is to make sure the good idea remains shining bright. The only way to ensure that is to make sure "nation building" starts at home.

America is physically badly maintained. Philosophically it is floundering having sacrificed its basic moral principles in the name of "national security", a theme Obama himself put in his inaugural speech, now forgotten in its expansion of a war in Afghanistan. And don't get me started on Wall Street where maximizing profits has taken precedence over all ethical business values for which America was once the standard bearer.

Monday, December 28, 2009

Are We Being Unfair to Goldman Sachs?

The principle value held dear by those who believe a voluntary market transaction between 2 consenting adults is by definition "fair". Enough Nobel Prizes in economics have proved that if there is "asymmetry" in information, "fairness" is not what it may seem.

Asymmetry in information means in a transaction I know something you don't in whatever we are buying from or selling to each other.

You decide after reading this longish article in the current issue of Vanity Fair here whether world opinion is being fair to Goldman Sachs.

Sunday, December 27, 2009

Efficient Market Hypothesis (EMH)

EMH has been the Holy Grail of financial engineering ever since the late Paul Samuelson as a lowly graduate student of economics at MIT discovered Louis Bachelier, a French mathematician who wrote about speculation in his 1900 PhD thesis in Paris. Eugene Fama at Chicago later refined the theory making the Hypothesis famous establishing as more an axiom than a hypothesis as the theory itself is called. Burton Malkiel at Princeton popularized EMH for the lay reader in his best selling book: Random Walk Down Wall Street making him a millionaire several times over.

Briefly stated EMH posits that active fund management is futile to gain advantage over market moves because the "efficient" stock market prices incorporate, absorb, digest and, therefore, reflect all known information about them instantaneously. No human brain can possibly match that giant discounting machine. Ergo, no fund manager can possibly outperform the market.

Very few professional fund managers who have lived through at least one business cycle ever believed EMH was anything but an interesting idea whose time is yet to come.

However, it was the reigning ideology under the Bush administration where the market fundamentalists such as Greenspan and Christopher Cox, deliberately turning the other way "running" SEC, simply allowed the "market" do whatever it wanted to do, to a not very happy ending for which Greenspan and Cox both later apologized.

Most of the "high power" equity research is done by global sell-side firms -- the Goldman Sachs and the Morgan Stanley's of the world -- hence, there is negligible time delay between the hour of the publication of research and the time investors get it.

The largest investors, institutional or individual, usually even get a phone call as soon as a piece of important research is released informing them of new information that would go with a recommendation to act: sell, buy more or just hold.

Now, this study here suggests that the market does not discount all the information, even the most relevant one -- phone calls or no phone calls. Ergo, the idea that the all mighty "Market" is efficient leaves much to be fantasized by future generations of academics who can only think in obtuse mathematical equations.

Saturday, December 26, 2009

Been There, Done that, Merry Xmas

30 years after USSR went into Afghanistan, remembrance of a former Soviet general::

..."Afghans will fight foreign troops as long as foreign troops are there," said Lev Serebrov, whose time there was book-ended by the Soviet invasion and retreat. He arrived in 1979 and stayed through 1981 as a lieutenant colonel and deputy division commander, and returned from 1987 to 1989 as a major general and deputy to the Soviet operations commander for the Afghan war"....

Another general:

...""It's very hard to fight in Afghanistan. Your leadership will have to find a way out."

The excerpts are from this report here. well worth 2 minutes of your time reading in its entirely.

Friday, December 25, 2009

My Son, the Investment Banker?

..."Two-thirds of Americans say they have an unfavorable view of financial firm executives, making them less popular than Congress and lawyers, according to a Bloomberg National Poll conducted Dec. 3-7"...

Source: Bloomberg.Com, Dec 24, 2009.

CIA conned?

CIA is like the IVY universities in public minds -- Only the smartest get in.

Many who did get into the top IVY universities soon realize not all is what it may appear to the "outside" world. In fact you wonder how some of those you meet in classrooms ever got admitted.

CIA for years had the same aura. This story here among many in the past suggest otherwise.

What's a few millions, right?

Today' headline:
Heads of Fannie and Freddie Could Earn $6 Million.

Fannie and Freddie have so far received $111 billion in taxpayers' money to bail it out from bankruptcy. Government estimate a total of $170 billion will be required to keep them afloat. Meanwhile the two quasi government firms are still bleeding in losses.

Read the entire news report here

Thursday, December 24, 2009

Wall Street Ethos

This excerpt from today's NY Times to my mind captures the core values of Wall Street:

..."The simultaneous selling of securities to customers and shorting them because they believed they were going to default is the most cynical use of credit information that I have ever seen,” said Sylvain R. Raynes, an expert in structured finance at R & R Consulting in New York. “When you buy protection against an event that you have a hand in causing, you are buying fire insurance on someone else’s house and then committing arson"...

Finally someone other than myself is using "arson" as a metaphor in describing the role of Wall Street. I long ago complained that those "masters of universe" and friends of Geithner and Summers and Paulson most cleverly played the victims of a firestorm when they were in fact accessories to arson. See my article here.

The NY Times article here (from which the above excerpt came) focuses on how Goldman Sachs as well as Wall Street firms in general knowingly packaged and sold inferior quality mortgage related derivates and then bet against these products expecting them to fall using the firms' own capital.

Normally when a financial intermediary bought or sold a product the traders would immediately hedge in part, seldom in whole, the underlying value of the product. If the market progressively moves against the firm, the hedge size gets bigger and bigger until it is fully hedged.

However, if this report is accurate which seems highly likely, then it raises not just a question of business ethics, it may have been illegal.

Do I believe something like that happened during the bubble or even as part of an ongoing process of proprietary trading on Wall Street? You bet I do.

Ah, yes. Notice the role of a Princeton graduate.

The unending AIG saga

I had no idea the bonus issue is still dragging on. Did you? Read here how the US Government continues its inability to run its 80%-owned bankrupt insurance company.

Merry Xmas -- knowing how well your government is looking after your tax dollars.

Wednesday, December 23, 2009

UK Dumbing Down?

UK is on the verge of a major education disaster if Lord Mandelson had his way in demanding that UK universities cut their 3 years undergraduate degree requirement to 2.

Lord Mandelson himself had the benefit of a 3 years education at Oxford. Apparently he was not much of a student spending too much time networking and drinking. That may have influenced his view on how useless a 3 years education was to him. The report is here.

It is also most unusual for a Jew to pooh pooh education which is something closest to being sacred just as the Chinese believe as well: more the better.

The issue this pathetic Lord Mandelson has missed is not about the length rather the content. He himself read the Mods, or PPE, that stand for Politics, Philosophy and Economics.

Mods modernizes the original "core" curriculum at Oxford known as the "Greats".

Greats refer to Greek and Roman Classics read in either Latin or Greek. Armed with the study of the Greco Roman philosophy, politics, literature and history, the graduates went on to help run the British Empire. That elite corps shared the same intellectual, philosophical and ethical foundation of being a Platonic Guardian (please reread your Plato's Republic) with certain moral and behavioral standards the Guardians needed to live up to.

Lord Mandelson wants to destroy all that to save a few hundred million sterling. Far more of that had bee pissed away by negligent and stupid bankers. Why is education, the basis of all human progress, is always the first to be axed by small minded politicians?

Oxford should recall the degree they had granted this Lord Peter Mendelson, former Labor MP and Cabinet member under Tony Blair. He has become the proverbial Barbarian at the Ivy Gate.

Bernanke, Time Magazine Person of the Year - 2

Yesterday I relayed a Washington Post report on Ben Bernanke's "impressive" record of missing all the signals of a bubble that was to burst.

Paul Krugman did a better job than me in giving a poor grade to his former Princeton colleague. One point I missed putting in my previous post was this:

The only lifetime intellectual benefit of having gone to a "branded" university is to carry with you the conviction that not all who have gone there deserve automatic intellectual "kowtowing". You need to be selective. As I have often written in the past, the various Admissions Offices of those elite universities more often than not fly in the blind, contrary to the myth of how thorough they screen candidates. There is no way anyone can pick 8-9% of all applicants (those are the rates at HYP and columbia) and then claim they are all the best of the best on this planet.

So many with the most prestigious degrees have crashed and burned. Need I mention Bush, Cheney, Rumsfeld in DC. Alan Greenspan, Arthur Burns both former Fed Chairmen. Many, arguably most at the top who ran Wall Street right into the bubble? And now Bernanke with a Harvard BA and a MIT PhD?

I don't even want to yet again mention Hank Paulson, Geithner and Summers whose record on how lax their Wall Street bailout conditions have been letting Obama do the pro-forma lecturing to Wall Street about lending more to Main Street and their jumbo size bonuses right after Main Street bailed them out. Well, I mentioned it anyway!
It is not even a secret that they titans of Wall Street totally ignore Obama's PR posture on such matters.

Here is what Krugman wrote in a recent blog of his:

..."December 22, 2009, 10:58 AM
A strange complacency

Many people have written about this WaPo article on the Fed’s failure to foresee the crisis. I was particularly struck by the complacency over housing prices. I mean, there had just been an enormous increase in prices; the dotcom bubble was fresh in our memory; simple indicators like the price-rent ratio were flashing red. How could they have been so sure nothing was wrong?

And I was particularly struck by this part:

In January 2005, National City’s chief economist had delivered a prescient warning to the Fed’s board of governors: An increasingly overvalued housing market posed a threat to the broader economy, not to mention his own bank and others deeply involved in writing mortgages.

The message wasn’t well received. One board member expressed particular skepticism — Ben Bernanke.

“Where do you think it will be the worst?” Bernanke asked, according to people who attended the meeting, one in a series of sessions the Fed holds with economists.

“I would have to say California,” said the economist, Richard Dekaser.

“They have been saying that about California since I bought my first house in 1979,” Bernanke replied.

This time the warnings were correct …
Believe it or not, the Post is being too kind to Bernanke here, by implicitly asserting that past warnings about California housing bubbles had proved wrong. Um, no. Here’s a quick and dirty chart of Los Angeles metro housing prices, adjusted for inflation, between 1980 and 2000 (I’m using FHFA numbers and national PCE; you could do a more careful version, but I’m sure it wouldn’t make much difference):

The point is that there was indeed a huge CA bubble in the 80s, which burst painfully. Nor was this an obscure bit of knowledge: in fact, people like Calculated Risk and yours truly were quite explicitly using the great California bubble of the 80s as a model for what was going to happen nationally.

This whole episode makes me think considerably worse of my former department head."

Monday, December 21, 2009

Bernanke, Time Magazine's Person of the Year.

Bernanke was wrong all the way until the bubble burst. Yet, Time Magazine honors him. He is also to remain chair of the Fed for a second term. Does he really deserve all this? This Washington Post questions his ability by documenting here how wrong he was during most of this first term.

Lots of things happen in this world are not based on sane logic. Obama getting the Nobel Peace Prize while calling his war in Afghanistan a "just" war when most Afghans do not even want the Americans to stay? It is a "just" war to keep drug lords and the corrupt president in power?

Geithner and Summers were writing big checks to save Wall Street, more accurately the tycoons on Wall Street, but not Main Street? Yet they are not fired?

Paul Volcker, the only sane voice in Washington, and advisor to Obama's Rescue Program, is totally ignored by Obama?

And so it goes.

Sunday, December 20, 2009

Saturday, December 19, 2009

Corruption in Kabul?

Excerpts from today's newspaper here:

..."Karzai wants to replace Muhammad Ibrahim Adel, the current minister of mines. Earlier this month, two U.S. officials in Washington alleged that Adel took a $20 million bribe to steer a $3 billion copper mining project to a Chinese company. The minister denied taking any bribes, saying the agreement was approved by the Cabinet and that Karzai was also aware of it"...

..."The president also wants to replace Sediq Chakari, who heads the Ministry of Hajj and Mosque. Allegations surfaced recently that money was pocketed at the ministry. Chakari, who has denied involvement, said two of his employees were being investigated in connection with missing money"...

Corruption in Kabul? Cabinet ministers taking bribes? Nah, never happened.

Yale vs Harvard, Harvard vs Princeton, Princeton vs Yale

Amazing story here.

When you are quadruplets and are accepted, let's say, by Yale, Harvard and Princeton, and knowing the 4 had never separated, how would they individually and collectively choose?

What shall thou do, dear quadruplets?

It is High Noon. Never did any quadruplets apply to these 3 designer colleges together, as far as we know.

What would these fab 4 do if the other 2 colleges accepted them as well after this big front page story in today's NY Times! I would wager a nice dinner that Harvard and Princeton would also offer 4 places to fab 4.

Paul Samuelson Spoke (Part 2)

On derivatives:

Samuelson: ..."Mea culpa, mea culpa. MIT and Wharton and University of Chicago created the financial engineering instruments, which, like Samson and Delilah, blinded every CEO -- they didn't realize the kind of leverage they were doing and they didn't understand when they were really creating a real profit or a fictitious one. There 's a lot of causality in economics, even though it's very far from an exact science"...

On Larry Summers:

Interviewer: And China .. You've written some about that. How real do you think the threat of a run on the dollar is? Some people, like your nephew Larry Summers has said that there's kind of "balance of financial terror" there -- that it's not in China's interest to see a big decline in the value of dollar denominated assets.

Samuelson: Well first let me say that I have big admiration for Larry Summers as an economist. However, when he was at MIT as an undergraduate, he never took a course of mine!

But I think he was wise. If he had people could always say, 'well, he's traveling on someone else's steam.' There's a Chinese wall between him and me. Any view he expresses and any view I express -- there might be some overlap, but there's nothing synchronized.

So you're not in touch with him now?


...By the way, I don't want you to think that I think that everything for the next 15 years will be cozy. I think it's almost inevitable that, with a billion people in China wide awake for the first time, and a billion people in India, there's going to be some kind of a terrible run against the dollar. And I doubt it can stay orderly, because all of our own hedge funds will be right in the vanguard of the operation. And it will be hard to imagine that that wouldn't create different kind of meltdown"...

All the above excerpts are from an interview published in June by The Atlantic magazine before Samuelson passed away this month. I only came across that 2 parts interview now.

Paul Samuelson Spoke (Part 1)

On Harvard star professor, Greg Mankiw and Ben Bernanke:

Samuelson: ..."The 1980s trained macroeconomics -- like Greg Mankiw and Ben Bernanke and so forth -- became a very complacent group, very ill adapted to meet with a completely unpredictable and new situation, such as we've had. I looked up -- and by the way, most of these guys are MIT trained; Princeton to MIT or Harvard to MIT -- Mankiw's bestseller, both the macro book and his introductory textbook, I went through the index to look for liquidity trap. It wasn't there!.."

Footnote: [Liquidity Trap is a technical term describing an economy when very low interest rates, like today, do not give the economy the boost it needs to revive from a serious recession. Not even zero rate of interest. It happened in Japan in the 80's and it is happening now in the US today. The "trip" is so identified with John Maynard Keynes who became intellectual poison in the States after the "monetarist revolution" led by Milton Friedman that even Mankiw threw it out from his best selling textbook}

..."And I looked up Bernanke's PhD thesis, which was on the Great Depression, and I realized that when you're writing in the 1980s, and there's a mindset that's almost universal, you miss a lot of the nuances of what actually happened during the depression"...

On Milton Friedman:
Samuelson: ..."Milton Friedman. Friedman had a solid MV = PQ doctrine from which he deviated very little all his life. By the way, he's about as smart a guy as you'll meet. He's as persuasive as you hope not to meet. And to be candid, I should tell you that I stayed on good terms with Milton for more than 60 years. But I didn't do it by telling him exactly everything I thought about him. He was a libertarian to the point of nuttiness. People thought he was joking, but he was against licensing surgeons and so forth. And when I went quarterly to the Federal Reserve meetings, and he was there, we agreed only twice in the course of the business cycle...

...When the economy was going up, we both gave the same advice, and when the economy was going down, we gave the same advice. But in between he didn't change his advice at all. He wanted a machine. He wanted a machine that spit out M0 basic currency at a rate exactly equal to the real rate of growth of the system. And he thought that would stabilize thing"...

Samuelson: ..."Milton Friedman had a big influence on the profession -- much greater than, say, the influence of Friedrich Hayek or Von Mises. Friedman really changed the environment. I don't know whether you read the newspapers, but there's almost an apology from Ben Bernanke that we didn't listen more to Milton Friedman.

But anyway. The craze that really succeeded the Keynesian policy craze was not the monetarist, Friedman view, but the [Robert] Lucas and [Thomas] Sargent new-classical view. And this particular group just said, in effect, that the system will self regulate because the market is all a big rational system.

Those guys were useless at Federal Reserve meetings. Each time stuff broke out, I would take an informal poll of them. If they had wisdom, they were silent. My profession was not well prepared to act"...

Well, it was about the worst form of prediction that various people who ran scores on this -- and I remember a very lengthy Boston Federal Reserve study -- thought possible. Walter Wriston, at that time one of the most respected bankers in the country and in the world fired his whole monetarist, Friedmaniac staff overnight, because they were so off the target....

Footnote: [Rational Expectationistas swept the Nobel Prizes in th 80's: Lucas, Prescott and at least 2-3 others who leveraged off the idea that the "market", meaning you and me and all our uncles and nephews, are so rational that no government actions or temporary anomalies can fool us. Hence, the market quickly if not instantaneous will correct itself requiring no one to set it right. This became a mantra that had real world consequences. Under the last Bush administration, SEC deliberately took its eyes off regulations on the notion that the "market" being rational would police itself to rid off whatever that was needed to be regulated. Self regulation was implicit in a rational market ideology. Christopher Cox, ex Chair at SEC admitted himself that was his belief. Ditto Alan Greenspan]

On Greenspan:

..."And this brings us to Alan Greenspan, whom I've known for over 50 years and who I regarded as one of the best young business economists. Townsend-Greenspan was his company. But the trouble is that he had been an Ayn Rander. You can take the boy out of the cult but you can't take the cult out of the boy. He actually had instruction, probably pinned on the wall: 'Nothing from this office should go forth which discredits the capitalist system. Greed is good"...

Theory vs Practice in Managing $$

Remember how Harvard under Larry Summers, often described by the press as "one of the brightest economists of his generation", nephew of 2 Nobels in economics lost about 1/3 of its endowment?

Here is more embarrassing news as to how at one point Harvard was so desperate for cash to balance its books, it had to ask the taxpayers of Massachusetts to lend the university some money. Read here.

Friday, December 18, 2009

Obama, a One Term President?

Food for thought from the Baseline Scenario Blog:

"Why Obama’s Poll Numbers Are Plummetting
Posted By Barry Ritholtz On December 17, 2009

The political buzz today is all about the President’s falling approval [1] ratings. He has now fallen faster than President Bush did (prior to 09/11).

The simple solution for the White House: Stop jerking around with Financial Reform. When there is high unemployment, people don’t want to see bailed out bankers making a killing. Fix what was wrong with the system, what led us down the path to disaster.

As noted in these pages back in September, the brain trust around Obama made a terrible tactical error by tackling Health Care before they fixed Wall Street. (See: Tactical Error: Health Care vs Finance Regulatory Reform [2]). The record low approval ratings during his presidency reflect that.

Unless Obama wants to lose one or both Houses in 2010, he best shake things up.

My advice?

Put Paul Volcker in charge of Financial Reform.


’nuff said"...

Thursday, December 17, 2009

A Royal Mess in Kabul

So, Obama has sent 30,000 more troops to save President Kabul whom no high American official sent to Kabul to talk to him ever liked or trusted. See this report here. One of the US officials, working at UN, even plotted to have him removed.

The Great Depression in Detroit

50% unemployment in Motown! Read this here.

America, the Beautiful and the Colored!

In the second half of the 21st century the principal language in America is likely to be Spanish!

Read this.

Now you know why conservatives such as Patrick Buchanan, the late Harvard scholar Samuel Huntington and many other less serious rightwing folks are really mad as hell in the States

Bailout Over? No!

Remember Fannie and Freddie who were the first jumbo "too big to fail" institutions? While the front page news is on Wall Street firms returning some bailout money, these two institutions may need more. Read this here.

Wednesday, December 16, 2009

Has America Learned Its Past Mistakes?

Maureen Dowd of the NY Times has a pair of eyes as sharp as any war correspondent hawks. When you read her latest take on the war in Afghanistan and her sharp questions to Defense Secretary Gates, do you feel she was convinced by him?

Read her column here.

Tuesday, December 15, 2009

Obama's Big Speech - 2

..." Pakistan's reaction to Obama's speech was to order its top military intelligence service, the ISI, to immediately begin rebuilding and strengthening covert ties to the Afghan Taliban in anticipation of their eventual return to power, according to a highly placed Pakistani official. There will be no more genuine cooperation from Pakistan (if there ever was)"...

The excerpt is from the analysis by two US military experts,0

Monday, December 14, 2009

Wall Street Bonuses and Capital Requirement

Jean-Claude Trichet, head of the European Central Bank made excellent points about "excessive" bonuses but either he or the FT report muddled his punch line. Scroll down to the end for the FT report on his views.

Let me try to reword what I consider are the major issues involved in this whole Wall Street bonus controvery:

1) Bonuses to Wall Street bankers are fine. You cannot and should not penalize profit maximization.

2) "Excessive" bonuses by themselves do not fuel future bubbles. Past and present bonuses became "excessive" because the firms they work for themselves were and remain highly leveraged. Before the bubble and even now these firms are leveraged 30-40 times to their capital base. Hence, the incentive to take risks was and remains high since the returns of risk taking are extremely high.

Annual multimillion dollar bonuses became a benchmark of acceptable work performance.

In bull markets such rewards created the inevitable hubris in the minds of the bankers that they were "geniuses". Nothing could be further from the truth. In a bubble the word "risk" got less and less attention. And then of course the bubble burst taking down everyone including those "geniuses".

3) The way to curb Wall Street from aiding and abetting future bubbles is to increase capital requirements forcing them to work with a much lower leverage. And that capital requirement, like cost of living auto pilot adjustment factoring in inflation, should increase as the size of balance sheets increases.

4) With a lower leverage, the incentive to take "excessive" risk resulting in either "excessive" bonuses will be lower. At the same time the probability of Wall Street aiding and abetting the expansion of bubbles should also be lower.

Mr. Tricket did mention the necessity to increase capital requirement. However, too much of current media attention is focused on the immorality of "excessive" bonuses.

As I have often written, the "immorality" of excessive bonuses is more an issue with the slapdash, negligent way bailout money has been handed out than with the bankers themselves who operate within the legal parameters set by the bailout.

Recall back in the days of Bush Jr, the reigning ideology was to put total faith in discipline the Market supposedly would impose on all players. Alan Greenspan admitted in a famous confession that he had thought so but he was wrong to believe so.

You can't hang the Bushies now. So....go hang Team Obama first before sending God's "disciples" at Goldman et al to the guillotine.

Before writing checks to bailout Wall Street, Team Obama should have insisted on replacing all Board members who in theory should have supervised how Wall Street firms worked on behalf of their public shareholders, a duty they failed to discharge.

So, to blame the management is really missing the main points. Oh, by the way, the news today is Goldman Sachs has changed its compensation scheme whereby for 5 years senior management cannot cash in their options.

However, let unsaid clearly those senior guys and gals could borrow against those options effectively rendering the 5 years restrictions moot. Wall Street is indeed much much smarter than Washington DC and the press when it comes to financial exercises.

FT report:

Trichet warns on bankers’ bonuses
By Ralph Atkins in Frankfurt
Published: December 11 2009 15:00 | Last updated: December 11 2009 20:04
Awarding big bonuses to bankers could help sow the seeds of a future financial crisis, Jean-Claude Trichet, European Central Bank president, has warned.

Mr Trichet said financial institutions should be using higher profits to strengthen their capital bases rather than paying out “unwarranted levels of compensation or bonuses”.

A culture of excessive financial rewards for individuals encouraged “self-referential” and “self-serving” banking, Mr Trichet warned in a speech in London.

His comments amounted to the strongest criticism yet from the ECB of excessive bank remuneration .

Mr Trichet has long urged bankers to take advantage of an improvement in financial markets to increase their resilience in the face of a still-weak global economy.He warned that excessive pay could even threaten the stability of the financial system.

“I will say that the so-called bonus culture is one of the many factors that can drive the financial system in the wrong direction – away from intermediation to self-referential speculation; away from medium-term stability to short-term orientation; and away from being a service sector to being a self-serving sector.”

His comments followed the UK’s decision this week to impose a one-off supertax on bankers’ bonuses bonuses – a move quickly followed by France.

Mr Trichet reminded bankers that the ECB had provided the eurozone financial system with unlimited liquidity, “not for the banks themselves, but to enable them to finance the broader economy”. The economic slowdown and its impact on loan books, he said, had led to a “second wave” of writedowns.

Mr Trichet has hinted in recent speeches at ECB fears that the global financial system remains inherently fragile – perhaps even more so than before the recent financial market crises. oSpeaking in Cambridge on Thursday, he warned that policymakers might have reached the limit of what they could do to head off increasingly intense financial market crises.

“The instruments of counter-cyclical policy have been used so intensely – and more so from one financial cycle to the next – that authorities might have tested the extremes of their control procedures,” he said.

One particular concern of the ECB is that the actions taken by central banks and governments have encouraged bankers to believe that a worst-case scenario will always be averted.

In his London speech, Mr Trichet argued that the “systemic risks” revealed by the financial crisis highlighted the need for a new supervisory framework in Europe that also assessed general risks for financial stability as well as policing individual banks. Under EU plans nearing implementation, Mr Trichet is expected to head a new European Systemic Risk Board, which will be supported by the ECB. Three new pan-European watchdogs will also oversee the banking, insurance and securities sectors. But Mr Trichet told the European Parliament this week that he did not see the new European Union system as the “first best” solution. That probably reflected ECB concerns about the blurring of responsibilities between the EU and national institutions.

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Paul Samuelson the Great

Excerpt from Paul Samuelson's obituary in today's NY Times.

.."At Harvard, as at Chicago, he was not shy about critiquing his professors — “respecting neither age nor rank,” according to James Tobin, a Nobel laureate of Yale University. The young Mr. Samuelson’s chief complaint against economists was that they preoccupied themselves with finer economic principles while all around them people were being thrown into bread lines...."

Does it remind you of present day "Freshwater" economist types who still insist the free market would cure all problems, if problems even existed?

Samuelson on whose textbook at least 2 generations of economics students were raised was every bit as great as the obit described.

The obituary, the longest I can recall on any economist and one of the longest on anyone who had ever died is here.

Sunday, December 13, 2009

Mr Volcker -- Too Late

Paul Volcker appointed by Obama to be his advisor never got his ears, frozen out by Larry Summers and Tim Geithner. It is clear why. What Volcker is saying is the opposite of what Summers/Geithner told the President.

Volcker's comment here on how Goldman Sachs is benefiting from taxpayers' money is well understood by anyone in the financial business. Goldman was given essentially risk free money by the US government with which Goldman has made record profits and is passing out record bonuses.

Let's be clear. Goldman has done nothing illegal. It's all within the parameters set by Team Obama.

Volcker is right to say a profit maximizing firm should not effectively be heavily subsidized, indeed, underwritten to make profits accrued to private interest.

However, it's too late. Appropriate restrictions had never been put on bailout money.

Wall Street Didn't Get it??!!

President Obama over the weekend once again blasted Wall Street for not "getting it":

..."The president told CBS' "60 Minutes" that "the people on Wall Street still don't get it. ... They're still puzzled why it is that people are mad at the banks. Well, let's see. You guys are drawing down $10, $20 million bonuses after America went through the worst economic year ... in decades and you guys caused the problem," Obama said in an excerpt released in advance of Sunday night's broadcast of his interview..."

Here is a little quiz:

1) Did the "people on Wall Street" violate any regulations that came with the bailout package? If so, which?
2) If they acted totally within the parameters set by the Federal Government, in what way didn't they "get it"?
3) Are "people on Wall Street" in the charity or in the profit maximizing business. Remember the maxim: the business of America is business.

There is just one person on this planet, so it appears, who still doesn't "get it".

President Obama, the Wall Street "people" acted totally rationally within the parameters set by your own people. They include most importantly Tim Geithner, your Treasury Secretary, Larry Summers, your principal economic adviser and Ben Bernanke, your Fed Chairman.

If you now blame Wall Street for having done this or that, why did your people hand over multibillion dollar bailout money on a silver platter without any restrictions? Without cleaning out those running Wall Street for having aided and abetted the whole financial bubble? You did that with GM, a Main Street firm.

Why not disclose all records documenting in what negligent or worse deliberate ways former Treasury Secretary, Hank Paulson, handed over billions to aid AIG knowing a big chunk of that money would go to Goldman Sachs, his old firm?

I am sorry, I cannot get excited over Wall Street's basic nature to make money for itself. These "people" exist to do just that. Making money for oneself is not a crime. It is what once made America great.

The only person who is clueless, Sir, is you, Mr President. You just don't "get it" that your own people have aided and abetted Wall Street to do what they do best. Normally that too would have been OK, except this time you were using money from taxpayers over 10% of whom are unemployment, over 40% of homeowners are facing negative home equity and with California, for years the "future" state of the Union bankrupt. That's really pretty poor performance for a former Editor of the Harvard Law Review.

The report on Obama's "don't get it" is here.

Saturday, December 12, 2009

Tiger Woods & The Trouble with Economics

Two items. 3 days ago, famous Harvard economics professor, greg mankiw, on his blog, using words of a UCLA professor as proxy, predicted Tiger Woods would play more games in 2010 based on the logic of "income effect", something straight from any good 101 textbook.

Today Tiger Woods announced an "indefinite break from professional golf".

What conclusion, if any, we may draw from fact vs theory?

The fact is economic theory as taught for years at academia is based on pure logic, a logic that assumes human beings are a specie of "homo economicus" -- a being acting purely on maximizing one's interest. To simplify matters, textbooks assume self interest is money. Money is measurable, quantifiable and is easy to use as evidence.

In Tiger Woods case, total income and wealth is expected to decline sharply as sponsors leave in droves. To maintain his accustomed life-style and to maximize his assets size, the axiom of "income effect" predicts MORE games Woods will play in 2010 not fewer.

Well, that's the problem with academic economics. We maximize and minimize all kinds of things in life. Sometimes it is $$ alone, other times, other stuff.

More often than not, except of course those guys and gals at Goldman Sachs et al, we maximize a lot of the "other stuff".

In Woods case, if we accept his public announcement that he wanted to work on being a "better person, a better husband and a father", the "other stuff" is not about money. It is anything but money.

The conceit of modern economics -- as we should all know by now -- was one of the factors in the creation and then the destruction of the financial bubble the fallout of which we are still living through.

Remember the big debate of "Freshwater" vs "Saltwater" Schools of economics? I wrote about that awhile back on my blog.

Here are the two references:

1) Greg Mankiw's blog:

Tiger Woods as a Natural Experiment
Chapter 21 of my favorite textbook discusses the role of income and substitution effects in determining labor supply, including a case study about lottery winners. UCLA economist Matthew Kahn applies this kind of thinking to the Tiger Woods saga.

Before reading Matthew's analysis, ask yourself this question: Does economic theory predict that Woods will play more or fewer tournaments next year?

Source: Greg Mankiw's blog

2) Tiger Woods' Statement here.

Friday, December 11, 2009

Global Main Street Revolt

Politicians love campaign donations, but they also can count. Main Street voters outnumber Wall Street bankers. Politicians have known for at least a year Main Street is seething with anger about Wall Street (including the City in the UK) profligacy, special treatments and obscene compensations.

Big banks are all global. So Swiss, Dutch, French and certainly UK based banks all needed to pay up to attract financial types who knew the definition of a Credit Default Option or an "accumulator", a derivative which acquired the nickname of "I kill you later" in Hong Kong after all those derivatives sold by famous banks blew up taking down many who thought they had bought a safe investment product from their friendly neighborhood Wall Street broker.

The 50% once off tax on bonuses proposed by the UK authorities though easy to dodge is an acknowledgement by the UK politicians that its own Main Street voters want to smell blood. The same realization among political leaders is spreading across the English Channel. Read this report in the Wall Street Journal.

While not a done deal, the cat is out of the bag that some sort of "punishment" on the over-paid bankers needs to be exacted. Stay tuned for more such actions in the big financial league. Nothing like that would happen in China because the financial bubble and toxic assets didn't get invented there.

Goldman Sachs & Its Shareholders

Better late than never.

Goldman Sach's new compensation plan is getting good PR traction. Read here.

It's been a scandalous mystery why the largest institutional shareholders of "too big to fail" Wall Street firms had refrained for so long to go public criticizing on behalf of their own shareholders on Main Street regarding the many shenanigans these Wall Street firms had engaged in. Finally, one of institutional investors has done so albeit indirectly by praising the latest Goldman Sachs action to cut its cash bonuses to its principal officers.

By praising Goldman, the country's largest pension fund for academics TIAA-CREF, is in effect saying Goldman's scrapped plan was not kosher.

Goldman's new compensation plan has gone some ways to dampen the anger on Main Street, though by no means entirely.

Thursday, December 10, 2009


Source: NY Observer, Nov 18, 2009

The Coming Decline of US physics.

Back in the middle 20th century at Columbia University's department of physics the atmosphere was electric charged with serial exciting discoveries. The joke, with some exaggeration, was that half of the department were Noble prize winners, the other half were waiting to be so recognized. MIT, Caltech, Harvard were not far behind. US dominated the field of physics. And then something happened.

The country, over-extended financially, decided not to fund fundamental research. In 1992, as this article here reports, the US Congress, in all its "wisdom", dismissed the idea to build the world's largest atomic smasher against dire warnings from the country's leading scientists, one of whom was Steve Weinberg, quoted in this same article. The largest smasher is now in Geneva. US is no longer in the lead.

Empires usually fell over a period of time with one seemingly unrelated event following another that at some point tipped the balance forever. Only then it became obvious it was too late. In the case of USSR not a day sooner.

Physics seems so unrelated to the rise and fall of empires that folks ignore its significance in the rise of the USA as a superpower. Now, this is yet another piece of corner stone disintegrating.

Goldman Sachs Doing God's Work (2)

In a well-reported recent interview with a UK paper Goldman Sachs chairman Lloyd Blankfein told the reporter his firm was doing "God's work".

Former Fed chairman, Paul Volker, totally sidelined by Geithern/Summers said this to a recent gathering of well-heeled bankers in England:

..."“I wish someone would give me one shred of neutral evidence that financial innovation has led to economic growth — one shred of evidence,” said Mr Volcker, who ran the Fed from 1979 to 1987 and is now chairman of President Obama’s Economic Recovery Advisory Board"....

Volcker also said the only useful financial innovation from Wall Street in his memory was the ATM machine. Options, shmoptions? For the birds!

The whole article on his speech is here.

One of several Volcker's ignored recommendations to Obama was to temporarily nationalize all those "too big to fail" Wall Street firms, re-establish confidence, clean out both the balance sheets and those financial "arsonists" [my word] to be replaced by a new crew and then re-privatize them. That would have been a lot cheaper and fairer than what has happened. It was sometimes called the Swedish model named after a similar exercise following a banking crisis there in the early 1990's. Read here for a brief backgrounder.

Geithner famously dismissed that option saying: "The United States is not Sweden". To which I responded in an earlier writing back in April 2009 : "No, US is not Sweden. It is Thailand"!

I reproduce my blog here that has a link to a couple of published articles including one of mine:

US is Not Sweden, of Course. It is Thailand
It gives me no pleasure to compare USA to Thailand, the land of crony capitalism, notorious for not providing a level playing field to entrepreneurs, big, small or starting. Its politicians and business interests are inseparable.

I wrote about that comparison weeks ago published in the Bangkok Post, the country's leading English language paper. (Here.) I didn't expect to be taken seriously. After all, I was no world famous Nobel laureate.

My view is no longer so "weird". Read Columbia's Joseph Stiglitz, Nobel laureate in economics and Simon Johnson, MIT professor's testimony at the US Congress Joint Economic Committee on April 21. (Here.) Enough to make you do a Peter Finch "I am mad as hell and I can't take it anymore" in that classic movie "Network'.

Thomas Hoenig, president of the Federal Reserve Bank of Kansas, at that same hearing, weighed in with his thinly vieled criticism of the Geithner/Summers bailout strategy. Sober reading. Scroll down on that page to get the link to their respective testimonies.

Wednesday, December 09, 2009

So, you are a Harvard reject?

A lot of students are crushed because they failed to get into their college of first choice. In the English speaking world outside of the United Kingdom, Harvard is by far the premier object of desire, sans pareil among college bound students.

In a famously ego crushing survey done by the NY Times a few years ago (here) Harvard came out way ahead of everyone else, including its closest academic rivals -- Yale and Princeton.

Mind you Yale, Princeton or for that matter, a host of other colleges such as Amherst, Williams or Chicago would deliver as good an education, some say better, than Harvard.

75% of students if accepted by both Princeton and Harvard would go to Harvard. Princeton, if you believe the US News Annual college survey, was often ranked number 1 over Harvard.

65% would prefer Harvard over Yale.

Yale, Princeton, Columbia and a few others reject at least 9 out of 10 of all applicants. Those applicants are normally already self-screened for being high probability candidates to enter any of those colleges.

What students who got rejected by their college of first choice should remember is that the rejection/acceptance is more a draw of luck than a statement about the applicant's ability or lack of. It is impossible really for the Admissions Office to make a Soloman's choice.

The following blog by Harvard professor Georg Mankiw provides, to my eyes, an accurate picture of how impossible it is to choose who should get in, who should not.

Though his example is about his freshman seminar, the same applies to college admissions.

Or the years I have told countless parents and their college seeking kids that to get rejected should NOT be borne as a scar nor should they consider that a judgement about their capability. A rejection by the college of your choice is definitely not a predictor of what the future would hold for the applicant.

The process of selection remains mysterious, putting it kindly.

I was once a "spotter" and a "gatekeeper" for one of the most selective colleges with an admissions rate of less than 9% based on last year's figures. I have also spent serious time at Harvard, Oxford, Princeton and Columbia as a visiting scholar with extensive contacts with students at each of these universities.

I met many brilliant students. But I also met students who did not seem obvious to me they were so extraordinary compared to any other smart students at, say, University of North Carolina or Virginia or any of the great pubic universities. Nothing wrong with being a normal kid without perfect SAT scores, by the way. Many of "perfect" scoring students crash and burn after college. Remember the "brilliant" Harvard graduate, the Unibomber?

After a few years serving as my alma mater's "gatekeeper" in Hong Kong, I quit in disgust and wrote a strongly worded protest letter to the Admissions Director.

Why? All my enthusiastic recommendations were rejected by the admissions officers and all my B to B minus recommendations got in. I knew then this so-called "brain wrecking" selection process at elite US colleges was often nuts without any earthshattering significance.

Consider this. I had interviewed all those candidates, sometimes twice. I had my own business. I had to hire staff. I was considerably older and more mature than the Admissions folks. I knew that because they listed their years of college graduation. I had vast international experiences working, living, traveling around the world, in cultures these admissions folks normally had scant first hand knowledge of. Yet, they thought they knew better than me in selecting talented students. I doubted that.

I don't know how Professor Mankiw finally arrived at his decisions, but I bet you a good meal if you pelled him with enough 1989 claret, he is likely to admit he decided more by the seat of his pants than by some seriously serious selection criteria. Here was an excerpt from his blog.

An Impossible Task

I am teaching a Harvard freshman seminar this semester (in addition to ec 10), and one of my first tasks is to choose the 15 students. About 200 applied. That means that getting into my seminar is about as hard as getting into Harvard--except that you first have to get into Harvard before you can even apply!

Having spent much of yesterday reading through the applications, I fully recognize how difficult and somewhat random such admissions processes are. I could fill almost the entire seminar with kids with perfect SAT scores (2400), but I won't, as there is more to life than test scores. I am looking also for passion about the subject, interesting life experiences, and a balance among the group of students to promote good discussion. But judging that from a few brief essays is very, very hard. To those students I do not pick: I am sorry, and it is my loss as well for not having the opportunity to get to know you better.

Tuesday, December 08, 2009

Karzai wants more money!

You've got to give it to this President Karzai who knows a good thing when he sees one: the American printing press as this BBC report shows here.

This is also as good as any a predictor of how long the US will be forced to stay in Afghanistan. If Afghanistan needs $$ over 15 years to finance its security forces to which Obama was saying he would start handing over responsibility in 2 years time, guess how long would US forces remain there?

The obvious question one should pose to President Karzai's financial woes is this: Mr President, how about remitting back to Afghanistan all the billions stolen by your own folks in the government, including perhaps your own good self? How about asking your own brother to send back all this drug money?

The Afghan Quagmire

One day we were told President Obama had committed to a firm withdrawal from Afghanistan in 2010. That was the "punch line" of his big war speech just the other day.

Now we are told he didn't really mean that. We are told we misunderstood him. No date! Read this amazing report here.

So, would it be too unfair to conclude he just doesn't really know what the heck he wants to do with that war which is now HIS and not Bush's?

If there is no withdrawal date, then we are talking about an open-ended war, no?

That being the case, we are in for more troops calls going down the road. More deaths. More casualty and in the end, Afghanistan will still be in the hands of extremists: extreme corrupt officials and fundamentalist religious Taliban nuts who believe women are inferior and children should not go to school except to their religious ones.

So USA is getting deeper in that cesspool while its water is polluted, while California is technically bankrupt, while the roads, dams, airports, seaports are second rate?

Inevitable financial implications: budget deficits will remain huge and the dollar will remain weak and weaker.

Nation Building in USA, not in Afghanistan

The New York Times has a report here on how bad the water treatment capability has degraded back in USA.

Poor quality of domestic infrastructure has been warned for years by the American Civil Engineers Association that has been giving a failing grade on all US infrastructures. Their annual reports have fallen on deaf ears. US Congress was more willing to finance stupid foreign wars, cut taxes and then cut spending on such "minor" matters as infrastructure and education.

The money spent in Iraq and Afghanistan continues to drain national resources that are much more needed back home than abroad. If you want to talk about "national security", which is more important? Building up Iraq and Afghanistan or building up USA?

Previous administrations from LBJ down to Obama all implicitly believe you can have guns and butter at the same time.

Biochemistry, anyone?

2 decades ago, biochemistry, genetic engineering, all that stuff was considered the future. I met 3 biochem PhD's in Beijing who laughed at their own past expectations. Now all of them are in the financial business. I got curious and looked up salaries of professors in various disciplines. I believe they reflect what the ultimate market demand needs. Indeed, business, legal, engineering professors command the highest average salaries in the US. Biological and biomedical professors are not among the highest paid. This is corroborating evidence of what I was told by 3 Beijing biochem PhDs:

March 14, 2008
Average Faculty Salaries By Field and Rank at 4-Year Colleges and Universities, 2007-8

Associate professor
Assistant professor *
New assistant professor
Agriculture, agriculture operations, and related sciences
Architecture and related services
Area, ethnic, cultural, and gender studies
Biological and biomedical sciences
Business, management, marketing, and related support services
Communication, journalism, and related programs
Communications technologies/ technicians and support services
Computer and information sciences and support services
Engineering technologies/technicians
English language and literature/letters
Family and consumer sciences/ human sciences
Foreign languages, literatures, and linguistics
Health professions and related clinical sciences
Legal professions and studies
Liberal arts and sciences, general studies, and humanities
Library science
Mathematics and statistics
Multi/interdisciplinary studies
Natural resources and conservation
Parks, recreation, leisure, and fitness studies
Philosophy and religious studies
Physical sciences
Public administration and social-service professions
Security and protective services
Science technologies/technicians
Social sciences
Theology and religious vocations
Visual and performing arts
* Includes data for new assistant professors.

Source: College and University Professional Association for Human Resources

Monday, December 07, 2009

The 21st Century Belongs to.....? (2)

I knew China in the "dark" ages under Mao and the Gang of 4 and have been a frequent visitor to various parts of China. I just returned from a 6 days visit to Beijing, the capital.

Some conclusions are so obvious but they still need to be made since the media has been singing a somewhat different tune:

1) Anyone who still puts India and China together as in BRIC as if China and India were in the same league (other than population sizes) is not thinking straight.

These two economies are miles and miles apart. India's infrastructure with minor exceptions is still stuck in the early 20th century at best. China is already thinking 21st century. Free high speed Internet connection is available at most coffee shops, even some hole-in-the-wall places you don't expect. Roads are generally better than those in the USA. What used to take hours and hours to go from A to B now take less than an hour. From Beijing to the Great Wall is one example: 45 minutes on superb highway. From Beijing to Tienjin by train is now less than 30 minutes.

2) Traffic trams in Beijing is not due to lack of roads built. The number of cars is growing at a speed the public works folks cannot keep up. The quality of cars is mind boggling for those who still remember the bad old days. Now your lawyers or local high executive types drive BMW's or Mercedes.

3) The quality and quantity of professionals, in finance, law and even in such very local businesses as real estate development, is impressively global in outlook. Many hold degrees from global "brands". I stumbled upon the Xmas gala dinner of Oxford and Cambridge alumni at Grand Hyatt and walked in without an invitation to take a look see. The grand ballroom was filled.

I was invited to a special occasion dinner for 25, all Chinese citizens in their late 30's or early 40's, all successful professionals. Some from families with impeccable Party history.

I counted 1 Harvard College, 2 Harvard PhD's in biochemistry 1 Harvard MA in economics, 1 Boston U Phd also in bio chem with post doc work done at Harvard, 2 Wharton degrees, 1 Chicago, 1 Wellesley, 1 Columbia Law, 1 Rutgers. I didn't get a chance to query the rest. Naturally all speak fluent English.

The long held idea that Indians had an advantage in English proficiency is no longer so relevant. English has become the universal business language and the Chinese are fast catching up overall.

Latest US data indicate a continuing pattern of "surge" in PRC student applications to study in the US. Any cursory walk through the various campuses in the UK could mislead you into thinking the Chinese were taking over.

The relevant fact here is this: more Chinese are getting richer faster than Indians and they are sending their children abroad at a rate faster than India.

In China they are also expanding the capacity of universities faster than India with improving quality and paying salaries that are well above Indian rates to attract overseas talents and to retain domestic ones.

Any economist worth mentioning knows the two principal prerequisites of sustained high economic growth are: human capital (read Education) and public governance.

Both of these conditions are more in place in China than in India.

I should stop here for a pause. More on this subject going forward.

Most people cite Democracy in India as sine qua non in predicting that in the long run will outpace China. Skeptics of Chinese miracle also point to the fact that only democratic economies are rich.

2 caveats. Is Singapore a true democracy? Second, as John Maynard Keynes famously said: "In the long run, we are all dead". The third caveat maybe this: why is getting rich a necessarily morality story linking that to democracy. Don't forget Adolf's 3rd Reich was doing far better economically than its predecessor, the Weimar Republic.

Meanwhile comparing China and India is like comparing a Ferrari to a Soviet Volga.


White House is putting out the word that it is recovering most of the billions delivered on silver patter to Wall Street. The taxpayers "only" lost $42 billion! How marvelous! Let's celebrate. Read this article here.

The taxpayers wrote near blank checks to Wall Street and what did they get? "Only" $42 billion loss while a few firms are reporting record earnings (using zero cost taxpayers' money with a guarantee), while paying out record bonuses in billions when the country is suffering from double digit unemployment rate and while California, formerly "the future" is teetering on the brink of being a "failed" state.

Losing only $42 billion is a "good" deal that warrants front page celebrations?

Pathetic is the only word I can think of.

Chalk it down as another Washington Xmas Giveaway. We all know the details of the bailout came from Hank Paulson, Larry Summers and Tim Geithner.

Let's not remember Harry Truman's axiom: The Buck Stops Here. Only one person and one alone must shoulder the accountability -- Barack Obama, the President of the United States.

Sunday, December 06, 2009

Obama's Big Gamble on Afghanistan

Read this excerpt from today's paper, stop and think for a second how Obama settled on how to conduct his Afghan war:

..."as his top military adviser ran through a slide show of options, Mr. Obama expressed frustration. He held up a chart showing how reinforcements would flow into Afghanistan over 18 months and eventually begin to pull out, a bell curve that meant American forces would be there for years to come.

“I want this pushed to the left,” he told advisers, pointing to the bell curve. In other words, the troops should be in sooner, then out sooner.

When the history of the Obama presidency is written, that day with the chart may prove to be a turning point, the moment a young commander in chief set in motion a high-stakes gamble to turn around a losing war. By moving the bell curve to the left, Mr. Obama decided to send 30,000 troops mostly in the next six months and then begin pulling them out a year after that, betting that a quick jolt of extra forces could knock the enemy back on its heels enough for the Afghans to take over the fight"....

source: New York Times, Dec 7, 2009

The scary thing is this: Obama finalized his early in/early out war strategy by wishing the "bell curve" to move to the left.

This sounds more like a waving of a magic wand moving that curve "leftward". And that the realities on the ground will comply with his wish that an early "surge" would "work" allowing him to withdraw sooner.

What is the probability that these 30,000 new troops are enough?

The whole report is here.

Saturday, December 05, 2009

Harvard on Hard Times

Maybe it is a good thing. Maybe USA has too many lawyers anyway. Read what Harvard Law is doing of late here.

Thursday, December 03, 2009

The Speech

President Obama's speech (here) has received some good press. It was good speech making. Obama has a well deserved reputation of being a man of letters.

But what has it clarified? A lot: here is a crucial excerpt in defining the mission statement and the necessity of sending more troops:

..."We must deny al Qaeda a safe haven. We must reverse the Taliban's momentum and deny it the ability to overthrow the government. And we must strengthen the capacity of Afghanistan's security forces and government so that they can take lead responsibility for Afghanistan's future.

We will meet these objectives in three ways. First, we will pursue a military strategy that will break the Taliban's momentum and increase Afghanistan's capacity over the next 18 months.

The 30,000 additional troops that I'm announcing tonight will deploy in the first part of 2010 -- the fastest possible pace -- so that they can target the insurgency and secure key population centers. They'll increase our ability to train competent Afghan security forces, and to partner with them so that more Afghans can get into the fight. And they will help create the conditions for the United States to transfer responsibility to the Afghans"...

I have one simple question, sir. General McCrhystal actually wanted 90,000 troops as we have learned from various leaks, though publicly he had called for 40,000.

If the 30,000 troops cannot "finish the job" with "job" now more clearly defined, will you still start withdrawal you say you will in mid 2011?

21st Century Belongs to...?

I am back online. Indeed, there are two parallel universes. One for the common folks whose Internet connection has been cut from accessing all foreign blogs, so I am told, Facebook, Twitter and Lord knows what else. The other universe is where I am: a famous deluxe hotel of a famous global chain. From the privacy of my room, I don't see (yet) any Big Bro watching over me. I am assuming.

Just a note to say I have surfaced and will catch up with "outside" news soonish. Meanwhile, it remains amazing to a jaded visitor to this land of ancient history and modern myths to observe how vibrant, dynamic, can-do this former sleeping and very inefficient giant has become.

One very obvious reality is how youthful and entrepreneur this society has become. Granted this is the capital, yet regional accents are everywhere.

I see folks who would look like high schools kids managing businesses, starting a new business, walking about with a sense of self-confidence that to many American visitors remind them of what US of A once was.

China also proves once and for all FALSE what we all once learned in economic development 101: size matters. No, size does not matter.

China proves that growth is not limited by size. It is limited only by productivity. Professors used to say when a country "matures", productivity slows down.

Define " maturity "? Is the US "mature"?

Not to my eyes. US has become more like a second world country. More investments in the right areas would produce much higher growth than what it has taken for granted for years that its long term trend growth is roughly 4%.

More on this in future postings. I am just glad I am now "connected".

Wednesday, December 02, 2009


If you do not see my writings for the next 6 days, it is because the country I am visiting starting tomorrow blocks access to my blog. It remains to be seen if I could access my own blog from the hotel room of an international chain which may have its own cable connection to an overseas server. Not sure.

i have already confirmed with a friend in that presumed superpower in the 21st century that access when he tried from his own home.

Tuesday, December 01, 2009

Revisiting War History of Vietnam and Afganistan

1) timeline of the Vietnam War

2) timeline of the Soviet War in Afghanistan

Why Obama = LBJ = Brezhnev

LBJ escalated the war in Vietnam because he didn't want to be the first President to lose a foreign war. He also believed his generals who told him just a more divisions will "finish the job".

Perhaps the most fatal error he and his entire administration made was they believed the South Vietnamese people they went all the way at great US sacrifice to "save" shared their values on just about everything -- on Vietcong, Ho Chi Minh and on democracy.

Brezhnev was "invited" by the Kabul government to fight against the Islamic Mujahideen. That war lasted 9 years with 100,000 Soviet troops on the ground.

A US military study later claimed the Soviets did not have enough "boots" on the ground. Right now, with the expected troop increase of 30,000 +/- Obama will announce tomorrow, US and allies will have more than 100,000 troops with most of them GIs.

You can count on the military to argue that 100,000 ain't enough given what both that study says and what General McChrystal has said openly. You can also count on whom the military will blame should they fail to "finish the job".

Incredible as this may seem, since so many analysts have drawn the comparison of this war to the US misadventure in Vietnam and the Soviet one in Afghanistan, Obama and his advisors are repeating the same fatal conceit.

They really don't appreciate the deep historical significance of Afghanistan as the place "empires go to die". Clearly the current leaders continue to believe in itself as being fundamentally different from all previous foreign empires since time immemorial. America is the Exception is as American as apple pie, as it were.

Here are just a couple of relevant passages from the Wall Street Journal report:

..."Few American officials know the Soviets' bitter Afghan predicament better than Mr. Gates. In the 1980s, he was the deputy director of the CIA, overseeing a massive U.S. effort to fund, train and equip the Islamic insurgents, called mujahedeen, who fought the Soviet army to a standstill.

Now some of the most prominent of these insurgents, such as Gulbuddin Hekmatyar and Jalaluddin Haqqani, are allied against America with the Taliban and al Qaeda. Almost daily their men are killing Western troops, who often operate from former Soviet bases and use Soviet-drawn military maps with faint Cyrillic markings.

"It's an eerie sense of deja vu," said Bruce Riedel, a Brookings Institution scholar who headed the Obama administration's Afghan policy review in the spring and who in the 1980s worked under Mr. Gates as a CIA officer in the region. "America," he said, "is in the rare position of fighting the same war twice in one generation, from opposite sides. And it's easier to be the insurgents"...

...Despite billions in U.S. aid since 2001 spent on roads, clinics and schools, there is little comparably prominent evidence of American reconstruction.

"What have the Americans done so far? They're only busy building their own military bases," said Mohammad Nassim, a 40-year-old Kabul resident, airing a frequently heard opinion....

...Portraying Americans here as the new Soviets, of course, forms the very foundation of the Taliban world view. "Both superpowers wanted to impose by force their alien ideologies on our country -- the Soviets socialism, and the Americans this strange phenomenon they call liberal democracy," Mullah Wakil Muttawakil, foreign minister of the Taliban government that was deposed in 2001, said in an interview. "These are outside ideas. And anything coming from abroad is resented and rejected here."...

The full WSJ report is here.