Minsky and Housing Bubble

Dr. Hyman Minsky's explanation of boom and boost in a capitalist economy is based on structure (or rather change of) of financial relationships. It is highly relevant today as it describes what is happening with the housing sector. The practice of ARMs and various option mortgages are nothing but Ponzi finance schemes.

“In order to understand why our economy has behaved differently since the middle of 1960s than it has earlier in the post-World War II epoch we have to appreciate how the broad contours of the financial structure have changed. The changes in the broad contours of demand have changed the reaction of aggregate profits to a change in investment and therefore have changed the cyclical behavior of the ability of business to validate its debts. The changes in the financial structure have increased the proportion of speculative and Ponzi finance in the total financial structure and therefore increased the vulnerability of the financial system to refinancing and debt validating crises.”

“A thorough research study should examine the changing composition of the assets and liabilities of the various sectors and the implications of this changing structure, as well as changes in financing terms, for the cash flows of the various sectors of the economy. The cash flow structure due to liabilities need then be integrated with the cash flow from assets and the various cash flows due to income production. In particular the changing relations between cash receipts and payment obligations and between payment obligations and the margin of safety need be understood.” (page 49)

“The combined effects of big government as a demander of goods and services, as a generator – through its deficits – of business profits and as a provider to financial markets of high-grade default-free liabilities when there is a reversion from private debt means that big government is a three way stabilizer in our economy and that the very process of stabilizing the economy sets the stage for a subsequent bout of accelerating inflation.” (page 56)

“Innovations in financial practices are a feature of our economy, especially when things go well… But each new instrument and expanded use of old instruments increases the amount of financing that is available and which can be used for financing activity and taking positions in inherited assets. Increased availability of finance bids up the prices of assets relative to the prices of current output, and this leads to increases in investment… In our economy it is useful to distinguish between hedge and speculative finance. Hedge finance takes place when the cash flows from operations are expected to be large enough to meet the payment commitments on debts. Speculative finance takes place when the cash flows from operations are not expected to be large enough to meet payment commitments, even though the present value of expected cash receipts is greater than the present value of payment commitments.” (page 66)

“During a period of successful functioning of the economy, private debts and speculative practices are validated.  However, whereas units that engage in hedge finance depend only upon the normal functioning of factor and product markets, unit which engage in speculative finance also depend upon the normal functioning of financial markets. In particular, speculative units must continuously refinance their positions. Higher interest rates will raise their costs of money even as the returns on assets may not increase…

In addition to hedge and speculative finance there is Ponzi finance – a situation in which cash payments commitments on debt are met by increasing the amount of debt outstanding… Ponzi financing units cannot carry on too long. Feedbacks from revealed financial weakness of some units affect the willingness of bankers and business to debt finance a wide variety of organizations… Quite suddenly a panic can develop as pressure to lower debt ratios increases.” (page 67)

Source: Credit Bubble Bulletin, by Doug Noland of Prudent Bear.

Virtual Gold Rush

 Via the Division of Labour, This BussinessWeek article, Innovation in the Age of Mass Collaboration, describes how a conservative mining company discovered gold by opening up its proprietary database on the Internet and offering a prize:

The contestants identified 110 targets on the Red Lake property, more than 80% of which yielded substantial quantities of gold. In fact, since the challenge was initiated, an astounding 8 million ounces of gold have been found—worth well over $3 billion. Not a bad return on a half million dollar investment.

Steve Jobs blames teacher unions

Apple Inc. CEO Steve Jobs lambasted teacher unions Friday, claiming no amount of technology in the classroom would improve public schools until principals could fire bad teachers.

Source: Cafe Hayek

Does change in exchange rates affect international trade?

If yesterday one dollar bought 100 yen, and today one dollar buys 120 yen, each dollar today buys 20 percent more Japanese goods than it bought yesterday.

Source: Cafe Hayek: Hooray for a Strong Dollar

Really! So, presumably, this 20% more japanese products came out of nowhere in a day?

Or did he meant to say that purchasing power has shifted from holders of Japanese Yen to holders of US dollars. But how can we conclude that merely from the fact that exchange ratio between dollars and Yen has changed.

If say, Japanese govt. has printed more Yen. It will simply inflate the prices of all products in Yen. US dollars will also appreciate compared to Yen but (may) not appreciate compared to Japanese products.

So, why would US dollars be able to buy more Japanese products?

If amount of US dollars and Japanese products in the market haven't changed in a day, why would their ratio (prices) change?

Bay Area and House Prices

Burbed.com, is my favorite blog when it comes to housing market. It is witty, sarcastic and informative. This post is just too good to pass!.

If you ask ask most people in the Bay Area “Why did homes get so expensive in the last few years?” you’ll probably here these reasons:

1. It’s not a bubble: They’re not making any more land. It’s special here. (Who knew that land suddenly decreased?)
2. It’s not a bubble: Weather. It’s special here. (Who knew that the weather suddenly got so much better?)
3. It’s not a bubble: Everyone wants to live here. It’s special here. (But why so much so in the last few years?)
4. It’s not a bubble: Web 2.0, Google, The Valley is BACK! Oh, and it’s special here.

The last one is distinctly possible. Google IPOed in 2004, instantly creating thousands of millionaires/billionaires. The job market has picked back up. Traffic is back with a vengeance.

Ok, so maybe that explains these two graphs:

Source: How the Bay Area caused home prices to go up nationally… -- Burbed.com: Your Silicon Valley Home and Mortgage Insanity Blog

"Guru"'s Businessman Hero

Those frustrated to see persistent bashing of business as evil in Bollywood (and Hollywood) movies will welcome the "Guru". I plan to see it as soon as the DVD version is released.

Who would ever have thought that one of the villains of a Bollywood film could be import duty? "Guru," the latest Bollywood blockbuster by the respected director Mani Ratnam, is that rare film -- perhaps Bollywood's first -- in which free markets are lauded as a force for good. Aliens emerging from the Taj Mahal would be less surprising.

"Guru" stars Abhishek Bachchan as Gurukant Desai, a character inspired by Dhirubhai Ambani. Ambani was that rare tycoon who went from rags to riches during the worst years of India's license raj, building Reliance Industries, which today is India's largest private-sector company. In the era in which Ambani flourished, the state strangled private enterprise with licenses, regulations and sundry restrictions. Jawaharlal Nehru's dictum that "Profit is a dirty word" about sums it up.

Source: Bollywood's New Capitalist Hero - WSJ.com

An just and efficent land acquisition

Nandigram village, near Haldia in West Bengal, is up in arms against forcible land acquisition for the Indonesian Salim group’s proposed project. In this case, I do support Arundhati Roy and others who are trying to support the rights of the villagers:

Left and left-of-centre intellectuals like Arundhati Roy, Romila Thapar, Jean Dreze, Sumit Sarkar and others in a joint statement said the tense situation in Nandigram is "likely to be repeated across the state if the policy continues to be executed as it has, without consideration for human rights, democratic procedures and livelihoods".

I wonder if what happened in Nandigram, Singur and Narmada will prompt this leftists to support property rights. Without property rights, only way against govertment violation of property rights is case-by-case agitation. With property rights, the courts will be on the side of those whose property rights are or will be affected.

In the end, we need to ensure that land acquisition is possible without force and without excessive transaction costs and veto by mischievous minorities. Swaminathan Aiyar's proposal for community-led land acquisition sounds pretty interesting!

As a libertarian, I instinctively dislike forced acquisition of the property of citizens by governments. So I support the farmer agitations in Singur and Nandigram against land acquisition by the West Bengal government for the Tata and Salim groups.

I do so with some reluctance, since I would love to see a re-industrialised West Bengal. But there are good and bad ways of achieving this. The wrong way is for state governments to acquire land by fiat. The right way is to empower farmers to become partners in industrialisation.

The Prime Minister has promised a new, humane displacement policy. This implies, rightly, that the old policy was inhumane. In the holy name of socialism, the government acquired land for any purpose it pleased, public or private, and decided what compensation to give. The abolition of the fundamental right to property in 1976 meant that compensation depended on the whim of politicians, not farmers' rights.

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However, a problem can arise when industry requires a block of contiguous land, and a few naysaying farmers exercise an effective veto even when the vast majority of farmers want to sell. The current answer is forced acquisition. Far better will be a new acquisition law that empowers farmers themselves to decide.

After all, if a few naysayers block a deal, they are affecting the property rights of farmers who want to sell. The new land law should provide for state governments or corporations to negotiate acquisition proposals with farmers, and then let the farmers vote on the deal. If a large majority--it could be two-thirds or three-quarters--vote in favour of selling, this should be binding on the minority.
In this scheme, the final decision will lie not with the state government or corporation, but with the community of farmers. It will constitute community-led acquisition. It will respect both the property rights and dignity of farmers, and make them full partners in industrialisation.

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The third feature of the new law should be to ensure that village residences stay untouched even when surrounding farmland is sold to corporations. A typical industrial estate consists of a core area that has to be walled off for security and tax reasons, and a non-core area with residences, community facilities and parks. The original villages should be incorporated into the non-core zones, which will then have a mixed population of villagers and sahibs, and not be enclaves of sahibs alone.

Pakistan's ISI helped Taliban: A Taliban Spokesman

Abdul Haq, better known as Dr. Hanif, was caught just hours after crossing the border from Pakistan into Afghanistan in Nangahar province.

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Afghan investigators say that under questioning, Dr. Hanif, who had been working with the Taliban for the past 14 months, told them that the organization would never have been able to challenge Afghan military and NATO forces without the direct assistance of Pakistan's Inter-Services Intelligence agency. "This means that according to his confession, the ISI of Pakistan is directly involved in funding, arming and supporting the Taliban and other opposition groups against the government of Afghanistan," says NDS spokesman Sayed Ansari.

Although the ISI is believed to have played a major role in nurturing the Taliban and bringing it to power in the mid-1990s, Pakistan has routinely denied the accusation that it continues to provide support or a permissive environment for the organization. Just last week, outgoing U.S. National Intelligence Director John Negroponte warned that while Pakistan is "a frontline partner in the war on terror," it is also the country "where the Taliban and al-Qaeda maintain critical sanctuaries." Al-Qaeda, he said, is "cultivating stronger operational connections and relationships that radiate outward from their leaders' secure hideout in Pakistan to affiliates throughout the Middle East, North Africa and Europe."

And on a visit to Afghanistan Tuesday, Defense Secretary Robert Gates reiterated the point, saying, "There are more attacks coming across the border; there are al-Qaeda networks operating on the Pakistani side of the border. And these are issues that we clearly will have to pursue with the Pakistani government."

Source: A Taliban Spokesman's Confession -- Wednesday, Jan. 17, 2007 -- Page 1 -- TIME

It's not as if we need further proof of ISI's support of terrorists.

One this I did not understand, though! How is it a confession if a Taliban Spokesman says that al-Qaeda received the help from Pakistan's ISI?

Cisco Ups the Stakes in the Outsourcing Game

SAN JOSE, Calif. // Wim Elfrink's climb up the corporate ladder has taken him from Holland to France, Italy, Switzerland and the United States.
But his latest promotion will take the Dutch polyglot far from his Western comfort zone. As the chief globalization officer at Cisco Systems Inc., Elfrink is taking his wife, two daughters and the family dog from suburban Silicon Valley to Bangalore, India.

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The 50,000-person company wants 20 percent of senior managers working at the proposed Globalization Center in Bangalore by 2010. The executives will be a mixture of rising stars from San Jose and Bangalore and talent plucked from acquisitions and competitors worldwide.

International business experts say Cisco's executive migration is a shrewd move that should give high-ranking employees critical insight into one of the world's fastest growing economies.

Source: Cisco Shifts Executives to India - baltimoresun.com

Bay Area has 2nd worst traffic jams

Via Burbed, America's Worst Commutes - Forbes.com.

California wins the award for worst traffic jams, with Los Angeles and the San Francisco metro area coming in first and second. The Riverside-San Bernardino area tied Orlando, Fla., for ninth place. In Los Angeles, the average annual delay per traveler is 93 hours.

But don't you worry, the house prices will continue to rise as they always have!