Once the Geithner plan was leaked in detail by the NYtimes, criticism started to pour in on negative aspects of the plan which heavily subsidizes the investors and the private parties. After reading the various articles attacking the plan, once thing seemed certain to me. You will always have some top economists (or) think tanks criticizing any plan that will be proposed for the rescue. There is no such thing called 'The Best Plan'. Any plan that will be proposed to get us out of this complex web, would definitely benefit a section of investor/private parties.Considering the enormity, complexity and urgency of the situation, you can't wait for a plan that is beneficial only to the tax payers and prevents even a penny to the private firms.
More the delay in rescue, will definitely worsen the economic situation and leads to more job losses. It is always better not to worry about the few hundred dollars of each tax payers money that goes to the private parties , rather than loosing out more jobs due to the delay in the rescue plan.
In the leaked out Geithner's plan, the proposed alternatives indicate that the Government is heavily dependent on the private parties to remove the toxic assets out of the banks. This clearly indicates that the government wanted to stop shelling out more tax payers money and involve private investors in the rescue plan. So, having realized this, private investors are going to exploit the situation and look out for some benefits. Since the govt has no better alternative, they are going to allow this. One of the first signs of the economic recovery is when you see the private investment firms starts showing interest in the bank's equity. On careful execution of this plan, it will win back the confidence that was lost by the investors on the banks.
If the private parties are not included, then the Govt. again has to infuse more money into these banks. It is already evident that, all the infused funds were not used for lending purposes, but were used by the banks to prevent itself from being insolvent. In order to start the lending process, banks definitely needs more money and is achievable only through the sale of these toxic assets. As per the proposed plan, it seems like Govt is taking all the risks involved in these assets, whereas the gains are shared by the private parties and the tax payers. Going by the plan, the govt. is going to auction these assets to the private parties and they will pay high prices as the downside risk will be handled by the govt. But the truth is undeniable that the private firms will handles these assets to profit than the government bodies. The risk of losing is less when it is in the hands of the private firms. But if the government dishes out the private parties in the rescue plan, it will be a highly risky bet for the govt alone to handle all these assets. It definitely need private firms' help in liquidating these assets as quickly as possible, so that the government can get back the tax payers money. But the govt should assure that, the private firms should not pool these assets and play around in packing and shipping them.
Read more...
Sunday, March 22, 2009
Saturday, February 21, 2009
Nationalizing banks is a risky approach
The stocks of Bank of America and Citigroup were hammered today after the 'Bank nationalization' rumor started to gain strength. Moreover, editorials and various publications started to raise their voice in favor of nationalizing the failing banks. Though most of the economists are not openly admitting this option, they accept that the tax payers money infused into the big banks is not working.
Considering the banks' high level of dependence on the government funds, now these banks are almost under the orders of Washington. This was clearly evident in the Congress hearing that was held last week. The CEOs of the Eight big banks were literally grilled and pounded by the Congressman. At one point of time, a congressman was asking a CEO to reduce his bank's interest rates and an other congressman asked the CEOs to sell their private jets. It almost looked like hundreds of Board of Directors were questioning the CEOs. Virtually, the bank executives resembled like the government employees of a nationalized bank.
Since these banks are in need of federal funds, it makes sense to nationalize the banks and remove the existing top management which brought the crisis at the first place. This option would be a better one, if the economic crisis is not bad as it is now.
Nationalizing these banks will serve as an additional burden to the govt which is already hands full in executing the stimulus plan. Acquiring these banks and running them successfully along with streamlining the funds of the stimulus plan is an onerous task and there is no room for failure. Considering the size of these banks, it is not an easy task to replace a new management and expect it to run the bank successfully in this tough economic situation. Any error in the nationalized banks would seriously hamper the confidence on US by the world countries. This will also add up to the already huge deficit and would heavily hamper the valuation of US currency. Then, US as a country would like a big corporation at the verge of bankrupt. On the other hand, successful execution of Bank and the stimulus plan would be a dream run. But this is not the time to test the tough waters.
Now the government would like to play safe and not worsen the current situation. But at the same time, it should avoid banks going bankrupt. Debacle of a single major consumer bank is enough to bring down the confidence and which this will eventually prolong the economic recovery process. The only way to help the failing banks is to acquire the toxic assets held by those banks. The government can aggregate these toxic assets into one entity and could alienate the banks from these assets. At the same time, it should ensure that the infused funds are used for its intended purpose. Strict transparency should be enforced in regulating the injected money. Essentially, a new regulatory environment should be setup which should have a greater control over these banks and at the same time a super regulator should be setup to oversee the interconnection between Wall street and Main street. The government can hold up these toxic assets and can sell them to the private investors in a staggered basis, thereby the spent money can be gained back.
The whole nationalization idea is widely seen as an option as the Swedish government followed this approach to recover its economy decades ago. Some say we can follow the same approach and others are against it. But, every situation is different and should be handled with its own pros and cons. US should devise its own customized model to suit the current situation. Revival of a country's economy is not so easy as copy-pasting a model from the history. It all depends on the risk capability of the government in devising an innovative approach.
Read more...
Considering the banks' high level of dependence on the government funds, now these banks are almost under the orders of Washington. This was clearly evident in the Congress hearing that was held last week. The CEOs of the Eight big banks were literally grilled and pounded by the Congressman. At one point of time, a congressman was asking a CEO to reduce his bank's interest rates and an other congressman asked the CEOs to sell their private jets. It almost looked like hundreds of Board of Directors were questioning the CEOs. Virtually, the bank executives resembled like the government employees of a nationalized bank.
Since these banks are in need of federal funds, it makes sense to nationalize the banks and remove the existing top management which brought the crisis at the first place. This option would be a better one, if the economic crisis is not bad as it is now.
Nationalizing these banks will serve as an additional burden to the govt which is already hands full in executing the stimulus plan. Acquiring these banks and running them successfully along with streamlining the funds of the stimulus plan is an onerous task and there is no room for failure. Considering the size of these banks, it is not an easy task to replace a new management and expect it to run the bank successfully in this tough economic situation. Any error in the nationalized banks would seriously hamper the confidence on US by the world countries. This will also add up to the already huge deficit and would heavily hamper the valuation of US currency. Then, US as a country would like a big corporation at the verge of bankrupt. On the other hand, successful execution of Bank and the stimulus plan would be a dream run. But this is not the time to test the tough waters.
Now the government would like to play safe and not worsen the current situation. But at the same time, it should avoid banks going bankrupt. Debacle of a single major consumer bank is enough to bring down the confidence and which this will eventually prolong the economic recovery process. The only way to help the failing banks is to acquire the toxic assets held by those banks. The government can aggregate these toxic assets into one entity and could alienate the banks from these assets. At the same time, it should ensure that the infused funds are used for its intended purpose. Strict transparency should be enforced in regulating the injected money. Essentially, a new regulatory environment should be setup which should have a greater control over these banks and at the same time a super regulator should be setup to oversee the interconnection between Wall street and Main street. The government can hold up these toxic assets and can sell them to the private investors in a staggered basis, thereby the spent money can be gained back.
The whole nationalization idea is widely seen as an option as the Swedish government followed this approach to recover its economy decades ago. Some say we can follow the same approach and others are against it. But, every situation is different and should be handled with its own pros and cons. US should devise its own customized model to suit the current situation. Revival of a country's economy is not so easy as copy-pasting a model from the history. It all depends on the risk capability of the government in devising an innovative approach.
Read more...
Monday, February 09, 2009
Don't criticize the stimulus package
There are several criticisms going rounds on the effectiveness of US stimulus package.The most prominent grumble about the amount being spent on industries which really don't need stimulus. There are also critics who are against the passage of such stimulus packages, as the amount is too big ajnd it will add more to the current US debt. But is there a better alternative than passing this stimulus bill? I don't think so.
Firstly, the president can't just allow the economy to drown without acting on it immediately. The most important thing at this juncture is to raise the confidence among the consumers and trigger the cash flow. Just proposing long-term policies would not create any impact. You have to do something which would create an immediate effect. This can be done only injecting money into the economy. Now, the next question is whether the package would help the industries to be back on track immediately? possibly not. Most of the companies don't need dollar bills, instead, they want the consumers to spend, which is directly related to the confidence. Only if the job layoffs reduce, consumers can gain some confidence. There are two ways in which the proposed developmental projects could create or save jobs. Firstly, these government projects directly create jobs for the people who were fired by the private companies. Employing them will reduce the unemployment rate. Though all of them cannot be employed, the number will reduce a bit in the initial stage. Secondly, these proposed projects requires equipments which can be purchased only from the private companies. These new orders could benefit the businesses. Though, we cannot see a dramatic increase in the job creation, it could save the existing jobs. These new orders in the private companies would also benefit other small businesses who are linked as sub-contractors.
By including every industry in the stimulus plan, you are literally bringing in some level of confidence and new jobs across every set of consumers. Increasing a little amount of share on the 'most affected' industry is less preferable than allocating the same amount to the small industries, particularly when the government wants to instill confidence across the board..
All the above activities would buy some time for the government to act on the toxic assets held by the banks. These assets serve as a great headache both to the Govt and the bank. Once some solution is found for those bad assets, the banks can see some stabilization and can start the lending process. Unless the consumers hear some good news from their banks, they would not do the spending. In the mean time, new regulations can be implemented in the markets, which would shun away the existing fears. One thing is sure;the recovery will definitely consume more time, but any hasty decision along the way could prolong the tough times.
On a final note, the passage of the stimulus package is certain and should be immediate. Considering the current stage, any further delay would worsen the economy. Best anyone can do is to avoid disparaging the current stimulus plan. Criticizing the plan will dampen the very purpose of instilling confidence among the consumers.
Tags: stimulus package, Recession, Stimulus pacakge criticism
Read more...
Firstly, the president can't just allow the economy to drown without acting on it immediately. The most important thing at this juncture is to raise the confidence among the consumers and trigger the cash flow. Just proposing long-term policies would not create any impact. You have to do something which would create an immediate effect. This can be done only injecting money into the economy. Now, the next question is whether the package would help the industries to be back on track immediately? possibly not. Most of the companies don't need dollar bills, instead, they want the consumers to spend, which is directly related to the confidence. Only if the job layoffs reduce, consumers can gain some confidence. There are two ways in which the proposed developmental projects could create or save jobs. Firstly, these government projects directly create jobs for the people who were fired by the private companies. Employing them will reduce the unemployment rate. Though all of them cannot be employed, the number will reduce a bit in the initial stage. Secondly, these proposed projects requires equipments which can be purchased only from the private companies. These new orders could benefit the businesses. Though, we cannot see a dramatic increase in the job creation, it could save the existing jobs. These new orders in the private companies would also benefit other small businesses who are linked as sub-contractors.
By including every industry in the stimulus plan, you are literally bringing in some level of confidence and new jobs across every set of consumers. Increasing a little amount of share on the 'most affected' industry is less preferable than allocating the same amount to the small industries, particularly when the government wants to instill confidence across the board..
All the above activities would buy some time for the government to act on the toxic assets held by the banks. These assets serve as a great headache both to the Govt and the bank. Once some solution is found for those bad assets, the banks can see some stabilization and can start the lending process. Unless the consumers hear some good news from their banks, they would not do the spending. In the mean time, new regulations can be implemented in the markets, which would shun away the existing fears. One thing is sure;the recovery will definitely consume more time, but any hasty decision along the way could prolong the tough times.
On a final note, the passage of the stimulus package is certain and should be immediate. Considering the current stage, any further delay would worsen the economy. Best anyone can do is to avoid disparaging the current stimulus plan. Criticizing the plan will dampen the very purpose of instilling confidence among the consumers.
Tags: stimulus package, Recession, Stimulus pacakge criticism
Read more...
Friday, February 06, 2009
IBM's alternative to layoffs -
Initially IBM announced around 1200 layoffs citing the current economic crisis. The employees in the state of New york were also affected by this announcement, but IBM had earlier received around $140 million tax cuts in a pledge to create jobs in NY. This contrary move of receiving incentives and still firing employees created rage among the residents, which resulted in the reversal of the plan. But, there is a catch:
"The company has created a job-matching service it has dubbed "Project Match." Instead of firing employees, IBM is trying to sell them on the opportunity to move to exotic locales, experience new and different cultures, and participate in exciting IBM business ventures across the globe—all for just a fraction of what they'd earn back home."
The options which had more openings are: India, Brazil and China. This model of relocation from developed countries to developing countries was not expected to happen so quick. But, the current situation has brought in too many changes to Globalization. Things are happening too fast in IT industry, quicker than Friedman's prediction in his book 'The world is Flat'. But, there is also a good possibility that this model of relocation could have been brought in, considering the number of foreign employees working in IBM,USA. Some US citizens may consider this option temporarily and may move back to USA when the situation improves.
Read more...
"The company has created a job-matching service it has dubbed "Project Match." Instead of firing employees, IBM is trying to sell them on the opportunity to move to exotic locales, experience new and different cultures, and participate in exciting IBM business ventures across the globe—all for just a fraction of what they'd earn back home."
The options which had more openings are: India, Brazil and China. This model of relocation from developed countries to developing countries was not expected to happen so quick. But, the current situation has brought in too many changes to Globalization. Things are happening too fast in IT industry, quicker than Friedman's prediction in his book 'The world is Flat'. But, there is also a good possibility that this model of relocation could have been brought in, considering the number of foreign employees working in IBM,USA. Some US citizens may consider this option temporarily and may move back to USA when the situation improves.
Read more...
Wednesday, February 04, 2009
When the top economists brainstorm - WEF
The other day, WEF conducted a brainstorming session on the topic "What happened to the world economy?". This was attended by renowned economists from around the world and they brainstormed on various reasons and causes for this crisis. The economists were distributed into separate groups and finally, one from each table summarized their discussions.
As expected, the biggest wrong assumption the economists had was that, the markets would self-regulate. This was endorsed by many economists. Of course, there were few who declared that the basic structure of the economy is wrong. Their point is, if a failure of a single module in an industry brings down the whole economy, then the underlying model is wrong. The other valid point made in the discussion was, that the present risk model which is purely based on past data should not be believed completely, as it wont predict the future. Also, the available data is too small to rely upon.
Though most of the points discussed were quiet common, the one blame which always received the applause was 'the greediness of the bankers and the compensation' they received . The group criticized the compensation model for the bankers, which is purely based on the revenue they generate, it doesn't matter on how you do that. An other pundit suggested that, the executives whoever is responsible should be jailed and should be set as an example for all the wrong-doers. This was also well endorsed by a group of applause. Another table cited that the regulators always believed that China would do all the savings and the rest can just spend. Few think heads blamed that the banks depended too much on Mathematics model, instead of applying common sense. One economists just simply attributed to one word "Stupidity". Even though, regulators were blamed, one group of economists differed by targeting the 'interest groups" who had the control over the regulators.
Of course, lack of corporate governance and ethics were identified as a fundamental problem, which would have prevented this at the first place.
Finally, the economists were asked to vote on the assumptions and causes. In the below order, the first point got the highest vote and so on.
1. Assumption that markets would self-regulate
2. Cheap flow of money
3.Assumption that good times last forever. ie..house rates never fall
4.Putting regulation over ethics
5.High leverage
6. Assumption of economic literacy
7. China can do the saving.
The group also concluded that the regulation of the international framework as the top action item.
Watch the full video here: ( 90 mins) - Scroll to the last 20 mins for various voting results.
World Economic Forum, WEF 2009, economists, World Economy
Read more...
As expected, the biggest wrong assumption the economists had was that, the markets would self-regulate. This was endorsed by many economists. Of course, there were few who declared that the basic structure of the economy is wrong. Their point is, if a failure of a single module in an industry brings down the whole economy, then the underlying model is wrong. The other valid point made in the discussion was, that the present risk model which is purely based on past data should not be believed completely, as it wont predict the future. Also, the available data is too small to rely upon.
Though most of the points discussed were quiet common, the one blame which always received the applause was 'the greediness of the bankers and the compensation' they received . The group criticized the compensation model for the bankers, which is purely based on the revenue they generate, it doesn't matter on how you do that. An other pundit suggested that, the executives whoever is responsible should be jailed and should be set as an example for all the wrong-doers. This was also well endorsed by a group of applause. Another table cited that the regulators always believed that China would do all the savings and the rest can just spend. Few think heads blamed that the banks depended too much on Mathematics model, instead of applying common sense. One economists just simply attributed to one word "Stupidity". Even though, regulators were blamed, one group of economists differed by targeting the 'interest groups" who had the control over the regulators.
Of course, lack of corporate governance and ethics were identified as a fundamental problem, which would have prevented this at the first place.
Finally, the economists were asked to vote on the assumptions and causes. In the below order, the first point got the highest vote and so on.
1. Assumption that markets would self-regulate
2. Cheap flow of money
3.Assumption that good times last forever. ie..house rates never fall
4.Putting regulation over ethics
5.High leverage
6. Assumption of economic literacy
7. China can do the saving.
The group also concluded that the regulation of the international framework as the top action item.
Watch the full video here: ( 90 mins) - Scroll to the last 20 mins for various voting results.
World Economic Forum, WEF 2009, economists, World Economy
Read more...
Monday, February 02, 2009
Minister's support for outsourcing at the WEF
Among the several events hosted at the World Economic forum (Davos), a discussion was held on "Managing Global Risks", in which the Indian Union Minister Kamal Nath shared the stage with other global heads. The event host asked different questions to the participants, which revolved around the topic of various risks in the current environment. Mr.Kamal Nath was asked about the 'Protectionism' which is prevalent across the countries. Protectionism is "the policy of imposing duties or quotas on imports in order to protect home industries from overseas competition". Kamal Nath clearly spoke against protectionism followed by various countries at the time of this economic crisis. He added that, Protectionism is kind of a panic response whenever a crisis looms in a country. He cited an hypothetical example in Auto industry. If a country is adding import duties on the auto components, it would definitely increase the price of the vehicle for the consumer.
As he was talking about the perils, he moved his topic towards Outsourcing. He told the panel and the group that, if protectionism is carried out it outsourcing, the competitiveness will definitely decrease and will affect the growth of the company, as the cost is finally transferred to the consumers. He also added that, lack of skill and better cost is pushing the companies towards outsourcing. Kamal Nath's response at a cardinal stage like WEF, is kind of response to the Obama's proposal to cut taxes for the companies which outsource the jobs. Though, the new president is not very keen on this campaign proposal at this time of crisis, the recent letter from Senator Grassley to Microsoft has started the 'protectionism' issue once again. The senator urged Microsoft to give American workers priority in the layoffs. Infact, Grassley, with Sen. Richard Durbin, D-Ill., is pushing for legislation to make employers recruit American workers first, along with other changes to the visa program.
But, Carl Guardino, the CEO of Silicon Valley's Leadership Council has a different view. Below is his response on CNBC:
He says in the tech industry today, 53 percent of the engineers are "foreign born" and half the CEOs and founders of tech companies are foreign born.
"If America ever goes against our strong roots of welcoming talents from around the world, wanting to work here, contribute here, be a part of America, that's the day that we are risking everything that this democracy is about," he says. "We cannot take an attitude in good or bad times that suddenly we should be throwing immigrants out."
The bottom line: As grim as the economy is today, and as much as we might want to protect our citizens from losing jobs to foreigners, giving US citizens the inside track because of their citizenship over their abilities is a short-term fix with long-term, negative implications. If a US worker's skills are equal to the skills of a non-US citizen's, then sure, the US worker should get the job. Go Team! If it's about salaries and money-saved, and how much more cost-effective a foreign-born worker might be over his US counterpart in a similar position, then legislators and companies need to re-work the H1B visa program.
But if it comes down to cutting your engineering team because they're all from India so you can keep your American born employees on the shipping dock, you shouldn't have to lay off your engineering team just because they're foreigners.The whole idea here should be about hiring the best and the brightest, no matter where they're from.
It's the only way US companies, or any company, can expect to compete in a global market. Period.
Easy to become xenophobic in an economic climate like this one, though we do so at the risk of not just dulling our competitive edge, but losing it completely.
Tags: outsourcing, WEF, India at WEF, World Economic Forum, Kamal Nath
Read more...
As he was talking about the perils, he moved his topic towards Outsourcing. He told the panel and the group that, if protectionism is carried out it outsourcing, the competitiveness will definitely decrease and will affect the growth of the company, as the cost is finally transferred to the consumers. He also added that, lack of skill and better cost is pushing the companies towards outsourcing. Kamal Nath's response at a cardinal stage like WEF, is kind of response to the Obama's proposal to cut taxes for the companies which outsource the jobs. Though, the new president is not very keen on this campaign proposal at this time of crisis, the recent letter from Senator Grassley to Microsoft has started the 'protectionism' issue once again. The senator urged Microsoft to give American workers priority in the layoffs. Infact, Grassley, with Sen. Richard Durbin, D-Ill., is pushing for legislation to make employers recruit American workers first, along with other changes to the visa program.
But, Carl Guardino, the CEO of Silicon Valley's Leadership Council has a different view. Below is his response on CNBC:
He says in the tech industry today, 53 percent of the engineers are "foreign born" and half the CEOs and founders of tech companies are foreign born.
"If America ever goes against our strong roots of welcoming talents from around the world, wanting to work here, contribute here, be a part of America, that's the day that we are risking everything that this democracy is about," he says. "We cannot take an attitude in good or bad times that suddenly we should be throwing immigrants out."
The bottom line: As grim as the economy is today, and as much as we might want to protect our citizens from losing jobs to foreigners, giving US citizens the inside track because of their citizenship over their abilities is a short-term fix with long-term, negative implications. If a US worker's skills are equal to the skills of a non-US citizen's, then sure, the US worker should get the job. Go Team! If it's about salaries and money-saved, and how much more cost-effective a foreign-born worker might be over his US counterpart in a similar position, then legislators and companies need to re-work the H1B visa program.
But if it comes down to cutting your engineering team because they're all from India so you can keep your American born employees on the shipping dock, you shouldn't have to lay off your engineering team just because they're foreigners.The whole idea here should be about hiring the best and the brightest, no matter where they're from.
It's the only way US companies, or any company, can expect to compete in a global market. Period.
Easy to become xenophobic in an economic climate like this one, though we do so at the risk of not just dulling our competitive edge, but losing it completely.
Tags: outsourcing, WEF, India at WEF, World Economic Forum, Kamal Nath
Read more...
Sunday, February 01, 2009
What really is the Stimulus Plan?
In order to avoid the recession to linger for years, the US government has announced a stimulus plan (American Recovery and Reinvestment Plan) of $819 billion, that would be invested in diverse sectors. The idea is to create more jobs in these industries, thereby jump starting the confidence and trigger spending from the consumers. But, is economy so simple to just pump in money and avoid a recession. To understand this, lets look through a brief history of this stimulus plan.
Why Stimulus plan?
During the great depression in 1930s, then president Roosevelt introduced a series of spending initiatives named 'New Deal', aimed at creating more jobs and recover the economy. These initiatives helped to create more jobs at the time when the nation unemployment was at 25%. More than the actual benefits, it raised the confidence in the consumers mind. Some of the programs that were created through the 'New deal' is still existent. Social security system, Security Exchange commission and Fannie Mae were part of the initiative. Arguably, it is believed that these programs helped US to get out of the recession. So, following the same policy, the current government also introduced the same kind of stimulus plan to stage a recovery. This model is called 'Keynesian economics'- which is named after the economist John Maynard Keynes. Its an economic theory which advocates government intervention, or demand-side management of the economy, to achieve full employment and stable prices.
Unfortunately, the government is left with no other option than injecting money through these plans. The only other way which will encourage spending is to reduce the interest rates, but that is not possible now. In December 2008, the Fed reduced it rate to almost Zero and there was no positive effect.
What is the criticism about the plan?
When the stimulus plan was brought to congress for the approval, the Republicans voted against the bill. Some of the reasons were that, the plan has lot of investments which would not really create jobs. Eg: Investment in arts, Global climate studies etc. They propose to setup a new bill with better spending areas, even if takes more time to draft one. However, they support the tax cuts for the individuals proposed in the current bill. Nevertheless, the democrats has the house majority and the bill was passed.
Risks in the stimulus plans:
Though there is no better alternative to stimulus plan, there are risks involved in it. Since the US just needs more money for these plans, this huge amount adds to the already debt deficit US, which would come to 60% of its GDP by 2010. At the same time, it should pay off the interests to the foreigners who brought its treasury bonds. Remember, just printing more money would lead to inflation. Also, it will further reduce the value of the dollar in the global market. In order to avoid all these mishaps, the stimulus plan should work as expected and once the economy recovers, the government should align its economy more towards 'saving money' and produce more goods. Else, it wont be long enough before the dollar loses its sheen in the global market and the Euro could take over the position.
What if the Stimulus plan works too fast?
When the world economy started de-stabilizing in 2008, international investment poured into US treasuries and bonds. So if the stimulus works faster, then there will huge flow of money supply leading to inflation.
Indeed, its a tricky situation. All US needs is to boost the economy by bringing in confidence to the consumers. At the same time, the market should be regulated to avoid any unforeseen crisis that may occur due to any sporadic economic activity.
Tags: Stimulus Plan
Read more...
Why Stimulus plan?
During the great depression in 1930s, then president Roosevelt introduced a series of spending initiatives named 'New Deal', aimed at creating more jobs and recover the economy. These initiatives helped to create more jobs at the time when the nation unemployment was at 25%. More than the actual benefits, it raised the confidence in the consumers mind. Some of the programs that were created through the 'New deal' is still existent. Social security system, Security Exchange commission and Fannie Mae were part of the initiative. Arguably, it is believed that these programs helped US to get out of the recession. So, following the same policy, the current government also introduced the same kind of stimulus plan to stage a recovery. This model is called 'Keynesian economics'- which is named after the economist John Maynard Keynes. Its an economic theory which advocates government intervention, or demand-side management of the economy, to achieve full employment and stable prices.
Unfortunately, the government is left with no other option than injecting money through these plans. The only other way which will encourage spending is to reduce the interest rates, but that is not possible now. In December 2008, the Fed reduced it rate to almost Zero and there was no positive effect.
What is the criticism about the plan?
When the stimulus plan was brought to congress for the approval, the Republicans voted against the bill. Some of the reasons were that, the plan has lot of investments which would not really create jobs. Eg: Investment in arts, Global climate studies etc. They propose to setup a new bill with better spending areas, even if takes more time to draft one. However, they support the tax cuts for the individuals proposed in the current bill. Nevertheless, the democrats has the house majority and the bill was passed.
Risks in the stimulus plans:
Though there is no better alternative to stimulus plan, there are risks involved in it. Since the US just needs more money for these plans, this huge amount adds to the already debt deficit US, which would come to 60% of its GDP by 2010. At the same time, it should pay off the interests to the foreigners who brought its treasury bonds. Remember, just printing more money would lead to inflation. Also, it will further reduce the value of the dollar in the global market. In order to avoid all these mishaps, the stimulus plan should work as expected and once the economy recovers, the government should align its economy more towards 'saving money' and produce more goods. Else, it wont be long enough before the dollar loses its sheen in the global market and the Euro could take over the position.
What if the Stimulus plan works too fast?
When the world economy started de-stabilizing in 2008, international investment poured into US treasuries and bonds. So if the stimulus works faster, then there will huge flow of money supply leading to inflation.
Indeed, its a tricky situation. All US needs is to boost the economy by bringing in confidence to the consumers. At the same time, the market should be regulated to avoid any unforeseen crisis that may occur due to any sporadic economic activity.
Tags: Stimulus Plan
Read more...
Friday, January 30, 2009
All the WEF's a stage
The World Economic Forum conducts Annual Meeting in Davos (Switzerland) by inviting top business leaders, Intellectuals, political leaders to discuss on the most happening issues in the current environment.The business leaders usually try to participate in maximum number of events conducted in the 5 days period, attended by around 1000 Chairmen/CEOs of various companies. Apart from proposing constructive ideas for solving the issues, business leaders use this is as a stage to brand themselves, which in turn would help their company. Some companies have even doubled their turnover after this meeting. One such company is Enocean.
But this year, Michael Dell of Dell computers, went overboard in branding himself. To be precise, instead of branding, he tried to get some business from not another company, but from a country. In a stage shared by the Russian Prime Minister, Vladimir Putin, Dell asked this question to Mr.Putin. He offered help to Mr.Putin by asking "How can we help to expand IT in Russia", after mentioning that he felt there is room for Russia to capitalize in Intellectual and scientific sector.
And, Putin shot back by replying "we don't need any help. We are not invalids. We do not have limited capacity. People with limited capacities, abilities should be helped...developing countries should be helped". (Watch the video)
The question which could have been a big business for Dell, turned out to be a disaster.
Now, lets look at the Indian business leaders who are now in WEF, Davos:
1. Mukesh Ambani - Reliance
2. Kris Gopalakrishnan - Infosys
3. Ajit Gulabchand - Hindustan Construction Company
4. K.V.Kamath - ICICI
5. Lalit.K.Modi - Modi Enterprises
6. Nandan M. Nilekani - Infosys
7. Azim Premji - Wipro
It should be noted that, Infosys had gained some good branding in 2006, when Nandan Nilekani became one of the youngest entrepreneurs to join 20 global leaders on this World Economic Forum (WEF).
Tags: WEF, World Economic Forum, Michael Dell, Indians at WEF, Vladimir Putin
Read more...
But this year, Michael Dell of Dell computers, went overboard in branding himself. To be precise, instead of branding, he tried to get some business from not another company, but from a country. In a stage shared by the Russian Prime Minister, Vladimir Putin, Dell asked this question to Mr.Putin. He offered help to Mr.Putin by asking "How can we help to expand IT in Russia", after mentioning that he felt there is room for Russia to capitalize in Intellectual and scientific sector.
And, Putin shot back by replying "we don't need any help. We are not invalids. We do not have limited capacity. People with limited capacities, abilities should be helped...developing countries should be helped". (Watch the video)
The question which could have been a big business for Dell, turned out to be a disaster.
Now, lets look at the Indian business leaders who are now in WEF, Davos:
1. Mukesh Ambani - Reliance
2. Kris Gopalakrishnan - Infosys
3. Ajit Gulabchand - Hindustan Construction Company
4. K.V.Kamath - ICICI
5. Lalit.K.Modi - Modi Enterprises
6. Nandan M. Nilekani - Infosys
7. Azim Premji - Wipro
It should be noted that, Infosys had gained some good branding in 2006, when Nandan Nilekani became one of the youngest entrepreneurs to join 20 global leaders on this World Economic Forum (WEF).
Tags: WEF, World Economic Forum, Michael Dell, Indians at WEF, Vladimir Putin
Read more...
Wednesday, January 28, 2009
Why outsourcing will be different in 2009
During this economic crisis, the IT budgets of companies have been under heavy pressure and major corporations are looking at outsourcing as a means to save money. But, the companies who have already outsourced their IT operations are looking at better deals to further reduce the cost. Here are the changes that are expected to happen in the outsourcing industry:
Read more...
- The traditional pricing model of time and material will be changed. Instead, the pricing will be more on transaction and results based - This model would demand more innovative approach to execute a project and will pose as a greater challenge to the project managers working in the outsourcing companies. It is not business as-usual execution for the management.
- Customers are also shifting towards short-term based contracts and fixed pricing models. This model will result in high productivity and optimized resource planning by the IT companies. Here, the IT companies will witness high utilization rate, thus reducing the 'bench' strength; especially at the time, when the number of projects are less.
- Customers will lean more toward multi-vendor approach, where a large portfolio will be distributed across different vendors. Though, this model is currently followed by some clients, it will gain prominence in the current year. This model ensures the distribution of risks for the customers, who are shaken by the Satyam's scam.
- Multi-vendor approach will definitely invite competition pressure, but there will be an 'opportunity in waiting' for the vendors.
- The projects will be more process oriented with heavy emphasis on transparency and data security. The outsourcing companies will try to avoid the data security issues that propped up in 2008.
- Till date, customers concentrated only on the project outcome. Now, they will also have their eye on their vendors performance as a company. The vendor's would also need to instill confidence in customers on any issue that may arise over the period.
- With allocations inclining more towards offshore., the Onsite-Offshore ratio will have an impact.
- With these heavy bailouts and treasury bond purchases, there is more chance of weakening US dollar and strengthening rupee. This will lead to change in pricing rates.
- There will be substantial opportunity in the consulting space. It will be a testing ground for the Indian companies.
- The next tier of western companies will consider outsourcing to save money and stay in the market.
- Finally, apart from India, other low cost destinations (China, Canada, Poland, Nigeria, East Asian countries..) will witness a considerable growth.
Read more...
Tuesday, January 27, 2009
How India avoided the economic crisis?
US and India were on the same boat during the real estate boom, but when the bubble burst, India was able to handle the downturn, while many of the US banks succumbed to it. What India did differently that saved its banks? NYtimes praises the former RBI governor for the effective measures that he took during his tenure, which eventually saved the Indian market. Before getting into the India story, lets briefly look at the incidents that brought down the US banks.
After the Internet bubble that burst during 2000-2001, the US stock market went down south and lost its lure as an investment platform. Many people were very reluctant to spend their money and the US was in the verge of a recession. So, to encourage spending among people and to infuse more liquidity, Fed reduced its interest rates. Eventually, the banks started giving more loans for the people to invest in houses. Those who were reluctant to invest money in the stock market, considered house as a safe-investment and invested in new houses; some bought their second house too. To attract the investors, the banks introduced the 'Adjustable Rate Mortgages' and people subscribed to it in huge numbers; loans were given to sub-prime borrowers . These were borrowers who were not eligible for the given loan amount and would default in their payment. So the loans accompanied high interest rates. Fueled by easy loans, the housing market grew rapidly over the period of time. This led to boom in the building industry which led to the over-supply. As over-supply always leads to lower prices, the housing prices started to reduce drastically followed by a few fore-closures.
So, to stabilize the market, the banks followed a different method to fund money. Here came Lehman and the other investment banks. All these mortgages were passed to these investment banks. Since these loans were generating some kind of money through high interest payments, those were considered as assets. The investment banks grouped these assets based on their Interest payment under the terms Mortgage Backed Securities (MBS) or Collateralized Debt Obligations (CDO). The CDOs were approved by credit rating agencies and were later insured by even AIG. So, these securities were sold to other investors around the world and the money generated out of those sales was shared by different parties involved in the transaction. So, these loans were generating good money. The greediness peaked here, and the investment banks needed more CDOs, which translated to more sub-prime loans to the customers. Remember, if the interest payment is high, the value of the CDO is also high. In this way, banks also benefited through these loans and it was money all over the wall street. Now, the market reached a point where the number of defaulters started to increase as the interest rates got higher and higher. This led to multiple foreclosures at a point as the loan value increased beyond the house value. This led to burst of the bubble and many banks failed as the borrowers were unable to pay the money. Now, the CDOs became worthless, so the Lehman and other investment banks too failed. Meanwhile, AIG which assured the CDOs were also in the verge of failure. It was later rescued by the government. The rest of the bad news were nothing but the domino effect.
Now coming to the India story, where did the Indian govt get it right?
Read more...
After the Internet bubble that burst during 2000-2001, the US stock market went down south and lost its lure as an investment platform. Many people were very reluctant to spend their money and the US was in the verge of a recession. So, to encourage spending among people and to infuse more liquidity, Fed reduced its interest rates. Eventually, the banks started giving more loans for the people to invest in houses. Those who were reluctant to invest money in the stock market, considered house as a safe-investment and invested in new houses; some bought their second house too. To attract the investors, the banks introduced the 'Adjustable Rate Mortgages' and people subscribed to it in huge numbers; loans were given to sub-prime borrowers . These were borrowers who were not eligible for the given loan amount and would default in their payment. So the loans accompanied high interest rates. Fueled by easy loans, the housing market grew rapidly over the period of time. This led to boom in the building industry which led to the over-supply. As over-supply always leads to lower prices, the housing prices started to reduce drastically followed by a few fore-closures.
So, to stabilize the market, the banks followed a different method to fund money. Here came Lehman and the other investment banks. All these mortgages were passed to these investment banks. Since these loans were generating some kind of money through high interest payments, those were considered as assets. The investment banks grouped these assets based on their Interest payment under the terms Mortgage Backed Securities (MBS) or Collateralized Debt Obligations (CDO). The CDOs were approved by credit rating agencies and were later insured by even AIG. So, these securities were sold to other investors around the world and the money generated out of those sales was shared by different parties involved in the transaction. So, these loans were generating good money. The greediness peaked here, and the investment banks needed more CDOs, which translated to more sub-prime loans to the customers. Remember, if the interest payment is high, the value of the CDO is also high. In this way, banks also benefited through these loans and it was money all over the wall street. Now, the market reached a point where the number of defaulters started to increase as the interest rates got higher and higher. This led to multiple foreclosures at a point as the loan value increased beyond the house value. This led to burst of the bubble and many banks failed as the borrowers were unable to pay the money. Now, the CDOs became worthless, so the Lehman and other investment banks too failed. Meanwhile, AIG which assured the CDOs were also in the verge of failure. It was later rescued by the government. The rest of the bad news were nothing but the domino effect.
Now coming to the India story, where did the Indian govt get it right?
- India didn't encourage the concept of sub-prime loans. Mortgages were issued based on just the borrower's income.
- When the land values were rising in India, then RBI governor Y.V.Reddy ordered the banks to stop issuing loans to raw lands.Without this ban, India would have got trapped in the bubble with its rising middle class income.
- Loan amount were released to the customers only after the development work was started.
- Indian banks were tempted heavily by the securitization method adopted by the US banks for funding money. But, the RBI governor was strict in rejecting the model. The Indian bankers who were critical of Reddy's tougher rules, later realized the reason behind the decisions. Meanwhile, the US equity firms funded the land purchases and got trapped into the bubble.
- Later, when the inflation increased, the governor increased the interest rates thus halting the housing frenzy.
- Apart from this, Indian regulators played a crucial in the stock market by bringing in tougher regulations. When the market was booming with voluminous funds from foreign investors, SEBI imposed tougher rules to limit and to regulate the funds.
Read more...
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