Is the War on Greed as misdirected as the War on Terror?

George W Bush had a response to the September 11 terrorist attacks on the US. He declared a "War on Terror". We all know how well that's going.

I'm not advocating that the US should have done nothing in response to the September 11 attacks. I'm saying that when you suspend clear thinking and honest debate in favour of blind belief and misguided loyalty, you get the totally misdirected Iraq war rather than the focus on Afghanistan (the home base), Pakistan (the training ground) and Saudi Arabia (the financier) that the response should have comprised. A proper response would have been messy and complicated, to be sure. It would have involved embarrassing investigations into two nominal US "allies" and brought out into the open the obvious failures in US foreign policy over the years. I believe that the longstanding US policy of cozying up to dictators instead of strengthening ties with democracies led ultimately and inexorably to 9/11. Yet nobody who knew better could talk sense to President Bush, because those who weren't with him were against him, remember? The world is in a fine mess thanks to expediency and moral certainty, combined with a knee-jerk reaction to crises.

Are we in danger now of reacting to the recent financial crisis with similarly misdirected populism? Australian Prime Minister Kevin Rudd today essentially announced a "War on Greed", by attacking the excessive pay packets of corporate executives as one of the negative aspects of what he called "extreme capitalism". And sure, he's got a point, a very valid point. But he's also in danger of being way off the mark, to the detriment of all of us.

Attacking excessive remuneration appeals to everyone (everyone, that is, except those in the top levels of the corporate world). Last year, Macquarie Bank's CEO Alan Moss took home 33 million big ones. This year, Macquarie caused quite a few jitters among investors. CEOs take home the big bucks, and when their enterprises threaten to fall over, governments have to rush in and prop them up with taxpayers' money, because the economy will suffer otherwise. It's like the fat cats have a gun to everyone's head.

So attacking executive remuneration understandably attracts animal howls of approval from the gallery. (Mind you, many of those in the gallery don't even pay taxes! They've nothing at stake, and it's probably just petty jealousy at work.)

Let me make my position clear. I'm a taxpayer, and my money is being used in these bailouts, so I have a legitimate right to voice my opinion about the way the system is run. But perhaps surprisingly, I'm against placing limits on executive remuneration. It indicates a mercantile mindset that believes in rationing out scarce resources. What we need is a capitalistic mindset that recognises wealth to be potentially limitless. The capitalist worldview recognises the need for appropriate systems that incentivise us to apply our ingenuity and industry to continue to create wealth out of nothing, exactly as we have been doing since we left our caves thousands of years ago.

Having said that, there are clearly limits to executive compensation that exist, not absolute dollar limits, but limits that are dictated by the ability of the enterprise in question to pay those salaries and bonuses. If an enterprise pays its top executive $466 million and then collapses, then in hindsight, it clearly couldn't afford the payout.

Many people may miss a crucial portion of Rudd's statement: "Regulators should set higher capital requirements for financial firms with executive remuneration packages that reward short-term returns or excessive risk-taking." (emphasis mine) I agree with the way Rudd is proposing to tackle the problem, which is to impose higher standards of capital adequacy on firms that show short-termism or risky behaviour in pursuit of profits, but there is a deeper aspect to the problem, which I'll come to in a moment.

I do believe that one of the fundamental things wrong with the brand of capitalism practised today (apart from its hostility to competition) is that it rewards companies for showing short-term profits. It encourages CEOs (who serve relatively short tenures) to under-invest in the future and show unnatural returns in the short term, then depart with huge payouts as a reward for such stellar performance. Every new CEO announces that things have been left in very bad shape by their predecessor (true), and then proceeds to write off huge losses at the start of their tenure. Not only does this clear the decks of all past losses, it also takes the share price to a comfortably low level, so that the new CEO can demonstrate impressive share price gains from this low point. Repeat ad nauseam. The enterprise and its shareholders bear the brunt of this short-term and self-serving behaviour. The technical term for this is "agency risk". The goals of the agent (the management) are not aligned with the goals of the principal (the shareholders).

To my mind, the problem of "extreme capitalism" (as Rudd would call it) is the tendency to reward short-termism. So it's not executive salaries per se. If a way can be found to link executive remuneration to an enterprise's long-term performance, then by all means, shower your executives with gold. For example, go ahead and give your CEOs generous stock options, but ensure that they vest only after 5 years or later. That'll make them more careful about the long-term effects of their decisions.

So I've no real argument with Rudd's proposal, as far as that goes.

Is this the root of the problem, though? Perhaps there's really no agency risk here! Perhaps the agents' goals are in fact perfectly aligned with their principals' goals.

We need to look within ourselves as shareholders. What kind of shareholders are we? Are we true investors, who buy stock and hold on to it, wanting a share of the profits of the enterprise in the form of dividends? Or are we just speculators, who buy shares in the hope that we can sell them at a higher price? Speculators don't care what happens to an enterprise after they sell their shares.

I think short-term performance benchmarks rule the market because the market is dominated by speculators.

If we want enterprises to be healthy, we need to encourage long-term behaviour from all concerned. The goals of the principals (the shareholders) must themselves be aligned with the long-term health of the enterprise rather than its short-term performance. Then the goals of the agents (the management) of these enterprises will automatically be tuned to the long term.

Executive remuneration is the Iraq of the War on Greed. It's an expedient target, but likely to prove a costly diversion. The real problem is more messy to target. It's short-termism, and we're all guilty of it as speculative shareholders. To quote Walt Kelly, we have met the enemy, and he is us.

Testing Times for the Clever Country

I guess not many people knew that bank deposits in Australia have hitherto not been guaranteed, until the government announced that they would now be. The other marvel, of course, is that when a guarantee exists, it will probably not be resorted to. The government's statement is purely to shore up confidence in the financial system and prevent a run on the banks.

Of course, there's the fine print. The Australian government will only guarantee deposits in Australian-incorporated banks, so we could still see a run on foreign-owned banks like Citi and HSBC. Still, it's a much-needed affirmation from the government, and will do much to keep the financial system on its feet.

I guess we're entering a phase when the "Australian model" is going to be put to the test like never before. Prime Minister Kevin Rudd has said he doesn't consider the budget surplus as something to defend in its own right. He's willing to use up the surplus if that's what it takes to stimulate the economy and prevent a deep recession.

Quotable quote: "How long have you all heard me say it is good to have a surplus ... as a buffer for the future? Well, the future is here."

The biggest fears now are a slowdown in growth and a rise in unemployment. The Reserve Bank has done its bit to stimulate growth by slashing interest rates by a full percent, something normally unheard of. The upside of having had high interest rates in the recent past is that there's sufficient leeway to move rates down, a luxury that the US doesn't have. If the PM and his Treasurer Wayne Swan play their cards right by operating the right fiscal levers (and they can spend a fair bit without running up a budget deficit, unlike the US government, which has dug itself into a deeper deficit hole), they can keep the Australian miracle going, and in the process, ensure their own places in history.

It's a difficult time in world history and no time to be partisan, but if Australia comes out of this crisis in better shape than other nations, it will be a powerful lesson in the benefits of good economic governance. I.e., avoid a budget deficit at all costs and tweak interest rates constantly to encourage growth without provoking inflation higher than 2-3%. (And let me add my Liquidism mantra like a broken record: maintain high levels of market liquidity through aggressive antitrust if need be. A thousand blades of grass will weather a storm better than a few oak trees.)

The Australian financial sector has also been prudently regulated and the "toxic assets" of other economies haven't been ingested to any significant degree here. To some extent, this hides the problem of oligopolistic conditions in the market. I wonder if we will have to wait for a different crisis before we learn that lesson...

JDRF Walk to Cure Diabetes

Today (Oct 12, 2008) was the Walk to Cure Diabetes organised by the Juvenile Diabetes Research Foundation (JDRF) at Sydney's Olympic Park. Not many people know that Juvenile (or Type 1) diabetes is fundamentally different from the diabetes that is more commonly seen in adults.

Let me quote the JDRF website verbatim:

Type 1, or juvenile diabetes is a serious, chronic disease that destroys the body's ability to produce insulin - a hormone needed to convert food into energy.

Type 1 diabetes is an autoimmune disease that usually begins in childhood or early adulthood, but can occur at any age. People with type 1 diabetes need up to six insulin injections every day for the rest of their lives, just to stay alive.

Type 1 diabetes is not caused by diet or lifestyle and cannot be managed through diet and excerise. Insulin injections keep people alive but are not a cure. There is no cure.

Even when treated, type 1 diabetes can cause serious and devastating long-term health complications such as blindness, kidney failure, heart disease, amputations and stroke.

Type 1 diabetes affects every aspect of a person’s life and managing the disease involves whole families.

There are currently around 140,000 children and adults in Australia living with type 1 diabetes. We have one of the highest rates in the world and every day, five more people are diagnosed, most of them children.

The only way that people with type 1 diabetes will live the long and healthy life they deserve is if more money is invested in research to find a cure.

For further information about type 1 diabetes and current research progress go to the JDRF Website.

I've written before that I'm sensitive to reports that ethnic minorities in Australia tend to volunteer less than the general population, so I've been trying to do my bit from time to time.

This time, I put together a group of like-minded friends and decided to collect money for the JDRF cause and also make this an enjoyable family outing. Most of us being Indians, we called our team the Sydneyside Maharajahs. The team website may not remain in place for long, so here's a screenshot (with the names of my friends and other volunteers blurred out to protect their privacy).



I would like to thank all my friends and colleagues who kindly donated and helped us towards our target (not quite achieved as of the time of writing).

Although the walk is over, fundraising is still open till the 7th of November, I'm told, so if anyone out there would like to donate towards finding a cure for this cruel condition that afflicts some of our youngest, please donate at my JDRF page.

Thanks!

Old Products, New Marketing

Being a nerd, I'm always amused by church signs that reference technology to evangelise religion.








Now the church has competition in this space, as this sign from Gurgaon near New Delhi demonstrates.


[I'm not an expert on Yoga, so I won't attempt to explain what Pranayama is. I'll leave it to Wikipedia to define Pranayama (and if someone doesn't agree with the definition, they can always edit the entry ;-).]

Humanity's Three Great Epics

OK, this is partly tongue-in-cheek, but only partly.

Those of you who saw the romantic comedy My Big Fat Greek Wedding will surely remember the father of the female lead who is always very big on Greek culture ("What were the three greatest contributions of Greek civilisation to the world? Astronomy, philosophy, democracy").

Well, like the Greeks have the Iliad and the Odyssey, we of Indian descent have the Ramayana and the Mahabharata. (Yes, it's hard to tell where the accent goes, so try Raa-maayuh-na and Muh-haa-bhaa-ruh-ta). Mighty proud of these epics are Indians, and rightly so. Modern Indian literature, movies, songs and colloquial speech are littered with allusions to these classics. Babies are named after characters in the great epics. You'll even find these epics in comic book form. Indian kids grow up on the stuff. I read these comics in English, side by side with Tarzan and Superman, when I was growing up.

But I've also enjoyed shocking traditional Indians with my entirely serious thesis that there are three great epics in the world, - the Ramayana, the Mahabharata and Star Wars. I never fail to get a rise out of people with that statement.

Just look at the similarities. All three are about the struggle of good against evil (and the ultimate triumph of good). They're all long, all boring in places, with confusing sub-plots and myriad characters, many of whom are only tangentially relevant. And ultimately, they're entertaining while being morally educational (To those like me who are perpetually suspicious of organised religion, that last bit should prompt a mental uh-oh).

I would like to report a successful experiment that I just concluded last week. I got my 77 year old mother to watch the entire 6 part movie series of Star Wars! And wonder of wonders, she grudgingly acknowledged that Star Wars was "quite nice". She agreed that there were parallels between the Jedi religion and Hindu philosophy (there are murmurs in the musty corners of Indian philosophy to the effect that dark, tantric practices are a bit more powerful than the wholesome yoga and meditation that India would like to showcase - the "power of the dark side"). She thought the transformation of Anakin Skywalker from innocent child through idealistic (and disillusioned) young man to evildoer paralleled the stories of many demons in Hindu mythology who also started off being nicer folk.

She quoted Yoda's statement: "Fear leads to anger; anger leads to hate; hate leads to suffering." To her, this was lifted straight out of Eastern philosophy, so rather than Star Wars being a legitimate epic of the stature of the Ramayana and Mahabharata, it was just a copy, albeit a well-made one.

An example of how Hindu philosophy has influenced Star Wars

But I'm happy at the outcome. My mother, a representative member of an older Indian generation, has seen something of value and relevance in Star Wars, so much so that she's expressed a desire to watch the series again after a few months!

I must say I don't necessarily see religion in any of these epics (though there's a fair bit of spirituality). I think they're great stories with awesome atmosphere, powerful symbolism and beautiful imagery. To me, the image of Tatooine's twin suns or the unfinished Death Star is as powerful as the paintings (by Raja Ravi Varma and by someone else) of the noble vulture Jatayu's (Juh-taa-yoo) vain attempt to rescue Sita as she is carried off by the demon king Ravana (Raa-vuh-na), or of Abhimanyu (Uh-bhi-muhn-yoo) attacking the Kauravas (Cow-ruh-vaas) "like a proud young lion falling upon a herd of elephants" (to quote Amar Chitra Katha). Or, for that matter, the image of Achilles dragging Hector's body around the walled city of Troy, or that of the Cyclops throwing rocks at Ulysses' ship as the Greeks flee his island. Lots of stuff that gives me goose-pimples even today.

Star Wars - Tatooine's twin suns

Star Wars - The unfinished Death Star

The Ramayana - Jatayu fights Ravana in vain to save Sita

The Mahabharata - Abhimanyu attacking the Kauravas "like a proud young lion falling upon a herd of elephants"

The Iliad - Achilles drags Hector's body around Troy

The Odyssey - The blinded Cyclops throws rocks at Ulysses's ship

That's the stuff of which epics are made. Epics are about heroes and other larger-than-life characters (many of them tragically flawed), their struggles and adventures, they're about destiny and nemesis and an overarching moral theme that dwarfs all characters. Star Wars has all of this in full measure. So an epic isn't necessarily one that was written hundreds or thousands of years ago. It could just as easily have been released in 1977.

So there you have it - humanity's three great epics (or five, since we wouldn't want to belittle Homer :-).

Clever Signs

We've all read about the funny signs with inadvertent mistakes from around the world. But try these:

At a car lot: The best way to get on your feet....Miss a car payment.

At a tyre repair shop: Invite us to your next blowout.

Outside a muffler shop: No appointment necessary. We heard you coming.

In front of a car wash: If you can't read this, it's time to wash your car.

At a towing company: We don't charge an arm and a leg. We want tows.

At a used car lot: Second-hand cars in first crash condition.

At an auto body shop: May we have the next dents?

On a caravan trailer: I go where I'm towed to.

On a music teacher's door: Out Chopin.

At a music store: Out to lunch. Bach at 12:30. Offenbach sooner.

On the door of a music library: Bach in a min-u-et.

At a pizza shop: 7 days without pizza makes one weak.

On a butcher's window: Let me meat your needs.

Outside a restaurant: Try our fish just for the halibut.

On the menu of a restaurant: Blackened bluefish

Outside a hotel: Help! We need inn-experienced people.

At an optometrist's office: If you don't see what you're looking for, you've come to the right place.

In a counselor's office: Growing old is mandatory, growing wise is optional.

In a dentist's office: Be true to your teeth or they will be false to you.

In a podiatrist's window: Time wounds all heels.

On a maternity room door: Push. Push. Push.

In a veterinarian’s waiting room: Be back in 5 minutes. Sit! Stay!

At the electric company: We would be delighted if you send in your bill. However, if you don't, you will be.

A church sign: To remove worry wrinkles, get your faith lifted.

At a gym: Merry Fitness and a Happy New Rear!

At a beauty parlour: Dye now!

In a farmer’s field: The farmer allows walkers to cross the field for free, but be aware that the bull charges.

In a non-smoking area: If we see smoke, we will assume you are on fire and take appropriate action.

In a cemetery: Persons are prohibited from picking flowers from any but their own graves.

At a hardware store: Would the person who took the step ladder yesterday kindly bring it back or further steps will be taken.

In the front yard of a funeral home: Drive carefully. We’ll wait.

In the window of an appliance store: Don't kill your wife. Let our washing machine do the dirty work.

Inside a bowling alley: Please be quiet. We need to hear a pin drop.

At a maternity clothes shop: We are open on Labor Day.

On a desk in a reception room: We shoot every 3rd salesman, and the 2nd one just left.

On a fence: Salesmen welcome. Dog food is expensive.

On a plumbing company's trucks: Don’t sleep with a drip. Call your plumber.

On a scientist's door: Gone Fission

On a taxidermist's window: We really know our stuff.

On an established dry cleaning store: Thirty-eight years on the same spot.

On the door of a computer store: Out for a quick byte.

Outside an antique shop: We buy junk and sell antiques.

Sign at the psychic's hotline: Don't call us, we'll call you.

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And my favourite (Patel & Co. Plumbing in London): You've tried the cowboys, now try the Indians.

Classic!

The Self and the Other

An aspect of the recent stock market meltdown has led me to some philosophical musings regarding ourselves versus other people.

When they say trillions have been wiped off the stock market, what do they mean exactly?

The market value of the stock is what the market thinks it is worth. Obviously, when a crash happens, a lot of people suddenly think a lot of stocks are not worth what they thought they were worth just hours earlier, and they put their money where their opinions are by not being willing to pay the earlier price for them. It's just opinion that suddenly changes. Nothing in the real world has changed in such a short period of time except some trigger event.

The reasons for the change of opinion have been heavily researched, and will no doubt continue to be heavily researched, but my immediate concern is something else.

Why are people suddenly "poorer" after a stock market crash?

If the bulk of a person's savings is held in the form of shares, either directly or indirectly (through mutual funds that invest in shares) [or even more indirectly (through retirement savings plans that invest in mutual funds)], their "wealth" is not measured by how well they dress and eat and live but by the value of the shares in which their entire life savings are ultimately invested. I have been oversimplifying by using the word "shares" when I should have been saying "assets", which include real estate, commodities (gold, oil, wheat) and securitised versions of these.

When the market value of assets crashes, the owners of those assets become poorer overnight.

In other words, in a financial sense, we are ultimately worth what other people think we are worth.

How starkly this contrasts with Eleanor Roosevelt's reassuring admonition that no one can make us feel inferior without our consent!

But on reflection, I realise that the two statements are not saying different things at all. When the market suffers a "correction", it implies that the new value of the assets we hold are the "correct" ones. Therefore it can only mean we bought them at unrealistically inflated prices. In other words, we accepted other people's opinion of what they were worth at the time we bought them. That's why we're now poorer. We have allowed other people to make us feel inferior because we earlier (wrongly) allowed an aspect of our true worth (our savings) to be pegged to other people's inflated opinions of various assets.

So Warren Buffett and Eleanor Roosevelt are essentially saying the same thing. Look for the fundamentals, for true worth. If you are blindly led by the opinions of others, they can make you feel superior for a while while the market continues to boom. But when things return to their "true" value, they can make you feel inferior as well. And it can really hurt.

On the positive side, if you invested in true value and the market has now crashed to take the price of your assets below their true value, there's no need to feel down. Things will eventually return to normal, and you will once again be seen to be worth what you are (in financial terms). Just don't panic and sell :-).