This is one of the best articles on Rediff for a long time. It is also most essential.
Economic survival should be the first priority of modern civilizations.
Gambling is also an economic activity but it is more for 'entertainment' of the gambler. (His wife and children symbolically always suffer his indiscretions ..... even for the 'winner')
A good economic system should 'by design' remain simple and transparent while simultaneously preserving free economy.
Which may mean even 'banning' of secondary or tertiary activities which can go non linear and result in uncontrolled turbulance.
For stimulating growth innovations must be allowed. But if a Bank starts changing interest rate to cover losses in wrong financial investments it should be legally not permissible.
For example if some body directly invests in stock market and looses money, it is 'direct' and linear happenning.
But if some body borrows money from a neighbour (say a bank) at agreed interest, and neighbour loses some of his own holdings, the unrelated losses can not be passed on to borrower by way of changed terms.
It is needed to progressively simplify each circumstance and remove 'potential' for unhealthy entanglements.
It sure will become insipid life for most economists, it may also not give double digit growth, but it will ensure survival.
It will also give opportunity for growth of most needed thing in modern lives, 'Peace with prosperity' and 'leisure with meaningful ac
Mr MRV , i beg to differ...financial derivatives maybe dangerous but they have a purpose. People also lose money on Equity shares...isnt that a gamble ? would you then stop stock exchanges?
Use of exchange traded derivatives makes it very transparent compared to OTC derivatives. It would be infact very good for the Indian markets if exchange traded derivatives are used. also if ICICI lost money on derivatives, were u not happy when TCS used them to protect their margins against Re appreciation..
corporates have exposures to Forex risks and not using derivatives (not hedging) is also a gamble.
what needs to be ensured is that they donot indulge in speculation.(which is not their job). But its up to the boards to decide whether they allow speculation or not.Its a corporate governance and control issue.
I have traded copper derivatives in my previous job and it serves a purpose in managing the company risks...it helps to smooth ur profits and ensure u r protected against Currencies and Copper..
just because a few organisations go wrong, doesnt mean u throw out the baby with the bath water. One needs to be prepared for what is there rather than dig ur head into the ground like an ostrich hoping tht danger will pass away.
as far ICAI is concerned...i am not too sure how much they understand what they are dealing with anyway. I guess IFRS will give us a very good guidance as to what needs to be followed.( i dont rate ICAI too highly, its just an organisation pr
RE:i disagree
by Good_man on Mar 15, 2008 02:28 PM Permalink
In a turbulant sea however, shielding against a large wave out to sink you, with another large wave that 'you' have accumulated for yourself may not happen.
It may also happen that whole large 'ocean' is to a large measure nothing more than a big bubble. Apple may have as many tens of million iPhones unsold, as they may have sold, the purchaser (at usd 600) may have borrowed money from banks (credit cards) who them selves in turn would have invested heavily in Apple to 'buffer' themselves. The buyer of iPhone is also a share holder of Apple presumably. So in future if Apple reports losses, it will be difficult to know who will loose and how much.
The scenario can be complicated progressively, by including more dependancies and 'circular' involvement. Mathematical solutions beyond two or more 'dependency on dependencies' however will not be possible or dependable.
Catastrophic break down of systems is never predictable with much accuracy.
After the catastrophe strikes nobody cares either. Most participants perish with them.
The survivors were either not involved with them, or most often can do nothing more than pick up the rudiments and start building again.
Albeit at much much lower levels compared to those prevailing before the catastrophe hit.
RE:i disagree
by Good_man on Mar 15, 2008 02:03 PM Permalink
In a simplistic way, if a share is overvalued by a large factor, any body dealing in it has to be either a looser or a gainer.
By timing the rise and fall of 'sentiments' powerful holders will always sponge off the excess money pledged in these shares. They also harm wider participation.
It is a pure game of 'lure' and 'loot' and it is an unintended outcome of 'Share' market.
The intention of 'Share' market is to make available, capital from public to a venture, which 'must' ( with sound fundamentals etc it 'MUST' ) earn a fair profit, and give it back to the real owners 'the share holders'.
This simplistic view must always remain topmost in our analyses. If a 'share' or a 'sector' shows growth potential, and catches public fancy, and people vie to buy it from each other, it can be allowed to have a 'proportionately' higher than normal (strictly mathematically calculated) value.
It provides for good entertainment ( and very vital continued interest of the participant) when a successful investor 'thinks' his accumen got him some 'extra' profit.
Same mechanism should be used to generate interest in bringing public participation in shares of industry which is essential and beneficial for 'social living'. ( By preferred 'manipulation' of profitability through incentives etc.)
It so happens that at trillions of dollars 'worth', world economy is like an ocean. Buffering your positions through variations is like harvesting tidal energy of this ocean.
IIM graduates are given 1 and 2 crore salary not for doubling the daily wages of 30 crore Indians getting 12 or 20 Rs a day. These highest salaries are given to an MBA to devise more and more involved strategies by which 'his/her' employer will be able to outwit the employer of other MBA who is offered 80 lakhs.
In Mongolia there is a game the horse riders play. They kill a goat and toss the carcass on their spear heads. After hours of humiliation of the dead goat a winner is declared to the joy of all.
Rules of economics as all other Intense Human Endeavour allow for end less entanglements. The pattern is simple. A new activity gives low output initially during invention or break-in period. The pioneers may have toiled for a nobler goal. As it starts showing a promise, the pioneers are shunted off / bought over or plain ignored and more 'intelligent' agents take over the game.
They use same ad-lines (those of pioneers who started it), to sell the concept to guilliable population, but internally ( always) set a different agenda. That 'secret element' is essence of all such phenomenon, and works like the force multiplier for 'entaglement' machine. Growth of 'parasites' at the cost of host is one example. All intellectuals are invariably the parasites. But it is intended that they be symbiotic helping the 'host' much more than themselves. A economic theory is needed which will liberate humanity from rut without harming
Just as Buffett said, I agree that Derivatives are Financial WMD. But, I would look at this way, just as Nuclear Power(the source of weapons of mass destruction) can be used to generate power (which is what india badly needs to alleviate its power shortage situation to sustain growth) Derivatives if used in the proper way will help grow the financial system in a healthy manner. And so is true for vice-versa.
RE:Derivatives: The time bomb in our financial system
by Venkataramana Marthi on Mar 15, 2008 07:16 PM Permalink
For every winner there is a loser. If the gains and losses in winning and losing can be within certain limits all is fair in love and war. But if they cross a limit then it's doomsday. In this game of futres and derivatives, as long as the same party wins and loses sometimes it's OK. But when the losses are beyond reconciliation then it's doom for all the people associated with it. Too much of simplicity in accounting and projections the world would not have seen so much growth in the whole world trade!! Brace yourself guys for some turbulent times ahead after some smooth sailing!!
Cent percent true! Almost all misery of the markets can be traced to the financial engineering being done by so called experts creating one exotic financial product after another with intention to be smarter than market forces, quietly unleashing power atomic bombs without any control to pull back and an indeterminate time for explosion. It is not a question if but when. We are witnessing only the tip of this iceberg so far! It is ultimately simple, all human misery can be traced to greed and lust and this is only a variation...
RE:True!
by anil b on Mar 15, 2008 03:53 AM Permalink
yes i agree ,
the subprime crisis is basically that , while the value of the underlying assets is very less even at its orginbals price , the amount theis value has been securitised is many times that and all this by banks and hedge funds with others money . thats is why we are seeing so much pain .
RE:not sure
by anil b on Mar 15, 2008 03:55 AM Permalink
it is true .read msnmoney.com and you will find that owning equity with companies that are into manufacturing/related activity /pharmacy/utility is more safe than even debt instruments
1) In this way banks will be no more profitable in near future. 2) Till 2009 open the baking sector. 3) Now u have reason to sell those banks to foreigners. :).
RE:The game is so simple
by ram narayan on Mar 15, 2008 11:30 AM Permalink
Now i understand why our FM Mr. Chidamparam is very much interesred in this. Just to sell our Banks to foreigners and make India The poorest country. As per his words any History glorifiing Indias fast should be banned. Yes sir, where will we go and tell our glory when people like you are here to play gambling and mortgage the country?
currency issues are way bigger than anything the world has ever seen. currency market events have more potential than 3 world wards put together. its so damn scary the currency markets. currency exchange and volatility scares the hell out of me.
i dont think there are problems with derivatives per se, but how we use them. if one wants to take risks and buy naked derivatives, it is his wish, but corporates and especially banks, whose business is to use derivatives ONLY to hedge their exposure cannot do so. there needs to be strict disclosure and regulation for derivative transactions and speculative transactions. However, given that there is such a huge, leveraged, unwarranted exposure to derivatives, it might lead to a massive crash in the financial system in case something bad happens. Investors in derivatives need to understand the risks involved in derivatives. Banks and corporates will surely refrain from such gambling if proper disclosure is made mandatory, because shareholders will be up their asses if they take unnecessary risks. ICICI needs to come clean with their exposures and so do the other banks. That said, the average investor needs to be much more alert and aware of the financial systems to atleast mitigate some impending losses that his/her portfolio might have to take.
okay, but what do we do with the FM's lungi now that MRV has shredded it to pieces and dropped it on the floor of the house ?
And what do we do the PC fellow who is making us focus all our attention on the assassination of the chief minister and not on the killing of that cop ?
