Somali Pirates and Investment Bankers of the world

Apart from the global economic turmoil, obama and falling oil prices another thing that has been keeping us entertained is the news about piracy. Somali pirates have been very active these days when the world was betting on which bank would fall n and what would be the margin of obama's victory (except for McCain from his family inclusive of his wife). The big news has been the Sirius Star of Saudi arabia with its 110Million $ oil cargo.

Piracy is not a new phenomenon and could been around from the days after humans learnt how to build boats and sail around from the days of phoenicians and may be before them, the more interesting thing is the fact that current form of piracy i

s becoming completely uncontrolled and the Horn of Africa or the Gulf of Aden is completely ridden with them and is driving people really crazy.

The Somali piracy is should be understood along with the recent history of somalia, Somalia has been in chaos ever since 1991 and it is unregulated majorly (though with a presense of a government, president etc) and is governed by various warlords. This lawlessness has opened up the vast coasts of the somalia. This fish-fertile coast was abused by everybody and some entrepreneurial somali saw this as an opportunity and started collecting a small some of fees (protection fee may be) from these foreign ships and today it has fully developed industry to the extent that pirates are about to hijack a ship which is 400 miles away from the coast with the sophistications of GPS etc. While the risk of losing the cargo drives the owners dizzy, they usually tend to negotiate and to get the ships back (17 ships are still with them) which further boosts the pirates morale.

Pirates seems to be very calculative and methodical, they wait for the right catch and take significant risk to conquer, retain and make the money through negotiations and release the ship after the ransom is obtained.

Strangely , I couldnt resist drawing the parallels with the economic crises, the investment bankers (who made money creating complex financial deals on the underlying financial instruments) played the roles of sophisticated pirates and took daring risks and reaped the bounty in bonuses, but should we blame the pirates or the conditions that breed piracy for this. I

t is eitherway and in a country like Somalia where there are not much opportunities and lawlessness is the only law, piracy gets justified morally (atleast for the bribed port authorities and pirates) and 

lack of regulation simply flames it up. Likewise when the market was unable to control the daring acts of the economic pirates and they took the whole economy down.

Hopefully international cooperation controls piracy and co-ordinated global action control the freefall, else the days of people queuing up for the free soups are not far from reality and may be Pirates would get really rich by then and could be contributing to IMF( it has been asking money from everyone)

Is economy an art or science?

Me and my colleague had an interesting argument about whether economy is a science or an art over a Friday evening pint. The conversation was driven by the fact that the pub we frequent was void of the usual buzzling crowds and owing to the current gloomy days. I took (as usual) one my recent readings as a basis of my arguments. George Soros in his recent books eloquently argues about thinking and reality. He puts forwards that 'thinking' alters 'reality' and vice versa and with wide array of participants with different mindset( but with the same goal of making more money), the economic systems are inherently very complex to predict. He refers this as theory of reflexivity.

 And anything complex has always been portrayed as art , ignoring some modern arts with just a dot in the canvas with an explanation of 'portraying intricate human relationships in a deterministic and dark emotions among human ethos'.

Science tries to simplify things and while doing so , removes lot of variables which doesn’t seem to have a significant effect on the outcomes during the observations.  This is done for known lack of correlations with the outcome based on our knowledge. But these variables may have massive effect on the outcomes under unforeseen circumstances.

For e.g. it is a very simple fact that if we lend to risky borrowers, it may never get returned and our capital may be at risk. You don’t need be a nobel laureate to be able to tell this. But in the stable economy with lot of promises and an upbeat mood, this simple variable has lost its meaning or lost its relevance before world woke up and started to stick to its basics. All those complex risky models which the WE-HAVE-ALL-THE-CASH-IN-THE-WORLD investment bankers employed haven’t helped much. So Is economy an art or science?

The human society learns predominantly based on what has happened and it follows the pattern of evolutions as the experience get hardwired into the genetic makeups, evolution in its  'design space' gives room for strong and weak both out of mutations and out of circumstances, but the weak doesn’t survive hard tests and gets eliminated. But there is a definite possibility by the laws of probability that it could re-occur and get killed again. Similarly economy which is fundamentally driven by the sentiments of buyers and sellers is extremely complex with humongous amount of influencing variables.  To be able to understand it better,  economists resort to simplification and try to make it as a science.

Without treating economy as a science , we will be walking in the valley of death ridden with beasts in the nights without any lamps to guide us. Science helps us to travel the night to a good extent with a reasonable success. But in the in the unknown path , we never know what is next and are bound to fall down and get hurt. This lamp helps us to understand where we have fallen , what has happened to us and how to get out that place.

World as a whole learns from its mistakes and proceeds forward, but the wounds take a bit to heal depending upon the severity and those who are in control (@#$) try different medicines like injection of capital , cutting interest rates etc hoping the wound will heal faster. This is a pure trial and error and no one will have the sure answer until the wound shows signs of healing.

This leaves us with a conclusion that economy is full of knowns and unknowns , while the knowns are answered by science, the element of unknowns are always an art , once we understand the art, it becomes replicable and gets moved to the science area. This is similar to commodization , to give an analogy, photography made lot of artists redundant and art gradually moved towards impressionism , modernism, post modernism etc etc whose understanding is left to the intrepretations of the viewer (mostly to the artists).

But the high profile economists and risk modelers dont seem to accept this fact and get trapped into deciphering economic complexities through mathematical equations.

The esteemed nobel prize foundation is not an exception, They have been rewarding best economists since from 1969 and am sure somebody who are making 10 Million Swedish Kronars for the contribution towards economics must be really having some answers and following are the list of people who have got the prize for last 8 years and am sure their views may be very relevant. You should definitely talk to them because mainstream media and the govt leaders are not seemed to be bothered about their thoughts and complex models sadly.

Found below is the list, if you want to know who they are.

2008 - Paul Krugman

2007 - Leonid Hurwicz, Eric S. Maskin, Roger B. Myerson

2006 - Edmund S. Phelps

2005 - Robert J. Aumann, Thomas C. Schelling

2004 - Finn E. Kydland, Edward C. Prescott

2003 - Robert F. Engle III, Clive W.J. Granger

2002 - Daniel Kahneman, Vernon L. Smith

2001 - George A. Akerlof, A. Michael Spence, Joseph E. Stiglitz

2000 - James J. Heckman, Daniel L. McFadden

Capitalism and Socialism

Last week is the most dramatic of all the weeks in known history of our generation (who had missed the great depression) and has redefined many conventional thoughts about the capitalistic markets and free economy. The week started with the fall of Lehman’s and was epitomized by the Fed’s bail out of monstrous AIG to the tune of 85 Billion dollars.
Capitalistic economy as per Adam Smith’s is governed by the invisible hand and is to be governed by the participants and with basic governance by regulators. Those who are smart could make money irrespective of their background and those who are not would lose money however mighty they may be. The free-economy had been the pioneering face of the democratic countries and is the basis of the consumerism and global addiction towards luxurious life style.
When the going gets tough, tough gets going and when the world was tired of conventional financial instruments, there emerged a bunch of smart traders who devised complex terminologies to sell the toxic assets (Credit Default Options and Credit Default Swaps have become household items now) and there was nothing wrong in what they did till the market busted. As they say “Success is a great Liar” and makes to be unaware of the possible consequences in the longer run and adding to the human behavior of denial, nobody wanted to blow the whistle.
In fact, nobody blew the whistle and it got blown by itself and eventually the market got shaky and the rest is well documented. But the very interesting part in the whole story is the fact that definitions of capitalistic society are being redefined and earlier foundations are being forgotten. This said, what the definitions of a capitalistic society are?. In my view, there are 3 top things which are the building blocks of the capitalism. First, the market exists by its participants and by their competitiveness. Those who are highly competitive survive and less competitive ones get eliminated (Survival of the fittest). Market is open for newer and legitimate ways to make money.
A socialistic economy based on Karl Marx philosophy advocates protection of interests and encourages governments to tightly govern the industries and advices them to build or own huge non-competing industries leading to state sponsored monopoly. After all the effort that has been spent in curbing communistic policies the US govt has sponsored bailout of Bear Sterns, AIG etc and has created a kitty of 800 Billion dollars to act upon any failures.
Though my intentions are not to undermines the intentions of different countries efforts to safeguard interests of public (me being one of those), but I have a feeling that with the revised laws of the game, the distinction between capitalism and socialism ( I hate this ) are lost and its time where we rewrite laws and come up with something like capocialism which is a balanced approach between best of both. Till that happens lets all start our days praying that we would be able to keep our jobs and pay our mortgage bills, Do you differ?

Img courtesy : http://www.luckythreadz.com/large/images/the_communist_party_large.gif

Simplicity vs Complexity

It has been a long time since i blogged last , the world has been the usual in these days with the oil prices going up (and down recently) people talking about unstable economies, inflations and terrorists mindlessly bombing and dopists still trying their luck in Olympics. All of these things have become something of a norm and doesnt strike us much in our routine life.

I led a very simple life of no internet for nearly 2.5 months thanks to ever confusing ISP's Sky and BT who kept me agitated, frustrated, disappointed (finally i settled down for Sky where i started with) so on.

Talking about simple life, it becomes extremely complex to be simple. Being simple is a very philosophical thing which ordinary mortals like us find very hard to attain.Great saints and yogis were able to remain simple as they had realized the truth which removes the complications and their whole purpose of life become to teach simplicity. (The simplicity that i talk here is the simplicity of thoughts and not wearing meagre clothes and living by fruits and milk ;-) . Late Indian Prime Minister Nehru once (jokingly?) commented that it is very costly for the congress party to keep Ghandhi simple (in the ways ghandhi wanted).
But that path towards simplicity is not all that simple as we are brought up in a complex world full of people with complicated thoughts and harder situations.

Our thought process is inherently complex as humans are gifted with a brain with 100 billion neurons and a processing speed of 100 million MIPS (million instructions per second), with this much of processing abilities , there is no wonder that we tend to process too much about a situation/person and make our life very complex.

While i was drowing myself in search of simplicity with no internet among the books and library, I came across a book called 'Orign of Wealth' by Eric D Heinhocker. Eric is a senior fellow of McKinsey Global Institute and his research and the original ideas are really fresh. He argues about the logical fallacies that traditional economists have built into their models that have resulted in over-simplification of the scenario(subprime mortgage dealers?) and argues majority of current economic decisions are taken assuming that world is "full of over smart individuals acting on extremely simple situations".

He starts the story from Adam Smith who pioneered the modern economy progresses towards to walras who brought the mathematical modeling into economics through his obsession with physics and so on. He argues the need to understand and accept complexity and chaos, as economy is a massive complex adaptive system. The book is an awesome read and is a great combination of economics, anthropology, physics and other academic disciplines. It was really a great read.

The world is really complex and if we need to face the complexity, we really need to keep our minds simple and be simple. I couldnt resist laughing when two students were discussing about a mathematical equation applied to pricing of commodities(during my tube journey last friday)on my way to a meeting to explain a complex architecture with a client. I think we still have long way to go in our quest to become simple.....

Relocations - Good and Bad

Birds migrate to avoid winter, fishes shoal in search of food, locusts swamp the fertile lands, human community started migration millions of years ago from Africa. It could be called as migration, movement, relocation or in modern terms immigration, emigration etc etc. Movement from one place to another has always been the norm of life for all the living beings (that could walk). I recently moved along with my family from India to UK and it made me think of these relocations dearly.

Movement has always been in quest of something , lets say Gold, Silver, Spices, Horses, knowledge, spreading religion etc. There has been voluntary migrations like people settling down in US , Australia etc from the European countries and there been forced migrations of African people all across the world(who were sold as commodities in the slave market those days).
The inquisitiveness in the man to understand things that existed beyond his vision and the stories told to him by other travelers from far off places must have really kindled the fire in him to explore. And obviously the first traveler must have been somebody from Africa where the mankind originated and spread across the world-, but the travelers like Huien-Tsang, Marco Polo, Vasco da gama etc made some real marks and increased human thirst to explore further and Silk Road greatly helped in bridging the diverse cultures of the west and east together(Silk route is a great book to read about it).

Somebody said 'Struggle in a battle is more interesting than the victory of it', On the similar lines life becomes dull as soon we achieve what we desired and its only the quest to achieve urges and motivates to do more. Those who escape this vicious cycle become either saints or losers. So travelers unlike tourists who have a determined path an schedule are the ones who are out there in the wild to enjoy the struggle to go to a place and they just keep moving. The greatest of the great warriors have all been only travelers and a glorious victory or insurmountable wealth have never been able to confine them in that place.

There is another sad side of the coin as well,there have been many mass exodus in the history where people had to migrate from one place to another to escape tyrant king, famine , wrath of lost wars etc and etc. The very earliest sighting of this can be traced to jews from earliest bible days to world war days , and the wandering had really made the jews very intelligent by etching adaptability to the difficult situations into their genetic make ups. We can keep quoting tribes after tribe at various times in history for varied reasons.

These sad travels, after having lost their homeland, assets, relatives with only hope as an investment and trying to begin a life in a new place where they dont exactly belong, to live as a refugee (or something equivalent) compromising the dignity must really wreck the minds. The fights that these individual alien groups launch have given rise to great leaders like Mahatma Ghandi, Martin Luther king to name a few.

Those who have traveled to Gulf countries and places like Singapore would have noticed the workers who have brought in to do the hard labor in harsh conditions, this is another mass exodus from developing countries to developed countries and has tons to sad stories in it(I cant forget two laborers cutting the grass in heavy rain opposite to my home in Singapore in 2002). Leaving families back home, pledging their assets for the visa and travel, living under hostile conditions of the agents who brought them , it is very hard to put their pains in the words(the national geography did a better job with the afghan girl - shown in the left-).

We just keep traveling in quest of fulfilling our desires and all of those travels are not always sweet for everybody.