Corporations versus People: Does our politics have to be that way?

October 30, 2010

If you were to listen to some of the political discourse in this country especially coming from the left, you cannot be faulted for thinking that corporations must be these evil, conniving, heartless, soulless machines that are trying to corrupt the entire political process and thwart the will of the people. If you were to listen to the right, they make it sound as if the government shouldnt exist and corporations should be free to do anything they want. I think reality is somewhere in the middle.

What people often seem to forget is that Corporations themselves are primarily collections of people, who exist as an entity because some other set of people, their customers, find what they do to be valuable and worth paying for. They are typically owned by yet another set of people, namely shareholders. Its amazing that all these people co-operate and get anything done actually. But, it is primarily because there is a lot of focus on incentives and aligning those incentives. 

In essence, Corporations are organizations with a clear objective and motivation, to maximize the rewards for people associated with it. Now, you may say that the owners benefit more than employees, and among employees, senior management benefits more than regular employees, etc., but, all that is part of the incentive structure. If everyone were paid the same and did the same thing, that would be called Khmer-Rouge style communism. 🙂

Now, I know the right has been calling Obama a ‘tax-and-spend socialist’. I dont know how they can do that with a straight face, when the previous republican regime presided over the greatest increase in our deficit in any 8 years in our country;s history.  However, even after all the hoopla about large government spending as part of the stimulus, the fact remains that any job growth happening in the economy right now is in the private sector. Not the public sector. To that extent, the stimulus spending is meeting some of its objectives. Which is why you see the Republicans who opposed the stimulus bill, now line up to get the money because they now think it creates jobs.

On the flip side, when republicans propose what seems to be a reasonable argument about lowering tax on repatriation of foreign profits of corporations, the knee-jerk reaction amongst my friends who identify themselves as democrats seems to be, why should corporations pay fewer taxes, when the common man pays his share? My counter to that is that this tax on repatriation of foreign taxes is a more subtle beast.

Recently, John Chambers and Safra Catz wrote a piece in WSJ (http://online.wsj.com/article/SB10001424052748704469004575533880328930598.html)   that I thought was very enlightened.

Their main point is that large US Corporations such as Cisco, Oracle, Google, Microsoft, etc., have about a trillion dollars of profits that are held overseas. If they could repatriate some of that money and invest in their future, that would create a lot of jobs for the economy. Think of it as a private-sector funded stimulus  bill of the same order of magnitude as, if not bigger than, the government funded stimulus. Yes, we spent the stimulus money and created a few jobs, but we had to borrow money to spend on the stimulus. To me, if we had allowed the companies to create more jobs, we may have avoided increasing our national debt. Honestly, I think we should have tried some ideas like this first prior to borrowing money and spending.

The argument seems to be that the reason why foreign profits of large multi-nationals are not coming back is because they get taxed at 40%. Today these multinationals avoid paying a penny in taxes by keeping the money abroad. In fact, they go to great lengths to not pay taxes, especially on foreign income (See recent Washington Post article: http://www.washingtonpost.com/wp-dyn/content/article/2010/10/28/AR2010102807139.html). Let me repeat, the government cannot get a penny in taxes from these corporations today on these foreign profits. However, the argument goes, if you reduce the tax on foreign profits, you will encourage repatriation of profits and, counter-intuitively,  actually collect some tax.

Keep in mind that it is corporations, big and small, that create jobs. And creating jobs is the best way to get out of a slump. Today, I would argue that the big corporations are probably creating more jobs abroad than here, not only because the labor rates are lower elsewhere, but also because it is too expensive for them to bring money back into this country. Now, rather than complaining about ‘outsourcing’ of jobs, we should make it easier for these companies to add jobs here. I am willing to bet that China encourages foreign companies to invest by providing significant tax breaks. So, if you had a million dollars of foreign profits, and bringing it into the US would immediately make it 600K, but if you invested in China, that 1 million is say 980K, you have 50% more to invest in China than in the US. As it is, the differential in the labor rates means that you can hire more than 2 people in China for the cost of 1 person in the US to do the same thing effectively, but the argument I am making is that from an investment perspective, because of the tax rate differential, the ratio is more like 3 to 1, making the case for investing abroad much more compelling. So, the government’s tax policy is encouraging US companies to keep the money abroad and hire abroad over and above the cheap labor argument. It is almost as if we just seem to be hell-bent on a system where we innovate, make money abroad, but cannot bring the money back for reinvestment. It is almost crazy. At least, that seems to be the argument. And I have to say, it seems pretty tight.

Other countries like Germany have gotten out of the recession without spending a lot on stimulus (See http://www.economist.com/blogs/freeexchange/2010/08/europes_economies), and you know what is the tax on repatriating foreign income for German companies? <5%. Co-incidence? I think not. But, I will have to let some Nobel Prize winning economist to weigh in on that. 🙂

I seriously hope that the next Congress takes a serious look at this issue and encourage American companies to repatriate profits that they earn abroad so that they can create more jobs at home. At least level the playing field from a tax perspective so that the ingenuity of the American workforce can overcome the labor rate differential. In essence, Corporations should be viewed as the primary mechanism to provide jobs to people, and they should be encouraged to play that role in society. Note, I am not suggesting that we should have a complete laissez-faire attitude as far as corporations are concerned. On the contrary, what I am suggesting that we treat corporations, large and small, as the the primary vehicles through which we can reach full employment. Encourage them to employ people, here, because corporations cant exist without people, and people need corporations for jobs. Its a symbiotic relationship, not an antagonistic one.

Time to restore some sanity in our political discourse I say…

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Aah! The World Cup

July 11, 2010

Now that the world cup fever has ended on July 11th, I thought I would outline the one thing about each world cup I remember.

The first world cup I consciously remember following was the 1982 edition. Indian television then was like North Korean TV today. If I remember right, there was precisely one channel, maybe two, and 24 hour programming was unheard of. Aamchi Maati, Aamchi Maansan and chhayageet were the key programs on TV. However, India was hosting the Asian games, and for the first time in the country’s history, TV transmission was going to be in color. The other thing I remember about 1982 was the world cup. I dont recall whether the matches were telecast live, but, I recall it was held in spain, and Paolo Rossi led Italy to victory. What was interesting was he apparently almost didnt make the team, and ended up winning the golden boot.

By 1986, Indian TV had progressed to relaying world cup matches live for sure. I remember because I was in high school and distinctly remember watching most of the matches live. As the matches were held in Mexico, they pretty much took place at unearthly hours in India. However, since lucubration in preparation for the IIT-JEE was well underway, it did not require any special effort. I distinctly remember the incredible goal by Maradona against England, not the ‘hand-of-god’ one, but the one where he single-handedly took on the entire team and scored. Argentina, of course, went on to win, but the tradition of seeing the matches live had taken hold in my life.

In 1990, I was an undergraduate, and our dorm was soccer crazy, being the intra-mural soccer champs. I recall Germany putting in an efficient performance, and squeaking past Argentina in the finals to avenge their narrow defeat in 1986. Brazil, supposedly the kings of soccer had not made the final game since 1970 and there was talk of parity in soccer in the world, etc.

In 1994,  I happened to be interning at small company in the Bay Area and my roommate and I caught a couple of games at Stanford stadium. I remember seeing the own goal by a colombian defender, Pablo Escobar, that cost him his life back in colombia. Brazil finally had Romario, Bebeto, and a few other players, and managed to lift the cup, helped in no small part by Roberto Baggio from Italy missing a penalty.

In 1998, the world cup happened around the same time that I got married, and I missed seeing the final live. I couldnt believe the final score of France -3, Brazil – 0, but, I guess this is when Thierry Henry, Zinedine Zidane, etc, burst on the international scene.

In 2002, the world cup was held in south korea, and what I remember most from that is how Hakan Suker from the Turkish club called Galatasaray led Turkey to a third place finish. I had not heard of Turkey, or the club ever before, and to see their quality of play was incredible. Of couse, who can forget how South Korea played an incredible tournament to reach the semis and finish fourth. Brazil won again to become the only country to win in Americas, Europe, and Asia.

In 2006, the world cup was held in Germany, and I remember the Italians starting very slowly, but, somehow, they managed to win the key games and won the final on penalty kicks. I wanted to go to Germany during the world cup, but having a 1 year old made that difficult. I did end up going for work during October-Fest instead. Most enjoyable time to be in Germany, one has to say..

In 2010, Spain managed to squeak past Netherlands in what must be one of the ugliest games of the world cup, but when the stakes are so high, no one wants to make mistakes. The better team won, but, it was painful to watch. I wanted Germany to win because of their incredible dismantling of England and Argentina, but, they lost to Spain in the semis, and ended up in third place. Thomas Mueller has got to be the find of the tournament, imagine scoring 5 world cup goals and winning the golden boot when you are 20 and being compared to Pele, when the supposed stars like Messi, Ronaldo, Rooney, Kaka, Torres, and not to forget the french and italians, all fizzled out.

health care for the masses

April 2, 2010

This health-care reform bill has had many detractors, but the primary right-wing complaint is that this is a ‘tax the rich so the poor can have better care’ bill. It has been labeled wealth redistribution by the high-priest of right-wing punditry, Glenn Beck.

The main reason for this is that people who make more than 250K in a family or individuals who make more than 200K will pay more taxes. But, that is missing the point. The country already has a progressive tax structure, where the higher your income is, the more taxes you pay. When we bought our Prius 4 years ago, one critical consideration was the potential for a $3000 tax credit. When we filed our taxes that year, we found out that the IRS thought that our income was too high and we had to pay AMT, which is bad in itself, but it also meant that we didnt qualify for the tax credit on the car.

Does the Prius emit any more CO2 if the person driving it is in AMT? No. But, we live in a society with a progressive tax structure. It is also well known that the greater your income, the greater the potential for you to increase your income. I am willing to bet that the incomes of the people who have to pay this extra tax will increase much faster than the incremental tax rate that bill envisages.

The bi-partisan CBO estimates that this will cost about 940 billion over the first 10 years. The same bi-partisan CBO estimates that the eventual cost of the iraq war will be $2.4 trillion. See: http://en.wikipedia.org/wiki/Financial_cost_of_the_Iraq_War

The irony is right there in front of us. The right-wing will have us believe that a wasteful 2.4 trillion war that has cost thousands of american lives was ‘worthwhile’ because of ‘patriotic’ reasons even when there was no evidence of Iraq having any connection to 9/11.

Whereas, a health-care reform bill that supposedly will cost $940 billion is bad because it is socialism because it is funded by taxing the folks with incomes much higher than the average per-capita income in the country. This in spite of the fact that the reform may have an outside chance of actually changing the lives of millions of people in this country.

To net it out, it is ok to spend 2.4 trillion on a completely flaky endeavor that kills 1000s of American soldiers, but it is not ok to spend 940 billion to give a larger number of people a chance to lead a healthier life.

That is Glenn Beck’s America for you..

how does glenn beck get away with it?

August 15, 2009

And then, it happened again. Glenn Beck talked  from both sides of his mouth. This time it was about the ‘best health care system’ in the world that only 16 months ago “did not care about the president of GE, let alone working class schlepps” to paraphrase.

I have to thank Jon Stewart for exposing me to the work of Glenn Beck because I am not the demographic that Fox News Network caters to. I have tried hard to understand their ‘fair and balanced’ point of view in the past, but I have concluded that they give conservatives a bad name by being very liberal with the truth.

Glenn Beck, far and away, takes the cake. While his tragic personal story is very inspiring, his punditry is downright comical. In my mind, Glenn Beck and Jon Stewart are the opposite ends of the spectrum. Glenn Beck is pretending to be both a comic and a pundit and being quite poor at both, whereas Jon Stewart is a pundit who uses comedy effectively to make his arguments.

The conservative movement has a history of distinguished intellectuals who have held forth on various complex issues of their day with great clarity. You know who I am talking about; the William Buckley’s of the world. Fox News claims to be the bastion of conservatism on cable, and presumably their pundits should represent the intellectual creme-de-la-creme of the present day conservative movement. Now, I do not expect these guys to be erudite scholars with PhDs, or JDs, but one does expect that their discourse, while not timeless, has a shelf life greater than 90 seconds. Especially, when one is talking about serious issues like race, the president, and the president’s attitude towards race. One does expect that their discourse is distinguishable from inane banter. At this point, I am not sure that is the case with Fox News. One would expect as stewards of public opinion, there is some responsibility, and that is taken seriously. I think Fox News in general is behaving like a sore loser after the Republicans got their butts kicked in the last election, and Glenn Beck is the poster child.

Glenn Beck managed to say one thing, and say the exact opposite in 90 seconds. What amazes me that Fox News does not consider that incompetence. I am glad to see that many corporate sponsors of the Glenn Beck show are calling it quits because of his behavior, but, what amazes me that Fox News still thinks he is competent. If this had happened in the corporate world, that guy would have been fired multiple times by now.

The only explanation I have for his behavior is that it is a new tactic to attract new users. Say such outrageous things on purpose that people will tune in to get entertained by a lunatic. Any publicity is good publicity, right? But, when such lunatics shape the agenda of important things like the health care system by making up concepts like death panels, or call everything socialism and potentially derail the future of the nation, it really worries me. A few dumb men from Fox News are desparately trying to derail the hard fought victory in the 2008 elections and god forbid if they should succeed.

Who would have thought…

May 21, 2009

that I would finally hear it from the Pakistani Ambassador on Jon Stewart’s Daily Show! I hope the ambassador does not get fired for saying what has been blatantly obvious for quite a while. Indeed, one can argue that it was obvious to the astute observer for at least a few decades, if not right from the beginning in 1947, that India did not pose the primary existential threat to Pakistan. In fact, it can be argued that, to the contrary, the whole notion of pakistan posed a significant threat to the notion of India. It was this fundamental belief that led leaders like Gandhi to oppose the division of India, but he made the ultimate sacrifice for his beliefs. He could not convince Jinnah that the dividing India was the wrong idea, and his attempts to convince Jinnah were construed by the hindu hardliners as appeasement. The British clearly had no incentive to get these answers right as they were more interested in getting out as quickly as possible, and in some ways I am glad they did because they had clearly over-stayed their welcome.

In fact, Pakistan has been the aggressor in three wars fought between the countries in 1948, 1965, and 1999. So much for India being the existential threat to Pakistan. Shashi Tharoor said it best: “Pakistan has nothing that India wants, India has something that Pakistan wants”. So, it is not in India’s interest to see Pakistan destabilized. However, it has been in Pakistan’s interest to see India destabilized. What I find amazing is that Parvez Musharraf goes on CNN on Fareed Zakaria’s show and says that Pakistan has to keep a large force on the Indian border because India made some noises about using force against Pakistan after Pakistan-based terrorists bombed the Indian Parliament and held Mumbai hostage for three days. He conveniently forgets that the pakistan army suffered probably the second worst defeat in the history of Pakistan in a war started by Pakistan under his command!

I think the primary existential threat to Pakistan is the fundamental notion of pakistani identity that is sufficiently different from the Indian identity. The reason I say this is that I am amazed at how much there is in common between Indians and Pakistanis. Every Pakistani I have met in my life, either in a university setting, or at work has had a whole lot in common with me. Now, of course there are differences, but they are no greater than the differences between a Keralite and an Assamese. I maybe a Tamilian who grew up in Pune, Kolkata, and Chennai, but, I could relate very well to Pathans from Islamabad or Lahore. Now, I know no one in Pakistan will probably agree with me, but, here goes anyways. The problem was that the set of folks who made up Pakistan in 1947, did not have enough in common to forge a national identity separate from the rest of India. At first, there was the distinction between west pakistan and east pakistan. In 1971, the erstwhile leaders of Pakistan, mostly Punjabi and concentrated in the west, did not believe that the Bengalis in east pakistan had the guts and determination to stand for their rights, miscalculated the Indian response, and caused the first split in the integrity of the idea of Pakistan. Indian sympathies lay with the bengalis, because guess what, those bengalis in east pakistan had family and generations of shared history and culture with the bengalis in India irrespective of their religion. Having said that, I can see how the paranoid Pakistani power establishment would have viewed the indian intervention in the bangladeshi war of independence in 1971 as the ‘Indian threat to Pakistani existence’.

In some sense, the events of 1971 increased Pakistan’s motivation to destabilize India. And when it became clear that using conventional methods such as fighting overt-wars would likely lead to repeated defeats, Pakistan resorted to encouraging separatist tendencies in India, may it be the Sikh separatist movement in the late 70s and early 80s, or the Kashmiri separatist movement since the late 80s after the sikh separatist movement ran its course with nothing to show but the tragic cost in terms of  almost hundred thousand innocent human lives.

What I think the powers in Pakistan need to realize is that the identity issue will not go away even if they get their wish with Kashmir. The Pakistani support for militancy in Kashmir has devastated the vibrant tourism industry in Kashmir. It has caused the non-muslims to leave Kashmir in droves. Prior to that, it was the restrictions on non-Kashmiris in Kashmir as envisaged in Article 370 of the Indian constitution that guaranteed that Kashmir would not benefit from the talents that were available in the rest of India, and the enterprising Kashmiris found more opportunities outside of Kashmir. When Pakistan with active CIA help succeeded in defeating and driving the Russians out of Afghanistan in 1989, Pakistan leveraged the jihadi infrastructure it had created and re-targeted them at Kashmir. This is the reason why the terrorism problem in Kashmir sky-rocketed after 1989. Anyway, as the jihadis themselves are finding out now, the Indian Army did not bomb them out of existence like the pakistani army is trying to in the swat valley now. Of course, if India had remotely done any such thing, Pakistan would have been at the fore-front of the understandable International outcry about mistreatment of muslims. I just want to point out how tolerant the Indians have been and as a result, finally, I hope there are signs that Pakistan is beginning to see that India is not the primary existential threat to its existence.

What we are seeing in pakistan now, even after 60 plus years of being part of the same nation, is that there are significant fissures in the populace. The punjabis dominate the nation because they are more than 50% in terms of population, and 70% of the army. The others feel left out and because it is not a functioning democracy, and do not have a way of organizing their interests and getting them addressed systematically other than resort to violence. What is ironic is that the argument that was constantly made for partition was that the muslims were concerned that their interests would be overriden by the interests of the majority hindus in a pure democracy. This is a very telling argument, because what is happening to non-punjabis in Pakistan is what the muslim leaders thought would happen to them in the larger India. Co-incidence? I think not. I think it is essentially because the leadership in Pakistan never really believed in democracy and did not build up institutions that could support democracy where the minority voices have a role to play. On the contrary, in India, while most social wellness indices indicate that muslims, on aggregate, are behind the rest of the population, India has had two heads of state who were muslim, and while there have been many significant instances of sectarian violence, muslims do exercise their right to vote freely and are actively wooed by multiple political parties. Keep in mind, India still has the among the largest muslim populations of any country in the world.

I think history as of now, has played out in a way that is very different from what the founders of Pakistan envisaged. The sense I get is that the hindus  and sikhs who moved to India as a result of partition have assimilated quite well into the country. However, I am not sure that is the case with the muslims who went over to Pakistan. Why do I feel this way? There are political parties whose whole premise is to represent the interest of the Mohajirs who are precisely the folks who literally risked life and limb to move to Pakistan because they believed in the idea of Pakistan. See http://www.mohajir.net/PDF/Sharp-Eyed%20View%20of%20a%20Mohajir%20_%20DesPardes.pdf for a fascinating perspective of a Mohajir on the creation of Pakistan and related events. Of course, part of the reason is also that the Mohajirs wanted political power, and they had it for a while. They were after all, the ‘ruling class’, so it is not surprising that they sought political power, and more on that later.

The problem is that Pakistan has relied too much on the army to provide stability and therefore their identity. And as history has shown, armies need enemies, and India has been a convenient enemy that has been misused to distract attention from more pressing matters of state.The pakistani army apparently regularly told its soldiers that they were descended from ‘warrior tribes’ that had conquered india in the past, and that one pakistani soldier could take on 10 hindu indian soldiers and beat them. This may explain how Pakistan thought it could attack and win in the four wars, when in reality it lost two wars outright, and had very limited success in the other two. As Shashi Tharoor said recently: “The army has a state in Pakistan. Other states have armies”. The amazing part is that Pakistan wants more western support because the alternative is that the state will disintegrate into chaos, and the ‘nukes’ will fall into the wrong hands. What more evidence does one need for the lack of a coherent identity! Is Pakistan not precious enough for Pakistanis to unite on?

So, some of this begs the question, why did Pakistan come into being anyway? Now, I am going to provide an over-simplified version, but from all the research I have done into this matter, I cannot find a more succinct explanation. Essentially, Pakistan was formed because some elite muslim leaders could not bear the thought of the prospect of taking orders from democratically elected ‘hindu’ leaders because they feared that the hindu leaders may not ‘respect their religious sensitivities’. It is as simple as that. Another nuance, though not explicitly stated part of their argument was that prior to the British ruling most of India, most of India was ruled by muslim rulers such as the Mughals. In fact, the most vocal proponents of Pakistan in India were the muslim elite from northern india who formed the ‘Mohajir’ community in Pakistan. So, somehow, these folks felt that they were the ‘natural leaders’ of the populace, and it was more important to find a populace to rule over than to create a viable, vibrant state. This may also explain why they wanted Urdu to be the national language of Pakistan when it was the native tongue for less than 10% of the population. So what did they do instead? They convinced the British that the best way out was to create a new nation. Imagine, the whole idea of Pakistan began being discussed publicly only in the 1930s, and its proponents deliberately decided to magnify the differences as opposed to building on the shared history of hindus and muslims in the sub-continent. Now, I am over-simplifying, and I am sure there is a lot of blame to go around, but, the fact remains that what the muslim leadership probably thought that the threat of separation will give them more leverage, but I am not sure they were actually prepared for the consequences of actually getting their wish. In fact, with 60-plus years into the experiment, one can say at this point in time that chances are that they were actually not prepared, and the death of a couple of  leaders early in the history of Pakistan caused the destiny of millions of people to take a very different course within one generation. Not the characteristic of a stable populace with a clear identity.

From the beginning, Pakistan was intimidated by India’s relative size, and tried to define itself as something that India was not and actively courted US support to counter their perceived existential threat from India. Add to this the fact that the separation was clearly not in ‘the best of terms’. This reliance on US support had many unintended consequences including one that made the Army the most powerful political institution in the country. The Indians, on the other hand, were very leery of powerful countries because of the experience with Britain, and diligently avoided any reliance, especially military relationships with very powerful countries. This reticence, led to the so-called hindu rate of growth for a long time, but I think it was important for the country to build up its sense of stable identity, and ensured civilian control of the armed forces. Pakistan, on the other hand, did not have the luxury because two of its founding leaders, Jinnah and Liaquat Ali Khan died within a couple of years of independence, and there was a leadership vacuum that was often filled by the army. So what was the consequence of that? The Army had to periodically rule the country, and Pakistan was seen as a close US ally. This alliance was very useful, especially to defeat the Russians and drive them out of Afghanistan, but after that, the Americans had to focus on other things such as the first gulf war, and the focus shifted away from Pakistan. The consequences of this in terms of the failure of Afghanistan as a state, the emergence of Taliban, and its consequences are only too well known to all of us now. What Pakistan did not realize is that this jihadi movement of their creation that they successfully used against the Russians and thought they could use to destabilize India has now turned on Pakistan itself. The recent blatant attacks in the Islamabad red mosque, the attack on the Sri Lankan cricket team, etc., makes one wonder whether other pakistanis, especially the army, will follow the Ambassador and stop obsessing about India, and instead focus on creating a vibrant state that Pakistan should be if the sample of Pakistanis I have met is at all representative.

In summary, it was a potent brew of multiple self-interests that led folks to believe that the creation of Pakistan in 1947 was a good idea. Who were the people who paid the price for its creation? It was the millions of people who were displaced and were suddenly of the wrong religion in the wrong place. Imagine, you were a hindu or sikh in punjab, and your forefathers had lived there for centuries if not millenia, and suddenly someone somewhere decides that your village is now in Pakistan, and likewise for some muslim family in the indian part of punjab. Imagine, you have been punjabi for generations, and potentially trace your roots to when civilization took root in that part of the world thousands of years ago, and suddenly, you find yourself on the wrong side. Really traumatic.

Anyway, I hope one cannot just wipe out centuries, nay millenia, of shared history and culture by drawing a line in the sand and start behaving like sworn enemies for a few decades. This time of crisis in Pakistan, I think, is an opportunity for India to show its leadership in the form of sincerety and commitment to peace in the sub-continent and to re-inforce the point that a stable Pakistan is in India’s interest. Pakistan, on the other hand, has to be serious about beginning a sincere mutually beneficial relationship with India and has to stop using religion as a political tool to destabilize India. It has to find an identity that its folks are comfortable with, and if  it is a variation of the Indian identity, so be it.

layman’s view of financial crisis

April 1, 2009

Since the financial crisis is all the rage these days, and pundits pontificate about greed on wall street and lack government oversight, collaterized debt obligations, credit default swaps, etc., and consequently take the discourse out of the reach of the common man such as myself, I have tried to put a historical perspective together based on my personal journey to try to make some sense of the current situation in simple lay terms. There are famous economists in famous universities who have blogs (see http://baselinescenario.com run by MIT profs, and other blogs run the freakonomics guys, university of chicago profs, etc..), and I actively recommend reading those blogs as well.

The story begins in my sophomore year of college when I had to write a term paper for the economics course. I decided to write about the debt trap that many countries, especially developing countries, found themselves in. While researching the paper, I was astonished to find that the country that was the most ‘in debt’ back in the late 1980s was the United States. The reason the US never got caught in the debt trap, I was told, was the capitalist society in the US almost always guaranteed that the capital was invested in projects whose return was higher than the rate of interest on the debt. Indeed people were lining up to lend money to the government of the United States because the perception was there was essentially no risk of default. Other countries, especially developing countries, ‘mismanaged’ the capital and invested in projects that did not provide sufficient returns making them borrow money to repay existing debts and consequently getting into a debt trap.

Now why is it that the capitalist system in America is able to find things to invest in that return better results? Well, it is because it is a ‘huge market’, that is, the GDP is high and there are many possible uses of the capital and we have good institutions, etc… What constitutes GDP? It turns out that 2/3rd of GDP is consumer spending. So, as long as people are buying, it looks like we have a good thing going. Now how are people able to buy? Are their incomes high? It turns out that over the last few years, the income distribution has become more polarized, so for even though the median income in 2007 was 50K, the bottom 40% earned significantly less than that, i.e., less than 36K.

In most countries, people accumulate assets by saving and investing, and that usually assumes that their incomes are higher than their spending. Here is where the logic seemed to start falling apart for me. It turned out that not only did the US have a huge public debt, but also a lot of private debt. Meaning the average US citizen spent more than he earned. But I was told that there is social security, medicare, etc., so the average american does not need to save as much. But to actually regularly spend more than what they earned? How could that be sustained? Well, that was because 68.1% of americans in 2007 (http://www.danter.com/statistics/homeown.htm) owned their homes, and as long as the value of their homes kept going up, they could borrow against their homes and spend.

Coming from a country where half the folks live on less than a dollar a day, this was an amazing phenomenon. Home ownership is a privilege for most people in the world, it seemed to be a right in America. In fact, politicians would routinely talk about the ‘American Dream’. They conveniently forgot to mention that the great american dream is financed by the great american debt! So the whole world is betting on the American citizenry consuming, and actively encouraging that behavior by lending them money.

The argument seemed to be backward, meaning that normally one would think that one accumulates assets and puts the down payment on the house and pays a mortgage, so, one has to reduce consumption to afford a home, but it seemed like the expectation of increase in home values drove an increase in consumption. Credit was freely available to folks who wanted to consume because the government kept the interest rates low, and the government itself was able to do this because it was able to borrow easily, mostly because there would be possibilities for investment that were dependent on the US citizen spending even more money. So in some sense the whole world was betting that the real-estate market in this country would keep going up and people would keep buying. In fact, it seems that they kept lending money to the US government on this essential premise. All this when industry after industry essentially disappeared to lower-wage countries which in my mind would undermine the consumer demand that seemed to be the primary driver of economic activity and growth.

I remember talk about US being the ‘ownership’ society where the house was the single largest asset that most people owned, so the argument seemed to predicate on getting more people to own homes. That would give people the asset base to continue to spend money and grow the economy. And then, from the late 90s and early 2000s, especially after the dot-com crash, I could see the distinct push to enable even more people to own their own homes, even people who were among the lower income brackets. I remember various powers-that-be rationalizing it as putting people in homes drives our economy. There were multiple research papers written by prestigious universities on why housing for low-income folks was critical for their economic well being (see http://www.jchs.harvard.edu/publications/finance/w05-9.pdf for a fascinating view of the financial returns of home ownership for low income folks). Of course, the paper did talk about the risk of the property values going down, the risk of default, etc., but, the general theme clearly was that home ownership was good for low income folks, and it was good for the economy as a whole. In fact, home ownership rates went up from 66% in 1998 to 69% in 2004 and dropped to 68% in 2007.

The net effect of this was that interest rates on home loans were amazingly low.  In fact, we were able to buy a home because of what we thought were really low interest rates. So, I was part of the statistic that contributed to the increase in rate of home ownership. And of course, once I got into a home, the number of things I spent money on went through the roof. So, I could see the argument that home ownership drives a certain level of economic activity that in all likelihood renters dont drive.

At the back of my mind, what did puzzle me was how were these financed? Who would lend money to people whose incomes are low, so that they can buy a house, and spend even more money to stay in the house? It would be too risky. If I was one of the folks who needed to borrow, I would be thinking about the fact that a significant portion of my assets would be tied up in a fairly immovable asset, and if its value were to fall, it would devastate me.  I could not understand what the economics/budget of a supposedly ‘low-income’ person on a mortgage would be like. In addition, common sense seemed to indicate that for the lenders, the higher risk of lending to lower income folks would mean that they would have to charge higher interest rates to folks with lower incomes making it even less affordable for lower income folks to borrow large amounts of money required to buy houses. Micro-lending works in really poor countries, because the amounts involved are small, not because the interest rates are lower than market rates. After all, the median house price was four times the median household income in 2007. How can a person on a 50K income afford a 200K house, and also spend money on all the other stuff as well? That was the puzzle.

I just could not understand how we could put a roof over everyone’s head unless it was significantly subsidized by someone. Assuming a population of 300M, with 80M families, a 3% increase in home ownership rate (from 66-69%) translates to about 2.4 million homes. The kind of incremental lending that would need to happen conservatively assuming an average of 100K loan per home is a staggering $240 billion. That is some serious financing.

What was even more puzzling was how could traditional financial institutions make money in the process? It seemed too good to be true, you are doing a ‘social good’, by putting a roof over everyone’s heads, and you know what, you are able to do it in a capitalist system. Who would have thought this was possible? I was told it was the magic of securitization. That is, you bundle a bunch of these loans with other loans, and magically the bundle becomes less risky than the original loans. You then sell pieces of the bundled loans to folks and give them a return that is lower than the original interest on the loans that the original borrower will continue to pay, and you can make good money on the spread.

What is interesting is that financial companies borrowed money for short periods of time to buy up bundles of these loans until they are able to securitize and sell them off to others, and as long as there was a spread in the interest rates, and you were essentially printing money. As long as they are able to keep borrowing for short periods of time to keep doing this, there would be profits for the foreseeable future. Here is where the leverage of the banks comes in. All the banks were making these bets with borrowed money. The only risk was that enough people would stop paying their mortgage, or refinance, or someone would stop lending them money in the short term to do this securitization. What people did not expect was all of these things to happen at the same time. And whoever ended up ‘owning’ these securitized assets was left in the lurch because they were not worth as much as they once were. What is worse, no one can price these things because there is no clear understanding of the risk associated with the promised cashflow associated with the instrument. Hence they are toxic assets. Since the financial regulators also require banks to guess the value of assets on their balance sheets, and ‘balance’ the balance sheet (the so-called mark to market rule), it meant that as the random guess about the values of these instruments fell, banks now had to set aside real assets to balance their books. Here is where the banks that were over-leveraged, i.e., ones that had borrowed money to buy these assets took it on the chin. And there were some real wall street powerhouses such as Bear Sterns, Lehman Brothers, and Merrill Lynch.

Now, it is interesting that folks think that this mark to market is the cause of the problem because it forces to guess the value of the assets on their books and ‘balance’ it every quarter. They even point to the fact that this mark-to-market has caused many financial scandals in the past, including Enron, and more on that later. As it is, these financial instruments are opaque, and when you are a public company and take in investments from the general public, I think you should be required to explain the use of the public funds in a clear manner. Now this is more easily said than done, and may prevent certain kinds of economic activity, but, if we believe in having transparency for use of public funds in a public company, we have to have some rule like mark-to-market.

Everything seemed to be going fine with the system and everyone seemed to be enjoying the party until someone started thinking, now wait a minute, all this is based on free flow of credit and house values and therefore personal consumption going on for ever., and yelled fire, and there was a stampede. What is amazing is that this is the explanation I was given for what happened at Enron in 2001. Enron, also ‘securitized’ assets on its balance sheet and sold it to various partnerships, to get the assets off the balance sheet so that the performance of the company would look superlative. I remember as if it was yesterday when Enron declared a record profit in some quarter of 2001, and also said something like they had to reduce shareholder equity by some obnoxious account. This was because the securitized assets were backed by Enron stock and cash if they fell below some value. These assets were properties such as the infamous Dabhol power plant in India, the Azurex water utility in scotland, etc.So, they were very unique assets that were very risky and securitization did not help in reducing or managing the risk of the actual endeavor.What is more interesting about Enron is that the law that they actually broke was that the parties to which they ‘sold’ the securitized assets were run by their CFO whose participation in which was underwritten by Enron. So, Enron should not have been able to take the assets off their balance sheet.

So, the net-net is that securitization, or market-based mechanisms while very interesting and fascinating, are not the answer to managing risk in every situation.

Now this system of securitization was predicated on the bundles of loans having lower risk attributes than a single loan. Think of it as there is always a small chance that a family loses income or has some other unfortunate circumstance and therefore cannot make it payments, but if you put in 1,000s of homes together, the argument was that the chance of similar default are lower. But, is that really true? Now I know that if you bundle financial instruments that are less than perfectly correlated, they will offer a better risk-return tradeoff than any single instrument. So if you buy shares in a company that makes sunscreen and one that makes raincoats and umbrellas, your portfolio value will be more stable and you will likely have a higher risk-adjusted return than if you bought shares in only one of those companies.

So, the kazillion dollar question was whether these bundles of mortgages were like any other financial instruments. The only way it would work is if these bundles comprised of mortgages of folks whose risk of default was not perfectly correlated. The question was how was the risk of the bundle calculated, and how did it match reality. Here is where the answers become very fuzzy, it looks like there were mechanisms to estimate risk, and even to provide ‘insurance’ (so called credit-default-swaps), but, it all had to be predicated on some assumptions of default from millions of families who had historically not owned homes, even in America. So, I cannot imagine that there were reliable models to predict the default risk of folks who got the so-called sub-prime mortgages. Our assumptions around the risk of default were all essentially broken by the increase in home ownership because our models for predicting risk of default were completely off.

It turns out that all of us are paying for trying to put an additional couple of americans per hundred into homes. In some sense, my hunch that putting everybody into a house needs to be subsidized by society is right. Either the government has to tax and subsidize, in which case, we would be socialists, but at least you get to vote every few years to decide who gets to call the shots, or we have to redistribute resources based on ‘market-based mechanisms’ where we have very little to no control over the companies unless we have enough ownership stake and are active shareholders.

In economics/finance, one needs to be a empiricist, meaning, one needs to gather the evidence for the application of mathematics to the phenomena that we observe. It seems to me that wall street had a platonist view thinking that the reality was generated by the numbers. There are of course the contrarians such as Nassim Nicholas Taleb who are probably laughing saying ‘I told you so’, but we need more of those skeptics who are able to question the emperor’s clothes when the herd is rampaging and taking all of us over the precipice.

Los Cabos Musings

January 31, 2009

I have wanted to visit Mexico ever since moving to California in 1996. Why, you may ask. Over the last dozen or so years, on more than one occasion, I have been mistaken for being a Mexican. This has piqued my curiosity to see for myself what the country was like, what the people were like, and settle the mystery once and for all. Maybe there was some deep genetic connection between Indians and Mexicans.

In this part of the world, depending on where you are, one needs to keep in mind that the word ‘Indian’ is over-loaded. It is not just the Native Americans who are called Indians. I have been called an ‘East Indian’ in Puerto Rico to distinguish me from the people of Indian origin who live in the  West Indies. So, there is more to being called an Indian than meets the eye. My interaction with the ‘Indian’ shopkeeper in Puerto Rico, and subsequent conversation about being ‘East indian’, has a lot of fascinating historical context. That will have to be the subject of a different post. This is about Mexico..

Mexico is a fascinating, rich culture and we decided that with a three year old, we would first experience the new Mexico, namely the vacation resorts. We knew that Keshav loved the beach and we could spend a lot of time on the beach keeping him entertained, and more importantly tire him out. The visits to the Aztec ruins will have to wait for a subsequent visit. We picked Los Cabos as a destination, booked air tickets, and a resort and off we went. The flight into Los Cabos was through LA and was uneventful. We thought we would get a cab to the resort and be done with it. This is where we could not have been more wrong.

Los Cabos, it seems, has an over-abundance of vacation resorts that want to aggressively push fractional ownership to anyone, even if they are not interested. As we gathered our luggage, finished customs and immigration and came out to the main lobby of the airport, there were many polite people talking in English who were offering to help people with transportation, i.e., cabs, rental cars, etc. Now, I had not made up my mind whether I wanted a cab or a rental car. Plus, I did not suspect that folks helping with transportation would be pushing vacation resorts. I thought they would push their transportation service. One of the polite gentlemen with a name tag on, approached me, and took me to his station and before I knew it started convincing me that a rental car was better, and that he would give me a free rental car if I were to agree to visit some random resort with my family. Of course, he made it sound like his family would starve if I did not visit the resort. He also made it sound as though my family would have the time of our lives on this visit. Now, I do not know why, I decided to go with the rental car at that point in time. I had not yet read Dan Ariely’s ‘Predicably Irrational’  (www.predictablyirrational.com) to know that I was irrational like everyone else and when something was offered as ‘free’, I had the propensity to take that offer without completely evaluating the potential downside.

Anyway, the guy took me to a car rental across the street from the airport, ‘negotiated’ a two-hundred dollar discount for the car rental, and told me to meet him the next morning on the highway outside the Sheraton Hacienda Del Mar resort where we were staying for the next four days. He also told me to not tell anyone in the resort that I had spoken to him. I thought this was an odd request. I could see the strategy of trying to make this ‘personal’, and trying to create the feeling that I ‘owed’ him something for the ‘discount’. Little did he know that I was truly undecided, and that his strategy was unlikely to work. In my mind, I was prepared to pay about 200 dollars for a car rental for five days because that is how much the car would have cost me anyways. In my mind, the justification was that instead of paying about $150 for cab both ways for the three of us, I am now paying $200 for the freedom of moving around wherever I pleased when in Cabo.

The drive to the resort form the airport was quite good. Cabo San Lucas is at the southern tip of the Baja Peninsula, and the airport is in a town about 30 km north in a town called San Jose Del Cabo. The drive from San Jose to Cabo is dotted with vacation resorts of all sorts along the way. The peninsula itself is essentially a desert, but it looks beautiful from the air and on the ground because of the contrast with the blue ocean. Our resort was about 2/3 of the way to Cabo San Lucas from San Jose Del Cabo. We made it to the resort, parked the car and checked in. While we were checking in, the reservation lady asked us whether anyone had approached us about visiting vacation resorts, and I told her about the transportation agent. On hearing about that she immediately told me that I could get a discount at the resort for whatever amount the other guy had given me, i.e., $200 in my case if we looked around this resort instead. I was stunned. The timeshare business was everywhere here.

Anyway, we then settled in and decided to have a late lunch at the italian restaurant at the resort. Later in the evening, we drove down to Cabo. Getting the right kind of food was a challenge We wanted to see the marina, and this was to be the place we would come more often the next few days were in Cabo.

The Marina in Cabo was definitely a very interesting place, with hundreds of boats of all shapes and sizes. Cabo, it seems, was a pirate base from which pirates attacked Spanish ships carrying gold and produce between the Americas and Spain. In some ways, Cabo still has some of that ‘anything-goes’ feel to it even now, although the marina is definitely ‘gentrified’ with malls, restaurants, bars, antique shops and street vendors hawking wares. Deep-sea fishing is a big deal here, and there are many boats and yachts that can take you out into the sea for fishing Marlins. There were some very impressive yachts, some even had helicopters on them and resembled yachts used by rich villians in James Bond movies.

The street vendors looked like native folks who were selling artifacts made from things like coconut shells, etc. The pricing strategy though was quite interesting. They first told us that the price was, say 10 pesos, only later to say that it was 10 dollars. It was about 10 pesos to the dollar. I guess, the mexicans in Mexico were quick to see through my ‘fake mexican-ness’. The lack of ability to speak in Spanish probably gave us away. 🙂

One of the featured items in the marina was a pirate cruise where the tourists are taken in a ship that looks like an old pirate ship. I was skeptical at first, but the experience definitely surpassed all my expectations, the open bar probably did the trick. Keshav had a blast in the pirate cruise as well. We were lucky that the sea was quiet that afternoon. We had not spent as much time on the beach as planned because it was too dangerous to go for the first three days we were there.

We flew back via Dallas, and Keshav created quite a racket on the ride back, especially the leg from Dallas. It did not help that one of my friends was traveling on the same flight, one row behind us, and Keshav and his daughter hit it off. He calmed down a little bit when one of the fellow passengers told him to behave. It was a trip that was to teach us to prepare to travel with Keshav, and we have hopefully learnt our lesson. 🙂

Keshav in Switzerland: Part II

November 10, 2008

In part I, we had just checked into the hotel, Keshav and I had freshened up, napped a bit and waited for Pavitra to get back from work. She came back at 7 pm, and we headed out across the Aare river to the center of the city.

KornhausBrucke on the River Aare

KornhausBrucke on the River Aare

The river Aare is crystal clear, and on a sunny day, one could actually see the bottom of the river from the bridge several hundred feet above the river. Pretty amazing. The river had a pretty brisk current, and on a warm day one could see people swimming along, enjoying the weather and a good swim. I have of course seen people enjoying the river in Kolkata and that has its own charm, but, the beautiful Bernese Oberland surroundings made the Aare a sight to behold.

There were many interesting places to eat, but we had gotten in the habit of asking Keshav what he wanted to eat and to take him to a place where what he wanted to eat was available. Keshav did not like ‘surprises’, and if we took him to a place he didnt want to go, it often meant that we couldnt eat there either. Keshav was in the mood for italian food, in particular spaghetti, and so we went to a busy spaghetti place. Thankfully, most restauranteurs in Switzerland speak English in addition to Swiss-German, French, and to a lesser extent Italian. This restaurant we went to also had menus in English. They must get a lot of tourists. We ordered a kids portion for Keshav, and I had an extra-spicy dish with artichoke hearts, sundried tomatoes. I topped off the spicy pasta with some beer, and that was good. After finishing his dinner, Keshav decided that he wanted to top off with chocolate ice cream, and this became a standard part of his diet in Switzerland.

We walked back to the hotel and settled in for the night. The Hotel Allegro Kursaal Bern, the place we were staying was a hotel casino complex. Having visited Las Vegas recently, I had a mental image of hotel casino complexes. That image was one of garish excess, pullulating with people on slot machines. The Allegro Kursaal, fortunately, was nothing like the MGM, or the Bellagio. It was a quiet place, and one almost could not tell that it was a casino. In fact, the casino was hidden away on the top floor. There were a handful of top-notch restaurants in the hotel with some vegetarian fare as well.

Switzerland is in Cenral European Time, a good 9 hours ahead of pacific time. This in addition to the fact that we had not for much sleep on the flight meant that on Saturday, we were very jet-lagged. Rather than fight the jet lag, we decided to sleep in, and by the time we woke up it was well past noon. We decided to just amble into town in the afternoon, see the zytglogge, the medieval clock tower in the old town.

The Bern Clock Tower

Zytglogge: The Bern Clock Tower

The old town in Bern is a world heritage monument, and walking through it, one can easily see why. The cobblestone streets, the historic facades, and the medieval wells that are now fountains, beautifully preserved. The center of the town has more than a dozen wells that have survived since medieval times. One could easily imagine folks living in the houses along the street, coming down to the street to gather water for their use. These houses were built right next to each other, not unlike houses in an agraharam in Thanjavur with the local community well, etc. Of course, one of these apartments was rented by Einstein for a few years between 1903 and 1905, and he is said to have done a lot of research that went into his seminal papers in 1905 while staying in this apartment. We visited the apartment, and I was suitably impressed.

One of the amazing effects of globalization was that we saw a McDonalds right next to the Zytglogge. We had never taken Keshav to a McDonalds in california, but this day, Keshav decided that he wanted to eat nuggets and fries. We went into the McDonalds, and the menu was familiar. Ray Kroc’s vision had made it to Bern Switzerland, from Los Angeles. There were some commonalities, but some significant differences. The price for one was different. One had to drop at least 10 francs (about 10 dollars) to eat almost anything at the McDonalds. In addition, one had to pay for additional ketchup. We picked up dinner for three people that cost us $35, though eating anywhere else would have easily cost us twice that amount. Eating in Switzerland is expensive. We picked up the food and went to the eating area on the next floor. I expected to eat quickly and get back to the hotel to retire for the night. McDonalds, after all was a fast-food place.

What happened was different. There was a PS2 console in the eating area and a few boys were playing some ATV racing game on it. Keshav was absolutely thrilled! He had a PS2 at home and loved car racing games. He pestered one of the boys enough to make him give up his seat and settled in to play the ATV racing game. There were other TVs tha were showing the olympics, so Pavitra and I kept ourselves amused watching TV. About 90 minutes later, we headed back to the hotel. What should have been a 10 minute dinner became a 90 minute dinner.

Keshav was so thrilled by this discovery, that he christened the McDonalds ‘Bern’. Indeed, as far as he was concerned, the place with the PS2 was the only interesting place in the whole city. From that night, I had to take him to the McDonalds everyday, either first thing in the morning, or for dinner so that he could get his PS2 fix for the day.

On sunday, we ventured to Luzerne. By the time we got up, went to McDonalds, had breakfast and got Keshav’s PS2 fix, it was almost noon. We then went to the train station, and I decided to get a 3 country Eurail pass valid for Switzerland, Austria, and Germany. The idea was that I would take Keshav to Salzburg to see Mozart’s house because he was an avid Mozart fan, and slept to Eine Kleine NachtMusik, and Rondo Alla Turca. Germany because i thought I would take him to Stuttgart to see the Mercedes-Benz museum and the Porsche museum.

The train ride from Bern to Luzerne was about an hour long, and was comfortable. We did the standard touristy things, and then Keshav decided that he wanted to be carried by me everywhere. This was likely because he was really hungry, but, he would not eat most things we would try to feed him. Luckily, we found an ice cream shop and he helped himself to some chocolate ice cream. We got back to Bern in the evening, and decided to call it a day because Pavitra had to go to work the next day.

Back in the hotel room, we were flipping channels on the TV, and one of the channels had a german program called KiKa Lounge. Keshav was transfixed to it, honestly, so was I. It was this sponge-like character with two small arms that spoke in german, kept pushing over some glass balls that would shatter, and the background music was very interesting. We could watch this for hours, not understanding a word of what the character said, but still be entertained. Of course, this meant that whenever we turned on the TV and Keshav was in the room, we had to first check if KiKa lounge was playing, and could watch something else only if KiKa Lounge was not playing.

Pavitra had to go to work on Monday, so Keshav and I did the usual breakfast and PS2 fix at McDonalds before heading out. It was almost noon by then. We decided to take the train to Zurich, to check the place out and we did that. We walked around the central part of the town, and took some photographs. We hopped on the train back to Bern. When we got off at Bern, we noticed that there was a train going to InterLaken. Since it was only 4 pm, we decided to take the train to Interlaken. The journey to interlaken was breathtaking with some amazing scenery, especially close to Interlaken. Once in Interlaken, it started to rain, and we could not spend as much time or go around as much. I wanted to go to Jungfraujoch, but, Keshav was not in a co-operative mood. I decided that we will have to come back to see jungfraujoch when Keshav got bigger.

The other amazing thing about Interlaken was the sheer number of tourists of indian origin. The people on the trains as well as people waiting for trains in stations seemes predominantly of indian origin. Reminded me of Niagara Falls. In some ways, interlaken is probably the ‘Niagara Falls’ of Switzerland. No self-respecting Indian will visit Switzerland for a vacation and not make a trip to Interlaken. For us, we made it to Interlaken, and as it was raining, we couldnt take many photos since my camera was not water proof. Even if it was, I was not prepared to risk exposing it to the rain.

After having done two places in one day, I decided to head back to Bern for the evening. We make it back without much incident. Keshav would occasionally get very excited, and as we had first-class tickets, we could find cabins where KEshav could scream and not disturb the rest of the passengers. We were also equipped with the PSP that had a golf game, and with music so that Keshav could be kept entertained.

We decided to go to Stuttgart on Tuesday, do some local sightseeing on wednesday, and try to go to Salzburg on Thursday, and squeeze in a trip to a new place on Friday. Pavitra would be free on Friday afternoon, so we thought we could squeeze a trip to some place we had not managed to see.  At least, that was the plan.

Stuttgart was a good four hours away by train, and we had to change trains in Karlsruhe. Salzburg was going to be more interesting. The concierge at the hotel said that it would take at least 7 hours to get to Salzburg from Bern by train. I was still hopeful of making the trip. Even going to Stuttgart meant that we needed to leave Bern by 8/9am to be in Stuttgart by noon or 1, have 4-5 hours at the Mercedes museum, and get back to Bern by 9 pm in the night.

The next morning, we got up early, grabbed a quick coffee and boarded the train to Karlsruhe en-route to Stuttgart. The journey took us through the city of Basel. We crossed into the German province of Baden-Württemberg close to Basel. Baden-Württemberg is the province where Stuttgart is, and indeed, Stuttgart was the capital of Württemberg Kings prior to German unification. It has a variety of museums that provide a unique glimpse into the history of that region from multiple perspectives. The region does not have natural resources like some of the other regions of Germany, but the people here are very enterprising and industrious. Indeed some of the most well known German companies across industries are based in this area, Daimler, Porsche, SAP, to name a few.

I had spent a couple of weeks in Stuttgart a couple of years ago, and knew the town quite well. The region borders France and Switzerland, and has its own sub-culture that is different from Bavaria, or Saxony, or any of the other German provinces. The cuisine is also distinct, called schwabian, and with signature dishes such as spatzler, the pasta/noodle dish that Württembergers eat with many other things. This region was also the region from which many germans emigrated over the centuries. Indeed, Charles Schwab’s ancestors must have been amongst them.

Anyway, the train journey was very interesting, Keshav and I had a late breakfast on the train, and Keshav surprised me by trying the different kinds of breads with butter and jam. We reached Stuttgart at noon, and I went to the tourist center ono Konigstrasse right across from the train station to get directions to go to the Mercedes-benz museum. I took a local train, and got off at the Daimler stadium and walked to the museum.

The museum did not disappoint. It is a post-modern structure that starts at the top, and gives a sense of the models that the company produced throughout its history. as you walk down the ramps from the top. Keshav had a complete blast. It took us more than two hours to get all the way down. By now, Keshav was hungry, and we decided to eat in the cafeteria below. After a late lunch, we went to the shops located in the complex. I told Keshav he could either get one ‘expensive’ model or five ‘cheap’ models. Keshav went for the five cheap models. and we got them. In addition there is a showroom where pretty much every model mercedes is on display and people can try them out. Keshav spent almost an hour trying out various cars. At around 4 pm, I decided to drag him out of the showroom. Keshav was not happy with that, and made me carry him back to the train station that was a mile away. Anyway, we got back to Stuttgart in time to catch our train back to Bern at 5:30. This would get us into Bern at 9:15 or so, and we would be back in the hotel byu 9:30. The journey back was pleasant, because the PSP kept Keshav busy. He crashed by the time we got back to Bern. This meant I had to carry him to the tram station, and back home, but, we survived. All my training with my gym instructor meant that my back and core muscle groups were in a position to carry him for extended periods of time without too much of a problem.

The next day, after our pilgrimage to McDonalds in the morning, I decided to take Keshav to the Bear pits in Bern. These bear pits apparently have continuously had bears for the last 500 years. It is one of the landmarks in Bern and a good walk from the hotel. We strolled down the other side of town and tried to go to one of the museums. Keshav was enthusiastic at first, but when it came time to enter the museum, he changed his mind and demanded that we go back to the hotel room. Rather than push my luck, I decided to call it a day from a sight seeing standpoint, and decided to try to find out what it would take to go to Salzburg the next day. We went to the train station, and asked the tourist center there what it would take to go to Salzburg. It turned out that we had to take the train to Karlsruhe, and change in Karlsruhe to go to Salzburg. The shortest train ride would take 7 hours and would require us to change trains thrice each way. When I mentioned that I wanted to go int he morning and come back the same evening, everybody looked at me as though I was insane. I began to see the writing on the wall, and started preparing Keshav for the fact that we will have to come back to see Mozart’s house. He was not as disappointed as I thought he would be.

The next day, thursday, we went back to the McDonalds, the bearpit, and the main cathedral in Bern. We had to go back to the bearpit because Keshav wanted to see the bear again. The previous day, he had seen the bear doing ‘poo-poo’, and when he went today, the poo-poo had disappeared. He kept asking who cleaned the bear’s poo-poo?

This cathedral was an amazing piece of architecture with amazing stained glass windows. There was a climb up the steeple, and I bought tickets for that but Keshav decided that he did not want to go up the narrow staircase. The church was kind enough to refund my tickets when they saw that. Outside the church, there was a line of cars, and as usual Keshav decided to ‘name the cars’, which is essentially identifying the brands. Keshav was going through the list when an elderly lady was walking by and heard him say ‘bmw’, ‘ford’, ‘toyota’, etc., and she was suitably impressed.

Stained glass window in Bern Cathedral

In the evening, we had made reservations at the Chinese place in the hotel. This was a restaurant on the terrace of the hotel with amazing views of the city across the river. Keshav got special treatment from the staff and he added a Porsche boxster to his collection of toy cars. The food was good, and the dinner set us back about $150, but was worth it.

On friday, we decided to do some shopping. I took Keshav to Luzerne to one of the shops we had seen there with very good trinkets. In the afternoon, we did some more local sightseeing and shopping for chocolate in Bern, etc., and we had to prepare for our trip back home on saturday. Keshav and I had to fly out of Belp at 7:30, and we had a cabcoming in at 6:30. We hopped into the cab, checked into the flight and as we boarded, we saw some hot-air balloonists take off from close to the airport. This was a sight to behold.

We landed in Munich at 8:30. Our flight out of Munich was only at 5:30. As we were passing through a security checkpoint, I asked one of the agents what it would take to go to the BMW museum. It was a 90 minute train ride from the airport to the museum. The BMW museum was in the Munich Olympic village. IT was as impressive as the Mercedes Museum, and Keshav had a blast in it as well. We made it back in time to the Munich airport, and got on a place back home.

The journey back was also uneventful, and Pavitra’s flight landed soon after Keshav’s and mine, and I had time to pick up my car from the lot and drive all of us back. We had landed on a saturday and monday was a holiday was a holiday as well. Keshav was starting a new school on Tuesday, so we needed the time to prepare him and ourselves for that adventure.

Keshav in Switzerland: Part I

October 29, 2008

The decision was made somewhat impulsively. My wife, Pavitra, had to go to Switzerland on business, and me and my son Keshav, would have a full week to explore the country. Seemed like an ideal opportunity for a great summer vacation and to do some Father-son bonding.

Not that there would not be any challenges. Keshav and I would have to spend 15-18 hours traveling each way because there were no direct flights from San Francisco to Bern Switzerland, which was to be our ‘home base’. I was anxious, not only about how Keshav would take to the journey, but how my fellow passengers would react. The last couple of times we were on long flights with Keshav, he had worn the patience of some of our fellow passengers thin. In particular, he had the nasty habit of kicking the back of the seat in front in spite of our imploring him not to do so. Of course, part of the problem was that the portable DVD player did  not hold its charge as well anymore. And there was only so much that I and Pavitra could do to keep Keshav engaged without his disturbing the passengers nearby. This time, I was better prepared. I had a PSP with an innocuous golf game that I had shown Keshav before boarding the flight. He showed moderate interest in the game, and I was going to pray that the Li-ion battery in the PSP would last long enough.

We spent the last couple of weeks prior to the trip preparing Keshav for the trip. Keshav had taken a particular liking to some key classical music composers such as Beethoven, Vivaldi, and Mozart, and we told him we would go to see Mozart’s house. We tried to use this possibility as a carrot to elicit better behavior from Keshav in the days and hours leading up to the trip with limited success. Keshav was also very fond of cars, and in particular, german cars such as BMW, VW, and Mercedes. I promised him I would take him to see cool cars in Germany as well. So, I am sure Keshav was eagerly looking forward to the trip.

One of the reasons Switzerland was interesting was that it did not need us to get a visa to travel there. As luck would have it, the ticket that I was able to get required Keshav and myself to take a ‘local’ flight from Frankfurt to Munich in Germany. This meant that I had to go get a German visa. I did not anticipate any issues since I had traveled to Germany multiple times in the past for business, but the rules had changed recently, and the consulate wanted to make sure that I had medical insurance in Germany, and my United Health Care insurance card was no consolation. I had to buy medical insurance for myself for a period of 10 days on top of my existing insurance to convince the german consulate that I had medical insurance!

Anyway, we were all set for the flight on the 21st of August. Keshav was a pleasure to travel with, and the PSP’s battery held on for its dear life and we were able to get to the airport in Belp close to Bern without any incident. We were of course, helped by the fact that Lufthansa had personal entertainment systems at each seat, and Keshav was now old enough to enjoy some of the programming available there. The only challenge I had to face was to try to change Keshav into new clothes in Frankfurt airport after a grueling flight from San Francisco, and to get him to eat something reasonable. But cheese, crackers, chocolate, ice cream, and water the main items of his diet on the flight.

The only slight inconvenience was that Keshav fell asleep on the flight from Munich to Belp after having willed himself to stay awake all the way from San Francisco to Munich. The gentle humm of the turbo-prop plane was irresistible for me as well. After landing, I woke up and realized that I had quite a situation on my hands. I had two pieces of checked baggage, two pieces of hand baggage, and a sleeping 3.5 year old who weighed 20 kg to carry. Somehow, I managed to carry him and the hand baggage pieces, get a cart, and pick up the checked-in baggage and hail a cab. The Cabbie was a Sri-Lankan who was kind enough to lend me a hand with the luggage and we were off to Allegro Kursaal Bern, the hotel casino complex where we were going to stay.

I struck up a conversation with the cabbie as we drove towards Bern from Belp. My first impressions of the country were that this place looks as prettier in reality than in picture postcards. The small airport, the lush greenery, and the cute cottages strewn along the country-side bely the incredible influence this tiny nation has on world affairs. Pretty much any place you pick has both historical and economic significance. May it be the banks in Zurich, the Chocolate Factories in Luzerne, or the Pharmaceutical companies in Basel, to name a few. I asked the cabbie whether there were many immigrants in Switzerland, and whether they were assimilating well with the rest of the society. His response was amazingly positive. It seems, at least at first glance, like Switzerland has been able to gain access to labor/talent pools from around the world, while still maintaining its centuries-old traditions as of now.

We reached the hotel without any difficulty, and Keshav got up on the way to the airport. Once there, I picked up the keys to the room, and we freshened up and settled in. My wife returned from work in the evening, and we decided to walk across the Aare river and walk around the old-city. The Hotel gave us a Map of Bern that was very useful. The hotel was on kornhausstrasse, and we had to cross the kornhausbrucke and that led to the kornhaus where there were some great places to eat and drink. I presume in ancient times, this was the route that the peasants used to bring in their grain to be stored in the granary in the center of the city. The basement of the kornhaus, kornhauskeller, was used to store wine, and is now a lovely place to experience Swiss hospitality.

Now that Keshav had arrived in Switzerland, what would he do? Would he go and visit Einstein’s house? Would he visit Mozart’s house? Would he be able to go see some cool German cars? Find out in the next installment of Keshav in Switzerland.

Cloud Computing

October 25, 2008

I have been following the cloud computing discussion group for a while, and even see some people with important sounding titles from important companies put up their “vision” about cloud computing, etc. with very little substance technical or business wise in their presentations. One then wonders why folks like Larry Ellison say that there is nothing new here.

What I do not see is a simple explanation of what is the change that cloud computing engenders for IT and what are some of the challenges for cloud computing to succeed in supplanting the current model of IT that is prevalent in the industry. People keep talking about how the existing business models will be busted, disrupted, etc. without necessarily having all the evidence. Just because one asserts that the current model will be broken, does not mean that it will.

I have been quoted in the past as saying that technical progress should be evolutionary, not revolutionary mostly because people who use these technologies want to evolve, not revolve. 🙂 (http://www.usenix.org/publications/library/proceedings/worlds04/tech/full_papers/karp/karp_html/index.html) I think the same is true of cloud computing.

Seriously, there is a real danger of us taking on the wrong problems in cloud computing and it will end up not achieving its potential. Some of these thoughs were spurred by my old friend Krishna Sankar’s blogs and posts on cloud computing (http://doubleclix.wordpress.com/2008/10/21/what-is-cloud-computing-and-do-i-need-to-be-scared/), and the active discussion on cloud computing group.

I wrote this piece for Krishna Sankar’s blog, but decided to make it my first stab at articulating what I think the axes are along which cloud computing claims to change the current model of IT, and what are some of the challenges that will have to be overcome, and what are the ‘limits’ of use for cloud computing.

I like to think of things along three dimensions for managing IT environments:
People (can be shared or dedicated),
Technology (can be standard or custom), and
Processes (can be manual or automated)

Now, you may say there is a continuum along all these dimensions, and you are right. But, go along with me for the moment..

Cloud computing implies: shared resources, standard technology, and automated processes. Amazon’s EC2 does not have folks dedicated to my account, it gives me a fixed set of standard technologies, and the provisioning/management is highly automated.

Most IT shops at an aggregate (there are clear exceptions, but I am trying to make a point here) are closer to the opposite end of the spectrum, i.e.,
People are likely to be dedicated
Technology is likely to be custom
Processes are likely to be manual

Many IT shops have some notion of shared services, but more often than not, there are dedicated teams per organizaitonal unit, even it the IT as a whole is centralized. The technology decisions are made wherever they are made, and often each IT shop has a variety of technologies through out the stack, and the processes are often not even standard, i.e, ITIL compliant, let alone automated.

Outsourced service providers maybe better than vanilla IT departments in some areas such as adherence to standard processes, but the people and technology dimensions are unlikely to be very different. Outsourced service providers would like to standardize the technology where possible, but, often they have to support what the customer currently has, and the cost of moving technologies to the ‘standard’ platform is often difficult to justify for both the customer and the service provider.

In theory, cloud is an enabler, for both in-house IT Shops and outsourced service providers to dramatically reduce the operating cost and move to the opposite end of the spectrum.

In theory, there is nothing ‘fundamentally new’ in cloud computing if you abstract it enough. However, the actual realization can cause dramatic difference on how IT solutions are created, delivered, managed, etc.

In theory, one analogy that I find interesting is the airline one, especially Southwest. It is not an accident that Southwest is more profitable than any other airline, in no small part because of standardizing on 737s. However, the flip side of it is that they dont do long-hauls, esp international long-hauls.

So, the point I want to make is that cloud computing may work well for some parts of the IT, and not so well for others. Parts that are likely to be standard across customers, dont have sensitive data elements that one has to demonstrate control over for compliance purposes, etc.

Here are some things to think about though..

1. If you are a company that already has a lot of investment in IT, you have many applications supporting many business processes, and you are looking to get the same ‘functionality’ but at a lower cost point. That is you have a ‘defensive’ strategy as it relates to IT, or to put it another way, the business and functional requirements dont change (or at least dont change a whole lot), but you want the technical and implementation components to transform to provide you a new cost point, while cloud computing seems to fit that bill very well, the challenge is in transforming the existing IT hair-ball that the customer likely has into the standards-based cloud platform. Of course, there are specific areas in your IT environment where this transformation is easier, e.g., messaging and collaboration, and maybe that is a good foothold for cloud computing to take hold. But, i dont think one should generalize to all of IT before we can at least get a clear picture of the problems we will need to solve.
(If you have only 737s, you can do only short hauls. If you want to do long hauls, maybe you need to have A380s)

2. If you are an outsourced service provider who has taken over someone’s ‘mess for less, and you think that you can do the same, you will have the same issues. The issue is transformation. And more importantly, who pays for it. So, unless cloud computing providers provide ‘on-ramps’ for migrating onto the cloud platform, they may severely limit the impact of cloud computing on existing IT solutions.

3. If you are an IT shop that is willing to invest in new capabilities, either because there are processes that you can ‘automate’, or because you can open up new revenue possibilities through technology, then the cloud platform is a platform definitely worth considering from the beginning. The problem in this case is only integrating this specific ‘cloud app’ with other things in your enterprise, and that is a relatively easier problem to solve. So, cloud computing folks should focus on creating the next generation of these apps. Anticipate the next gen of IT spending and enable the alternative economics on that.

4. If you are an outsourced service provider, one way you can ‘innovate’ is by enabling these new apps on the new platform, else all you will be doing is ‘your mess for less’, squeezing squeezed lemons, trying to make lemonade, etc.. )
Most clients expect outsourced service providers to expose them to the new platforms, and shield the client from technical disruptions. And it is indeed the responsibility of the service provider to do that.