Book Review – Freefall: America, Free Markets, and the Sinking of the World Economy

I decided to read Freefall (by Joseph Stiglitz) after seeing a talk by the author. In the book Stiglitz promises to peel back the layers of causes responsible for the recent financial market collapse. When asked why the collapse happened most people will respond by saying banks were giving out mortgages to people who could not pay back. But Why? Because the incentives of the mortgage originators and bankers were flawed. But then the question is why did the market not respond to those flawed incentives and encourage firms that had the right incentive structure. Stiglitz frames the economic collapse in context of larger debate between Keynesian's and Monetarist's. His central claim is that since late 1970's Monetarist thought has been gaining the upper hand and the current crisis is the result.

The book starts off very crisply. Stiglitz invites you to listen to the story of the crisis and keeps you engaged even while going over parts of the story that you have already heard. He gives a comprehensive account of the crisis and I learned many things even though I considered my self well aware of the events. He castigates the political administrations starting from Regan's for dismantling the regulatory system which was ultimately responsible for the crisis.

While he is extremely critical of the bankers, regulators and politicians he seems to give the homeowners who took mortgages they could not afford a free pass. He never quite gets around to explaining how the american family who took the zero percent down, non recourse mortgage was the victim when they could just walk away from the home that they had no business owning in the first place. He seems to see no difference between the hardworking Americans who save for a down-payment and only buy homes they can afford and those who get the biggest house they can with nary a thought to finances.

He also latches on to ARM's as unequivocally bad and predatory which is not really true. He mentions them multiple times and faults Greenspan for encouraging them in a lecture. In an otherwise crisp and insightful narrative I felt a dissonance reading the simple minded rhetoric on ARM's. In an ARM the borrower takes on the interest rate risk and in return gets a lower cost for the loan. These mortgages are pretty common in many countries (like Canada) and they work as well as the fixed rate mortgages used to in America.

The above faults aside Stiglitz is spot on in his criticisms on how the stimulus has played out. Banks and their shareholders got too sweet a deal. He explains how all the reasons given on why banks and their shareholders are entitled the the tax payer largess are flawed. The Obama administration policies have failed to stop a crisis like this from recurring. The banks are still too big to fail, and thus enjoy the implicit government guarantees.

The only problem with the book is its length. After about half way through, I started feeling that the arguments and examples got repetitive. It felt like someone who has been ignored for years has finally been vindicated and now cannot stop saying "I told you so".

Overall, I would highly recommend the book to anyone who is interested in the financial crisis. It pairs really well with The Big Shot

OVO: The colorful world of insects

Cirque du Soleil are visiting the bay area with their show OVO. We went to a showing in San Jose, and were wow'ed by the spectacle. The show's theme is the world of insects, and all the acts are based on the life of an insect, a butterfly growing inside a pupa, coming out, spreading its wings and dying. A spider dancing on its web. Ants running up and down a vertical wall. Without going into the details of the act, they are all classic Cirque du Soleil quality.

The show starts a little slowly, but things pick up when a fly(?) comes carrying an ovo (egg) to this insect colony and falls in love with a lady bug. Follows a deep and spectacular dive into the colorful world of insects as they go about their world. We watch as red ants play with their food, juggling corn with their feet in synchrony. We watch spiders as they dance and float around on strands of their net. Towards the end there was a gravity defying act showing ants in their colony, walking up and down their ant hill taking care of the day's business. There was a lot more, but Cirque du Soleil are to be experienced, not described. We will never think of insects in the same way again.

The venue in San Jose, was a bit cramped. You probably do not want to take any eatables/drinkables in the show, as the seats are quite small without any arm rests. The audience sits in a U shape on three sides of the stage. We were sitting in the second row along the left arm of the U. The theater was not so big, so even in the last row you will get an excellent view of the stage. A small word of caution, there is trapeze act for which they hook up a big net. If you are sitting on either side of the stage the view is a bit less than perfect, but only a little bit.

Managing Your Portfolio.

I have been doing some reading on investment planning. Some great books that everyone should read are "A Random Walk Down Wall Street" by Burton Malkiel and "The Intelligent Asset Allocator" by William Bernstein. Both of them advocate passive investing. Markets are efficient, you cannot beat the market, you most certainly cannot beat the market by being an arm-chair analyst. The most you can hope for is to not lose to the market. Read the first book if you do not believe me. A Random Walk also gives an excellent introduction to various investment vehicles and terminologies. If you do not know about mutual funds, expense ratios, capital gains, turnover rate, rebalancing, PE ratios, alpha, beta, read the first book.

So what is the intelligent investor to do? Decide on how much risk you can take, depends on what you are saving for and your personal appetite when you lose half your portfolio. The most important thing in investing is to stick to your strategy though bear markets, so it is essential that you design your portfolio keeping this in mind. Risk decides bonds to stock ratio in your portfolio, higher the stocks fraction, more the risk and higher the expected rewards. Now further divide each part into various sub components. For example, short term bonds and intermediate term bonds for bond part, and foreign stocks, large cap stocks, small cap stocks, REITs for stocks part. Assign percentage numbers to each of these and buy a index fund that tracks the corresponding asset class. You now have a portfolio! Every time you invest more money, invest in all of them in the proportion you decide. This part is important, you want to keep putting money in even when the prices are falling and you are losing money. Everything reverts to mean, buy low and sell high. The Intelligent Asset Allocator gives excellent advise on how to design a portfolio and analyze its expected return and risk.

Every year, rebalance. Sell off assets that now make a higher proportion of your portfolio and buy those that now make a smaller proportion than the target. This is by far the most important part. More important than the exact composition is disciplined regular rebalancing. Rebalancing essentially means selling your winners and buying your losers. Remember, assets revert to mean. Buy low sell high.

I designed a spreadsheet to track a portfolio, calculate how much off target it is, etc. Its is a very simple sheet, you can check it out here. You only need to fill out the grey cells, rest are all automatically calculated. It is pretty basic, I might add new features from time to time. If you find it useful, let me know. If you add some stuff to it, let me know. (Need less to say the numbers in the sheet are made up, the allocations should not be taken as suggested allocations).


Disclaimer: I am not a financial planner. You can bankrupt yourself by following this advise. All software is provided as it. You can bankrupt yourself by using the linked spread sheet.

Cool Entropy

So I ran into this problem on updating cups on my server. Whenever I tried to access the admin page, it will seem to hang with message generating ssl keys. Nothing happened. Google came to help, searching for "Generating SSL server key" got me this page. Looks like SSL needs kernel entropy to generate good random numbers which are needed to generate SSL keys. Now this entropy is produced by random events on a computer, key press, mouse movements, disk access etc. Since my server does not have a mouse or keyboard, and disk access is not very often, it did not have enough entropy! As suggested by Ross Burton, I ran find / (lots of disc access) and watch sysctl kernel.random.entropy_avail and indeed after a few minutes the entropy was high enough and cups proceeded normally. Cool!

Me: A Software Professional

Came across this random piece of information on Sarvjeet's blog.

Pisces (February 19 - March 19)

The people who are just meant to work only in groups. They are selfless and do as you require them to do. They most important thing to be put in them is the "focus" since they get out of doing something when they lose interest. All signs take advantage of Pisces for their work because they like all others to make use of their abilities. Though they are not intellectuals they are very broad minded and good thinkers. Very trustable as long as they are not abused too often by their colleagues.

Indifference

Indifference would be the more appropriate title for the last entry. Loneliness was what I started to write about, but I ended up making more of a comment on indifference rather than loneliness. Anyways, that's the random thought of today.

Loneliness

Seeing poor homeless people is no new experience. Coming from India, poverty in all its ugliness is not a novel sight. Though there is one aspect of poverty that I only noticed here in USA.

New York has its fare share of homeless people. I would not call them "poor" as the term is used in India (poor in India is starving, even a homeless in USA would have a drink of Pepsi), but nonetheless they are poor. Living on the streets, their plight, especially in cold snowy months of winter - when you see them sleep on manhole covers which are comparatively warm from all the steam rising from city's gutters and subways - is gut wrenching. When you see the light and warmth and riches beyond imagination just a few feet away, you can't but feel bewildered by this strange world.

There is a particular old homeless man who lives on the steps of a church near my home. I have seen him almost everyday for the past two years. Begging the passing mass of humanity for money or food. I must admit I paid him passing attention; he was a one-dimensional personality, sitting on those steps. Then one beautiful sunny day when I was going my way I saw him coming towards me from the distance. There was a policeman standing on the corner and when he saw the old man he said something to him. I did not hear what he said, but it seemed like a greeting, a "how do you do?" that we exchange a hundred times over the course of the day. And the old man gave a broad genuine from the bottom of his heart happy smile. A smile that transformed his face, a smile that changed him, a smile that made him a person from that non-descript one dimensional man that I was used to seeing. I had passed him by before the smile ended, but I wonder how lonely a person must be to be filled with such joy at being recognized, on hearing a friendly voice. I have had my share of days when I have felt lonely, but to feel alone day after day, with no end in sight? That is a fate I cannot imagine, a state that I would find impossible to survive.

Today on my way I saw the old man again. Sitting on the usual steps, begging for money the usual way, I passed him by in the rich and glittering city of New York, with my Ipod and Bose headphones, wondering what a strange world this is...