Saturday, 5 April 2008

Questions for a PGDM

why are food prices rising all over the world ? how is the price of oil determined ? what justification is given for the assertion that wealth trickles down ? what do consultants do after 5 years of consultancy ? what are they good at ? why do derivatives and other financial "products" exist ? what purpose to they serve ? why are the richest and most cash rich sectors (investment banks, consultants etc etc) the ones that create no wealth ? why do people with bad credit histories provide the major portion of bank profits ? why is fractional lending allowed at all ? what controls the amount of money in the economy ? what relation does amount of money in the economy have to real income ? what is real income ? why cant we have a fixed amount of money circulating ? does that even mean anything ? what percentage of consulting income is result dependent ? what percentage of consulting income in india is from family owned businesses and what percentage from government ? why do pgdm related jobs like investment banking and consulting tend to be so elitist and opulent ? why is the guy who makes a better chulha not rewarded more than a man who talks nebulous bullshit in the current economic system ? the pharma business is the most profitable in the world, followed by food, why are these not govt controlled to ensure food, medicine pricing and availability ? who controls commodity prices and availability and how ? who regulates them (both prices and people) ? what justification is given for the assertion that there will be less corruption if the private sector controls sectors that are currently govt controlled ? in a free market, what represents a person with no money ? where did the money lent out in the sub prime crisis go ? if it is circulating in the economy, some one must have it, so why is there economic slowdown in the US because of that ? what punishment has been meted out to the rating agencies who messed up on such a large scale ? why do IIMs need to have such ridiculous fees when they require no expensive labs, no special equipment apart from good class rooms ? do corporations HAVE to increase profits for shareholders ? cant the charter mandate instead a maximization salaries of employees or minimizing acres of rainforest cut ? why should corporations have the same rights as citizens ? why is no human liable for the misdeeds of a corporation ? how foolish is that ?

as more questions occur to me I'll put them in another post. Please feel free to comment and clarify, correct, explain any of the above, or connected things.


Soumitra said...

you need to simplify :|

Cevian said...

Nice questions Pras, and I'd like to have answers to most of them. I can attempt to start answering some with the hope that more opinions pour in. Also some of the lines I type might not relate to anything you've queried for, but are my general take on i-banks and could be relevant in a more general discussion. Let me start off with a rhetorical question. Why is your post addressed to PGDM's ? Apologies for a rather crude [ possibly tangential :) ] analogy, but one doesn't have to be a prostitute to debate about whether or not the profession should be legalized. The reason I bring up the analogy is because most questions about the existence of investment banks and other financial institutions can be attributed to basic tendencies inherent in all humans beings. Dare I say, qualities that make and define human beings. Tendencies like lust and a need for physical gratification, which are met by professionals like prostitutes. Similarly, you have i-banks which service 'simple' needs like want of a secure future to the more 'profane' like greed and power. There can be an endless 'moral' debate about prostitutes, but the fact remains : they exist, because human beings do. Investment banks exist, because human beings do. Probably, the only way to get rid of them, is to get rid of humanity. *end of pontification :-)*

Why do derivatives and other financial "products" exist : Why does insurance exist? Because you want to protect yourself against unfavorable events that "may" occur in the future. You are willing to pay a premium for the guarantee that you suffer limited damage from whatever forces you choose to protect yourself from. Robbery, earthquakes, floods, AIDS, fire etc etc. Derivatives are the equivalent of insurance against various market forces. Depending on what you want to hedge/protect yourself from - you've got a whole lot of "products" to choose from. You can protect yourself from anything ranging from price moves to your tenant not paying his rent up. Now, Derivatives are not limited to being a form of insurance alone. The greedy and speculative tendencies of people are serviced just as well and in this form derivatives cease to be little more than lottery tickets. Different "products" exist to satisfy different human needs and feed different human greeds. As for the premium charged by i-banks when they 'structure' different products it depends on how 'exotic' and custom made your need is. Just like you'd end up paying more for a custom made Bentley.

One can argue that the Bentley gives its owner a comfort never felt before and such blah. However, in the end, all it is doing ( and so is the iPod or Mac ) - is servicing a human need. Something that financial 'products' are guilty-as-charged of doing as well.

I'll end with some more
pontification. I-banks are nothing more than the proverbial middle man in that they bring buyers and sellers together; nothing more and nothing less. In doing so, they not only become a catalyst for innovation by providing capital to businesses when they need it the most; but also help in identifying the enterprises that would make best use of the Capital. If in carrying out such duties and decisions, these professionals end up being well paid, then I am not surprised. Should they goof-up and channel capital to unworthy/less promising enterprises - they could potentially stifle innovation and make way for mediocrity.

Psmith said...

thanks a lot for that Cevian !
everything you made makes sense. No doubt the ibankers deserve the salaries they get, but one of the questions I raised was why ibanker better paid than most of the innovators or engineers he is supplying capital to ? why is the middle man better off than the actual creator of wealth ?

and the explanation for derivatives was illuminating. I did not know they were used to 'protect' against various contingencies. a sort of betting. hmm. so what is all this about "repackaging risk" and selling it ? what does that mean ? how can it possibly work ? how can the quality of a loan (let alone 10000s of loans) be encapsulated in one number given by a credit rating agency ? is that really what happens ? if these things are going to affect people at large, should not the systems be transparent enough, and education be modified so than a significant proportion of commoners understand them ?

Psmith said...

Soumitra : these are questions that came off the top of my head, and are things I know nothing about. cant really simplify :)

Cevian : you know my name, so you are one up on me there. feel free to drop me a mail and introduce yourself :)