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This book tracks the history of credit derivatives market from their roots in J.P.Morgan to their eventual role in Wall Street collapse in 2008.

ABS and MBS have been around for sometime that allowed banks to offload credit risk to other investors. However J.P.Morgan had a peculiar problem with their corporate lending. They needed a way to keep the loans on their books yet find a way to offload the risk. Out of this need are born Bistro instruments which allowed banks keep the loans on books yet remove the risk. Better still, they could reduce the capital charge required by regulators against such loans and thus free up capital.

This concept is later borrowed by other investment banks and used to create derivative products on residential mortgages. Thus we have CDOs (Collaterized Debt Obligations) that are born with a premise that risk will be spread across the system instead of concentrating with a few banks.

Soon banks set-up assembly lines and started churning out CDOs in various forms worth $billions of dollars. In the then low interest rate environment, investors are too happy to snap up the instruments offering higher return. Eventually the supply of underlying mortgages is not enough to meet the demand. Thus are born CDO derivatives and CDS that allowed investors speculate on the prices of mortgages.

All is well until interest rates are low and the default rates on mortgages are minimal. Both have changed to worse by mid 2007. Banks and brokerages who themselves held a few super-senior CDOs on their books hoping for higher return were staring at huge losses. To make matters worse the ABCP market that supplies short term funding for brokerages dried up. A panic took hold that finally altered the westeren financial system permanently.

As the book describes, derivative instruments – used for the right purpose – are never meant to be harmful. However once the greed is mixed it became potent weapon.

Read this book if you are keen to know the history behind the collapse of our lifetime. Read reviews on Amazon.

Close to 2 years after the the first quantitative easing exercise from Fed,  they are forced to do it again. But this time the opposition is fierce both from within the country and from other countries running trade surplus with US. Their concern is that dollar will weaken which will make their exports costly and uncompetitive. However Fed has its own problems to worry about,higher unemployment rate and weakening domestic economy, to name a few.

In principle, Fed is only buying the long-term US bonds and pumping printed money into the market. They seem to have no choice as the interest rates on short term bonds are close to zero.

All this points to an escalating currency war and more protectionist measures that could become a bigger threat to globalization.

This book is a definitive account of the events leading up to the crash of 2008. The narration of the events starts from March of that fateful year when Bear Stearns agreed to be sold to JPM at dirt cheap price. This was the beginning of the end of famous wall street business model. The book gives a blow-by-blow account of the bankruptcy of Lehman, government’s take over of world’s largest insurer (AIG), Freddie Mac and Fannie Mae; conversion of Goldman and Morgan Stanley to banking entities and fire sale of Wachovia to Wells Fargo. It is interesting to read about the actors and their personalities at the heart of the crisis including Paulson, Geithner, Dick Fuld, Bernake, Dimon, John Mack, just to name a few.

Although the book does not dwell much into the actual reasons for the wall street collapse, it still offers a good chronicle of every event that led to the final blow-out of the crisis. Read this book if you are keen to know the inside story that led to the fatal fall of wall street. Read reviews on Amazon

Interesting chart from Economist about iPad pricing across the world. The price of iPad varies significantly – as much as $200 – between countries. Logistics, variation in personal incomes and differences in sales tax lead to significant price anomalies. A seamless global market for goods , it appears is still very far away.

If you need to take a guess, about how much US plans to spend to build eight innovation centers that will pioneer research in energy security, the answer will throw you off the chair. It is about $60mn. Surely this is not the country that invented the atomic bomb or sent a man to the moon. Breakthrough innovations need funding and an opportunity for scientists and engineers to collaborate. A half-hearted approach with an eye on the budget will not help the cutting edge research – that is expected from a country like US.

It must be worrying the central banks in emerging countries that an economic bubble is forming in Asia. With the outlook in developed economies still uncertain, foreign investors are pouring money into Brazilian bonds, Indian Equities and Chinese Real estate. The net effect is that emerging countries are finding their currencies appreciating rapidly. Exporters in these countries are facing a double whammy – the sluggish demand in developed countries coupled with appreciating local currency. Another worrisome opinion is that most of the foreign investor inflows are just hot money and once the developed economies are back on track, the money will just evaporate leading to asset crashes in all developing economies.

From kerosene to rice husks: Powering India’s rural revolution is a glimpse into the now famous “Indian Jugaad”. Business is booming in rural India. Every company is drafting business plans to design products that are based on sophisticated high performance technology, yet affordable to the rural poor. Some examples here highlight the innovation at work.

- Bio gas power plants that produce power from rice husk and distribute at $1.80 per month for 30W of power
- A $1 per patient ECG equipment
- A $35 ipad-look-alike which may come down to $10
- Nokia’s plan for rural customers to buy phone at $2.30 a week

It appears that more than one firm is trying to make fortune at the bottom of the pyramid.

An excellent column from Martin Wolf about fighting the currency wars with stubborn China. China has become the nation with largest current account surplus in the world. It amassed more than $2.5tn reserves which are growing at $300bn per year. The impact on other high income countries, notably US, who are net importers of capital is devastating. Major economies are running large trade deficits with China leading to monetary policies heavily influenced by China’s currency trends. This situation, as Martin Wolf explains, is not sustainable. The only way to avoid a trade war, yet impose a currency restriction on China is to have capital control reciprocity. G20 countries must ask China to either stop buying their financial liability instruments or let other countries purchase China’s financial instruments.

A good economist article about the state of business in India. India has a long list of plus points that are driving up the GDP. Yet the shoddy infrastructure, ineffective governance and skill shortage could play spoil sport. In the long run, the article says India will be a better bet than China, something I agree with too.

Op-Ed Columnist – The New American Normal – A great column in NY Times about the uncertainty facing the US economy today. Clearly, there is no new direction emerging from the current economic trends. No one is sure where the unemployment is heading or whether there is a need for further stimulus or not. The stock market-once a barometer of the economy in US-is now ruled by traders. It is perhaps not a surprise that amidst this uncertainty US policy makers are coming up with protectionist policies such as the ban on offshoring for government contract vendors.