Oikonomia 7 Final

7/31/2019 Oikonomia 7 Final

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CONTENTS:

Economics Section

Tryst With Crisis......................................1

The Game Of The Game

Theory...................................................4

Finance Section

Interview.................................................7

The Economics Association

News......................................................8

Economics News....................................8

Hello people, its been a long time but finallyOIKONOMIA is back with its 7th edition! Firstly a

very warm welcome to all the freshers from theOIKONOMIA team. Well, to introduce ourselvesin short, this newsletter is an outlet for all peoplein the field of economics and finance to put forththeir views on these subjects. There are so manyevents that we come across every day, we hearof recessions, fuel price hikes, FDI entering India,each one of these events has significant impacton our lives but the question is how and why arewe affected? Well economics is a beautiful subject

which gives us an insight into such events and wefeel through this newsletter we will be able to simplifyand disseminate these complex events around usso that you guys could have a better understandingand awareness of the happenings around you! Fromthis edition onwards we have decided to include afinance section to this newsletter due to its relevanceto economics.The issue of Eurozone crisis has beendealtnwith in this issue.A brief insight into GameTheory a very vibrant topic in Economics has beengiven in this issue. Hope you guys have a good read.

Date 21st October,2012 7th issue

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TRYST WITH CRISISA Case Study On Euro Debt Crisis

- Achyuth MuthyamThe Lehman Brothers fiasco triggered widespreadbankruptcy and insolvency in the US finance

industry, after the government refused to bail out thecash-strapped investment bank. The world economyis still under the repercussion of the turmoil, whichis considered to be the worst only after the GreatDepression of the 30s. Some put the blame on over

speculative financial investments, some on tardyregulation, while most curse the system. As the

events that followed, the economies of the developedworld have taken a beating. Trade, commodity prices,employment and overall growth were hit, which is surelya punch dealt deftly. Emerging markets withstoodthe onslaught, largely because they lacked complex


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CLASSICAL LIBERAL

VISIONThe classical liberal vision (Treaty of Rome, 1957)regards individual liberty as the most important culturalvalue of Europeans and Christianity. In this visionsovereign European states defend private propertyrights and a free market economy in a Europe of

open borders, thus enabling the free exchangeof goods, services and ideas. In this vision, no onecould prohibit a German hairdresser from cuttinghair in Spain, and no one could tax an English manfor transferring money from a German to a Frenchbank, or for investing in the Italian stock market.Capital moves where wages are low, biddingthem up; workers, on the other hand move wherewage rates are high, bidding them down. Markets offerdecentralized solutions for environmental problems

based on private property. Political competitionensures the most important European value: liberty.This vision finds extensive and overwhelmingsupport in GBR, Germany, Netherlands, etc.,prominent indicators being the disintegrationof Soviet Union and unification of Germany.

THE SOCIALIST VISIONThis is, as expected, a contradictory to the liberalvision, proposing protectionist and closed to the

outside and interventionist on the inside. In thisideal, the center of the Empire would rule over theperiphery (Lesser developed economies. Core/Periphery countries. Present day Greece, Spain,Portugal). There would be common and centralizedlegislation. They want a European welfare statethat would provide for redistribution, regulation,and harmonization of legislation within Europe.Such harmonization of social regulation is in theinterest of the most protected, the richest and the

most productive workers, who can afford suchregulationwhile their peers cannot. The agenda ofthe socialist vision is to grant ever more power to thecentral state, i.e., to Brussels (Belgium, consideredas the de facto capital of the EU). Along the socialistpath, the European central state would one daybecome so powerful that the sovereign states wouldbecome subservient to them. (We can already see theindicators of such subservience in the case of Greece.Greece behaves like a protectorate of Brussels, whotells its government how to handle its deficit.) Yet

some of the achievements of the vision include theformation of the Euro currency, ECB among others.

The influence of the French government (predominantly

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investment vehicles similar to the mortgage backedsecurities, which caused a housing bubble in the U.S.

Apart from the financial markets, sound regulatorypolicies and relatively closed economies cloaked thedeveloping world from the after-shocks of the crisis.U.S., on the other hand is on a path towards recovery,

or so it seems. Compared to 2008 investor sentimentis going up, thanks to massive policy interventions.Nevertheless, its still susceptible to bust ups.Occupying the front page media attention in Europeand elsewhere, Euro has become associated withCrisis a tad too long. Ensuing political dialoguein the Union is to be blamed for the continuingapathy. People are getting agitated with the tardyprocess, where protests and riots have becomecommon place. Public opinion has taken a hit.

What began as a common consensus among theEuropean nations has now become a full scaleblow up, with the common interests now becomingconflicting. The bond between European Union hasmanifested into an ever synonymous Euro-Crisis!

The Union was formed with the intention of beingEurope as a whole, rather than a collection of obscurecountries in the atlas. It was created to be a force to

reckon with, presently can be viewed as counteringthe United States monogamy in world affairs andChinas ever growing influence, be it to have aresounding political influence or economic strength.

As of May, 2010, European Central Bank (ECB)has acknowledged that the Union was on the brinkof collapse. Several European countries, includingFrance, were on the verge of default. In fact, defaultrisks for some European banks, as measured

by credit default swaps, surged to higher levelsthan they did during the panics that followed thecollapse of Lehman Brothers in September of 2008.

Let me give a very brief overview on the wholecrisis of sorts (the whole purpose of this articleis not to tell you about what happened butrather to explore the possibility of overall healthof the EU), whereas you can always refer back toWikipedia/Google for more extensive information.

There has been a fight between the advocates of twodifferent ideals from the beginning of the EuropeanUnion. Which stance it should adopt: the ClassicalLiberal vision, or the Socialist vision of Europe?


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Socialistic) is now reduced. Nicolas Sarkozy was aleader of Union for Popular Movement, a centre-rightwhile the current president Franois Hollande is fromthe Socialist Party, which is centre-left. EUs politicaldimension, for now has shifted, but it still remainsto see how Hollande influences decision making.

There is a marked political and economic differencein opinion and ideals since EUs inception, and stillcontinues.

THE GREEK TRAGEDYSuppose a national government spends more than itreceives in taxes. To pay for the difference, i.e., thedeficit, the national government prints governmentbonds. The bonds are sold to the banking system,which in turn takes the bonds to the ECB and pledge

them as collateral/security for loans made throughthe creation of creating new money. In this way,national governments can practically print money.Their bonds are as good as money as long the ECBaccepts them as collateral. As a consequence, thesupply of Euros increases. The first receivers ofthe new money, the national governments runningdeficits, can still enjoy the old, lower prices. As thenew money spreads to other countries, prices are bidup in the whole European Monetary Union (EMU).

Later receivers of new money see their buyingprices increase before incomes starts to increase.

To use a real world example: The Greek economyis not competitive at the exchange rate with whichit entered the Eurozone (Drachma to Euro). Wageswould have to fall to make it competitive. But wagesare rigid due to privileged labor unions. Greece hasmaintained this situation by running public deficitsand printing government bonds to pay unproductivepeople high wage rates: its public servants and

the unemployed. Those who receive governmentbenefits may use this new money to buy evermore expensive German cars. The rest of Europebecomes poorer as car prices increase. There is oneway transfer of cars from Germany to Greece. Themeans used to pay for the cars are produced in acoercive and involuntary way: the money monopoly.

As Greeces structural problems remain unresolvedand its government debt reaches extraordinary levels,

Greece struggles to place new debts on the marketseven though the ECB still accepts Greek governmentbonds as collateral (even if they are rated as junk).The market has begun to doubt the willingnessand capacity of the rest of the EMU to stabilize

the Greek government.

The result is the bailout and transfer of funds fromthe EMU to Greece in the form of subsidized loans.The process of the bailout implying involuntary one-way transfers of goods has provoked contempt andhatred on government and civilian levels, especially

between Germany and Greece.German newspapers called Greeks liars when theirgovernment falsified statistics. One German tabloidasked why Germans retire at age sixty-seven, yet thegovernment transfers funds to Greece so Greeks canretire at an earlier age. In turn, Greek newspaperscontinue to accuse Germany of atrocities during WorldWar II and claim that reparations are still owed them.

Greece is not alone in fighting to stay alive against thisperpetual debt situation. Portugal, France, Spain, Italyand Ireland also happen to be reeling. Widespreadunemployment, negative growth in the manufacturingsector, rising commodity prices have instigated awide-spread doom in Europe. This is a scenario whereeverything is going wrong! Indian markets too areshowing volatility with regard to the stability of the EU.

There have been many arguments regarding theright way to solve this mega, continent-wide

crisis. Bail-out packages have been issued to theperiphery, with much reluctance on the part ofconservative Germans/Northern EU economies,who realize that it is they who are paying for thefallacies of the periphery, the fallacies being lack ofcompetitiveness and strong growth. Basically it hasturned out into a Core v/s Periphery game of lobbying.

In the first week of September, 2012, Mario Draghi,President of the ECB has announced that ECB will

buy unlimited, open-ended buying of distressedgovernment bonds to pump money into the deficitladen Southern economies (periphery). The newbond-buying scheme, to be known as outrightmonetary transactions or OMTs, means that theECB will intervene in the secondary markets to buyup the debt of governments whose bond yields aretoo high and are therefore jeopardizing the uniformconduct of monetary policy across the Eurozone.Immediate action is out of the question. The ECB willonly move when countries have signed up to theirstructural adjustment programs (policies implementedby the IMF and World Bank in developing countries,which help them to receive cheaper credit, in turn by

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following prescribed regulations, set by the IMF andWB) and that will take time. When the bond buyingbegins, the ECB will remove money from elsewherein the system to ensure there is no increase in moneysupply. This process, known as sterilization, is a smallvictory for the Bundesbank (German Central Bank).

OECD (Organisation for Economic Cooperationand Development) said that Italys economywill shrink by 2.4% this year. In Spain youthunemployment is more than 50%, the banks aretottering under the weight of bad debts from abombed-out housing market, and private capital is

leaving the country at an alarming rate. Greeceseconomy is 20% smaller than it was four years ago.

To sum up, Draghi has bought Europe a bit moretime. The can has been kicked a few metresdown the road. He has done so by incurring thewrath of the Bundesbank and will know that if this

fails, there is little more the ECB can do. Successdoesnt mean infusing enough liquidity into thetroubled economies. It all depends on how theperiphery utilizes the bail-out packages, and howthe mundane regional theatrics can be curbed togive way to sane politics and sound economics.

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A study of economics usually reveals that the best time to buy anything is last year!-Marty Allen

THE GAME OF THE GAME THEORY

-Kunal Mehta

Imagine yourself in a situation. You are the captainof your college football team. Your team is losingby 0-1 and the game has reached towards the endminutes. What will your strategic stance be, as thecaptain, to ensure maximum chances of winning?

You dont want your opponent team to score moregoals as well as you are desperate to score goals inorder to register a win. Consider scenario#2 (forthe computer gamers specifically). You are playing a

game of Counter Strike in which only you (CounterTerrorist) and one other opponent (Terrorist) remain.The terrorist has planted the bomb. Now, you haveto choose from two bomb plant sites and diffusethe bomb without dying. What will you be thinking?

There are many such instances of us playing agame in our daily life. Be it academics, casual fungames, strategic decisions etc. we are surrounded


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by games. Now what situation qualifies to be agame? Technically, a game is a series of eventswith a) Players (to play) b) Strategies for playingc) Payoffs (the incentives/outcomes of choosinga given strategy). So everything including thetests or sports or the small bets that we makeare all games that we play regularly. The Game

Theory is just an additional tool to help us makeinformed decisions in such games by analyzing itfrom a slightly deeper and different perspective.

Let us now explore the ingredients of a game. We allknow pretty much about the players so we move on tothe strategies part. They can be of broadly two types:Dominated and Dominant. Their qualities are quite

easily deduced from the literal meaning of dominatedand dominant. In the same way, payoffs are actually

the outcome of playing a particular strategy in thegame. Always remember that while playing a gamewe will be involved in a strategic situation. Thismeans that the outcomes will be affected by thechoices of all the players playing the game. Let usconsider a game to analyze each of these aspects.

The Game#1: Two candidates are standing forthe post of the President of the Students Union.Assume that they both have only 2 strategies to follow:

Positive campaigning and Negative campaigning.If both do positive campaigning both will haveequal chances with probability of winning equal to0.3 for both with the remaining 0.4 (40%) votingfor none. If candidate 1 does positive campaigningand candidate 2 does negative campaigningthe odds will turn in candidate 1s favor therebyincreasing his/her chances of winning to 0.8.Similar case will be observed if the candidates fliptheir choices. If both do negative campaigning thenthough both will have equal chances of winning.

Analysis and Possible Strategy

selection:

Let us summarize the above information in a more

standard form which is generally done in a gametheory problem by constructing an output matrix.

This matrix gives all the details that we require forplaying the game. The left side of the matrix indicatesthe choices made by player 1 between positive andnegative campaigns. Similarly, the top side of thematrix shows the choices made by candidate 2. Thepayoffs for this game are the chances of winning thegame based on the strategy chosen. In the outputnumbers, the first one indicates the probability ofwinning for the first candidate considering the choicesmade and the second one indicates the probability ofwinning of the second candidate. So, if candidate 1goes for positive campaigning and simultaneously,candidate 2 goes for negative campaigning, thencandidate 1 has 70% chances of winning and

candidate 2 has only 30% chances of winning. Hadyou been candidate 1 what would your choice be?

Suppose you (candidate 1) stick with positivecampaign. Then, if candidate 2 chooses positivecampaign, your chances of winning are 30% and ifhe/she chooses negative campaign then you have80% chance to win. If you had chosen to stick withnegative campaign then the chances of winningwill be 20% and 50% respectively if candidate 2

chose positive and negative campaign respectively.As can be seen, sticking to positive campaign willalways yield better results for you (irrespective ofwhat candidate 2 chooses) than choosing negativecampaign. So, negative campaigning, in this case, isa strictly dominated strategy as it always yields inferiorresults in comparison to positive campaigning. As aplayer, it is always advisable to avoid choosing thestrictly dominated strategy. So you will better off bychoosing positive campaigning. The same analysiswill go for candidate 2 also (Hope our prospectiveleaders and voters follow the same game).

For a better understanding, you can go to http://en.wikipedia.org/wiki/Prisoners_di lemma.


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This link gives the description of the most classicexample used to explain the basics of game theory.

One lesson learnt from this game is that identify thestrictly dominated strategy while playing the game (ifit exists) and always try to avoid it. Lesson#2 is thatalways try to put yourself in other peoples shoes.

In order to play your optimum strategy you need topredict the opponents strategy and act accordingly.Let us play one more (and yes, the final one too)game to strengthen our understanding of lesson#2.

TheGame#2:Suppose there are competing firms selling snacksand drinks to a common public. In our case, imagineone Nescafe` has opened up in competition withBRU in the mess lawns. Now you are the owner ofthe new shop and want to fix the price basket (set ofprices) for your products so that you can maximizeyour profit while competing with BRU for the same.We add one more constraint to the problem that bothhave only two similar types of baskets to choose Basket 1 (B1) and basket 2 (B2) (This assumptionmay seem unrealistic but the sellers cannot vary thecost much and hence do not have much options).The payoffs are profit percentages with respect tothe costs of products. The output matrix is given as:

In this one too, the first number in the bracketrepresents the profit percentage of BRU basedon the selection of price basket by both and thesecond one corresponds to the profit percentageof Nescafe`. Now, you are the owner ofNescafe`. Which price basket will you choose?

Analysis and Possible Strategy

selection:Following the previous line of analysis, you willfind that there is no strictly dominating strategy for

Nescafe`. Price basket 1 (B1) is better, yieldinga profit of 26%, if BRU chooses B1 himself. AndB2 is better for Nescafe` if BRU chooses B2(giving Nescafe` a profit of 30%). So our selectionnow relies solely on the selection made by BRU.

Looking into BRUs choices, we can easily spot a

strictly dominating strategy. B1 will always yield higherprofits (as compared to B2) for BRU irrespective ofthe strategy chosen by Nescafe` (30% is Nescafe`chose B1 and 28% if Nescafe` chose B2). So,assuming that BRU is a rational player, we can becertain that he will choose B1 over B2. In this case,it will be best for Nescafe` to choose the price basketB1 for maximum amount of profit on sales (26%).

The lesson#2 learnt is you can decide your optimumstrategy even if you do not have a strictly dominatingstrategy by analyzing your opponents strategies.

Further delving into this subject will reveal afantastic (though complicated) analysis of manyreal time games that are being played around theworld through theorems like Median Voter Theoremand Nash Equilibrium. But at the end of the day,these are only tools, with assumptions, to helpus make a strategic decision in the game of life.Relying completely on them does not guarantee the

predicted output/payoff and as it so happens thatsometimes the results are the complete opposite ofwhat we expect. But its human nature to speculateand we will continue to do so, feeding our intellect.

Image from: whistlingthis.com


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FINANCE SECTION

INTERVIEW

There was a workshop on Financial modeling in excel conducted in our campus from Oc-tober 5th to October 14th .It was a very fruitful workshop attended by about 32 students giving thestudents an insight into the world of finance. The workshop was conducted by Mr. Basesh Galawho is the chief strategist at the Indian Institute of Quantitative Finance. I had a chat with him af-ter the course to find out more about the latest trend in the field of finance and how it is relevant tous as students and the opportunities waiting for us in this domain. To tell you more about Mr. Gala:

Basesh Gala has significant global experience in finance, risk management and consulting. Baseshhas a MBA in Strategy and Financial Risk Management (Gold Medalist) from Fisher College of Busi-ness, The Ohio State University, USA. He has his undergraduate degree in I.T. from VJTI, Mum-bai. He is a CFA (Chartered Financial Analyst) and certified Financial Risk Manager (FRM, GARP)professional. He has worked in firms such as Lehman Brothers, Nomura and Ernst & Young.

Oikonomia: You shifted from IT to finance. How?Basesh: I was very enthusiastic from the beginning to enter the field of finance. During 3rd year engineering,I simultaneously did a diploma in finance management (a part time evening course offered by Wellingkarinstitute.).I got placed into Lehman brothers via campus placements (taken into back office). I showed alot of commitment to my work and showed my interest to my superiors to work in the core field of finance. Iwas eventually shifted to middle office operations. I went on to work in London, Tokyo and New York (WallStreet). My firm helped me to pursue my FRM and CFA certifications which I cleared in a span of 18 months.

Oikonomia: How was your experience in Lehman Brothers during the 2008 crisis?

Basesh: I was one of the few people who was retained during the crisis because the work I had donewith the organization .This was the period in which I learnt the maximum and also grew in leaps andbounds. The amount of growth I experienced in six months would have taken 4-5 years to achieve.

Oikonomia: So what advantage do you think we engineers have in the field of finance?Basesh: Engineers are firstly hard working. They have analytical thought process and good quantitativeskills. They also have the ability to multi-task.Oikonomia: So as an engineer how do I enter this field?Basesh: Read economic times daily, visit website like Investopedia.com, be active on Linkedin.com and read good books (Rich Dad Poor Dad, Who moved my cheese?, Whale dole. Try tointernships in fianc firms .Practical experience always helps.(He adds that networking is king.Always stay connected and keep approaching people.) Having the right attitude also matters.

Oikonomia: So does having an economics background help?Basesh: Economics helps one develop a macro picture of things. Certain areas in economics whichone can focus are on Game theory and Human behavioral finance which have a lot of scope. In-vestment banks Asset management companies typically like to recruit people with such skills.

Oikonomia: So finally how was your experience here?Basesh: The students here are smart passionate and are starting at the right age .The campus is very lovely.

If ignorance paid dividends, most Americans could make a fortune out of what they dont know about economics!-Luther H. Hodges


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THE ECONOMICS ASSOCIATION

NEWS

BITS -RBI INTERFACE

For the first time in BPHC, a workshop on FOREX and FDI (retail) was conducted by RBI alongwith major other banks, State Bank Group and Andhra Bank. This initiative has been taken by RBIGovernor Dr Duvvuri Subbarao to create awareness about FOREX and FDIs and has reached everyuniversity in Andhra Pradesh. The event was graced by various dignitaries such as RBIs RegionalManager, General Managers of SBI, SBH and Andhra Pradesh. Various events such as Quizzes,One Minute Talks and Debate were conducted. The workshop was informative as well as enlightening.

ECONOMICS NEWS

TheUnionCabineton4October2012approvedthe12thfive-yearplanwithitsaimtorenewIndian

economy and use the funds from government in improving the facilities of education, sanitation and health. Thisplan has seen a three-fold increase in the budget constraints when compared to that of the 11th five-year plan.

The Union Government of India approved fourteen foreign direct investment (FDI) proposals,

which would bring in the capital inflow of 113.35 Crore Rupees. The major portion of 81.05crore Rupees investments accounts to the three clearances made in the Pharmaceutical Sector.

TheUnionGovernmenton4October2012approvedtheCompaniesBill,2011andPensionFund

Regulatory and Development Authority (PFRDA) Bill, moving with its proposal to hike the foreign investment inthe insurance sector to 49 percent from the present 26 percent with also opening up the pension sector for FDI.

ReserveBankofIndiainjecteda liquidityofaroundRs17000crorebyslashingdowntheCash

Reserve Ratio (CRR) by 25 basis points to 4.50 percent from 4.75 percent.

TheUnionCabinetclearedtheproposalofforeigndirectinvestment(FDI)for51percentinthemulti-

brand retail chains and 49 percent in Aviation industry.

Standard Chartered Bank is set to acquire retail assets of Barclays Bank in India and an

announcement is expected soon.

TheLandAcquisitionBillwasclearedbyaGroupofMinisters(GoM)headedbyAgricultureMinister

Sharad Pawar which is going to be presented to the Cabinet this month


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Oikonomia 7 Final

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