Archive for January, 2011

Financial Derivatives in the 2000′s like Thalidomide in 1950′s?

Remarks I made at IIM Cal’s International Finance Conference, Calcutta  Jan 10th, 2010 with India’s Finance Minister, Pranabh Mukherjee attending.

‘Whenever financial experts gather nowadays the talk inevitable veers to the financial industry meltdown of 2009 in the US and Europe. Was it greed on part of the market participants, was it a failure of the regulatory system, was it the compensation system for financial industry executives that lay at the bottom of this crisis which has created immense suffering for tens of thousands of ordinary people in the United States and Europe?
We have seen an outpouring of dozens of scholarly papers, many dozens of books and thousands of newspaper editorials trying to make sense of these events. Implicated in all of this are ‘derivatives’,mathematical abstractions. Even a savvy marlet player like Warren Buffet has called them weapons of mass destruction.

But do derivatives deserve this kind of demonization?

I draw your attention to a similar event inthe pharmaceutical industry in the 1950′s in the early days of the synthetic drugs era when a German company came up with a ‘wonder drug’ that supposedly cured coughs, cold, headaches and was also a tranquilizer, a pain killer and could also cure insomnia. It was soon a best seller in many countries. It was then also discovered that this wonder drug could also relieve morning sickness in pregnant women, so tens of thousands of pregnant women took to it.

Then reports started filtering in that pregnant women who took this drug were giving birth to babies with deformities: the feoutus would have fish-like flippers instead of arms and legs. Tens of thousands of children were born by the time alarm bells rang and sales of this wonder drug were halted.

This, of course, was Thalidomide.

There were many calls at that time for the ban of all further synthetic pharmaceutical innovations such as derivatives are now being demonized. Wiser counsel prevailed. An elaborate system of clinical trials was instituted, the scale and expertise of national level drug approval authorities like the US Food and Drug Administration was bolstered. The occasionally confliciting needs of Consumer protection and technical innovation were reconciled. The world has since then benefited enormously from an outpouring of synthetic pharmaceuticals.

The derivatives issue needs to be looked at in a similar light. If properly designed and tested and with the right regulatory system, derivatives could play as big a part in our lives as other financial innovations such as the metal coin or the paper currency note or Bills of Exchange have done.
Instead of demonizing the derivatives innovation, we should put in place testing facilities and regulatory systems which will allow mankind to benfit from this financial innovation.  Central to this new system of regulation of derivatives are expert and neutral bodies who can undertake stres testing of derivatives.

IIM Calcutta’s Financial Research and Trading Lab is one such facility which is ready to undertake such stress testing on behalf of regulatory authorities.

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Telemedicine at Work

Last week when we spent New Year’s eve in my hometown Cannanore in Kerala,  I ambled over to the Cancer Society and saw for the first time the practical possibilities of telemedicine.

High expertise cancer diagnostic experts are few and are located in the Regional Cancer Center at the state capital, Trivandrum several hundred kilometers away. For a patient to go to Trivandrum from Cannanore costs Rs 4000-8000 per visit including the cost of staying in a hotel for him and a helper. It also takes up 3 days time. A patient needs to visit several times for follow up.

The Cannanore centre folks have  variety of diagnostic equipment like ultrasound scanners, colposcope, etc which are connected by VSAT to the Trivandrum center so that diagnostic data can be instantaneously sent to the experts at the Regional Cancer Centre. TV monitors and screens allow the patient in Cannanore and the doctors in Trivandrum to converse.

The highest cost person in this operation is a radiologist who locally
costs Rs 2.5 lacs a month. I made a mental note to check whether machine
learning could help reduce this cost.

A typical Kerala Panchayat has a population of 25,000 and the Cannanore
survey finds that 50 or so are in pre-cancerous stage and 30 are in the
cancerous stage.

It appears that the incidence of cancer in Cannanore is above average. This is partly because Cannanore is a major centre for beedi manufacturing and at one time employed 350,000 people in beedi factories. Th has decline now to about 100,000 because of the declining popularity of beedi and smoking in general. The likelihood of cancer in a beedi factory worker is several times higher than the average person.

The second reason for the above average incidence of cancer according to local doctors is that vegetable and fruits in Cannanore ( and for that matter in all of Kerala) are imported from large scale farms in Tamilnadu and Karnataka where dangerous pesticides like Endosulfan are extensively used. Endosulfan, incidentally, is banned in the West but is still legal in India. The Cannaore municipal food inspection authorities dont have the time or the technical skills to spot and remove such fruits and veetables from the market. And thei charter presently extends onlt inspecting cooked food in restaurants.

The Cannaore Cancer Society folks have van equipped with high tech diagnostic equipment also linked to the Trivandrum centre specials by VSAT which they take to remote viilages for diagnostic drives.

Apart from the high-tech equipment, they also recruited and trained 25,000 volunteers to do a house to house campaign to educate citizens about easy-to-detect pre-cancerous conditions and to tell them that early detection can increase the chances of cure exponentially. Their recors show that when they started in 1994, only 9% of the patients were detected in Stage 1 whereas nowadays 60% of patients are detected in Stage 1. Patients detected in Stage 3 or 4 used to be 75% but has been brought down to 20% now.

 More information at their website

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