Wednesday, May 26, 2010

What lies ahead for Capitalism - a worldview

Capitalism was supposed to be the final stage in the evolution of the economic man. Every pundit worth his modern salt, every professor worth his Harvard pedigree, every intellectual worth his Kenyesian learnings and every policy-maker worth his neo-liberal leanings convinced us through the past 30 years that the only way forward for humanity was to let the energies of individuals be liberated, through the fantastic system we call Capitalism. And to top it all, like the wonderful brown cream my cafe guy tops my cappuccino with (how I love it!), we had the US with its mighty army, navy, airforce and eyes-in-the-heaven to reassure all who wanted to take solace in capitalism's arms. With its fancy brands that conquered the world markets and painted the urban youth everywhere (including India) with one single uniform colour of an amazingly sick and conformist modern culture (what an irony!), global capitalism was here to stay forever.

To douse the fires of skepticism that raged at times, Adam Smith was recalled from his grave, and his 'invisible hand' waved so vigorously it must have pained like hell. We were told that entrepreneurs' 'animal spirits' were the key drivers of all significant progress mankind had ever made - from the first hairy guy who must have discovered that fire can indeed be tamed (how relieved that guy (and the girl he might have eloped with into the forest) must have been!) to the first child who must have discovered the joy of rolling a wheel (I am sure his mother would have beaten him for venturing too deep into the forest doing that!).

And when the likes of Marx interjected with their amazing works like Das Kapital (nothing to do with any Mr Das from Bengal although it always makes me smile to think so!) and pointedly remarked that all this hullabaloo about capitalism was actually inane and insane, they were brushed aside by our pundits saying that the creations of Marxism (namely USSR and China) have anyway collapsed and turned to capitalism itself. As for their glory days, conspiracy theories abounded about how the grand Soviet ventures of connecting rivers had massively failed and turned promises of fertility into oceans of barren lands. We were told by the glossy western magazines how the serpentine queues for bread in Soviet-era were a living testimony to the inherent failure of the concept of communism (and socialism).

Being an (Indian) entrepreneur myself, I totally believe in the virtues of Capitalism, its freedom and its promise of prosperity. In a moderately conservative society, I have lived this promise for 17 good years now, every single moment. And I believe every individual driven by a positive attitude can do good for himself/herself in any such society. So on the whole, an open entrepreneurial culture is fairly rewarding. 

This philosophy of Capitalism is indeed lucrative, and that's why it has survived through centuries, across geographies. But swayed by the seemingly unfailing ways of its captains, the US went beyond what the limits should be. Capitalism turned into Extreme Capitalism.

So, what are the founding principles of Capitalism, after all? Let's see. 

Capitalism (the good one) is all about -
  1. A firm belief in the inherent goodness of man (for his society), when he is allowed to pursue his personal enterprise and profits
  2. An 'invisible hand' that works for society's benefit (through employment generation etc.) even as the entrepreneur pursues his personal adventures
  3. The greatness and goodness of productivity enhancement, which is possible only through personal profit motives, and not social ones
  4. Leveraging the 'animal spirits' of human beings; the energy of reaching out to the stars; the madness and passion of undertaking ventures which seem impossible
  5. A near-perfect system of capital distribution to resources in society so that only who deserve it, get it, and those who don't are marginalised (deserve is in the sense of efforts they are willing to put in)
  6. Profits, profits, profits; and not as a dirty word, but as a reward for vision and toil of individuals
Presto! Every single one of these tenets has been kicked in the groin by the grand daddies of them all - the US bankers. As I wrote, they turned Capitalism into Extreme Capitalism. Adam Smith never advocated throwing caution to the winds. But these educated, well-dressed, well-heeled gentlemen from the Wall Street turned everything upside down. How? Read on, to discover how those whom everyone trusted with their monies, and capitalism itself, cheated everyone (including themselves!). The key follies of these captains were -
  1. They did not believe in any inherent goodness of man; they just pursued the economic goodness (to take a taste of this, just talk to the so-called PE funds .. their salivating mouths upon sensing a project that has promises of obscene economic returns (at whatever human and moral cost) will tell the whole story).
  2. Forget the invisible hand. Their visible hand was used to channelise maximum salaries and perks for themselves. Horror stories abound, even in Western media.
  3. Sitting in a banker's cabin, productivity enhancement of industry is the last thing on their minds. All they are concerned about is how to multiply their capital (and returns) by any means - genuine physical productivity enhancement or artificial ones.
  4. 'Animal spirits' indeed! They leveraged it to the fullest. Unfortunately, they leveraged their own, and not those whom they were supposed to fund and excite, so more real-world productivity could happen.
  5. Distribution of capital was totally flawed. Only a few banks (and bankers) had access to trillions of dollars, and this happened through years of what these criminals call 'industry consolidation' (another name for killing competition. Ironical, isn't it?)
  6. Profits, for sure! For themselves, and the next 100 generations of theirs.
But capitalism's mother nature has her ways of settling the scores of those who think they are just too intelligent for everyone else.
The entire edifice of leveraging that these US bankers built, fell upon itself. This is called "implosion". Nowhere in history will you find an example more apt than this of an implosion. The banks just collapsed. They kept lending (for buying homes) to idiots (who could never have repaid) as the bank-salesmen had their incentives tied to the number of loans they could issue (and in the rah-rah boom years, all that looked so real, so do-able, so correct!), the bankers kept making money out of their quarterly profits and bonuses, and the Federal Reserve just sat tight with its eyes shut, ensuring adequate money flowed through the banking system. And to soothe the naysayers, AIG was roped in to put its seal of insurance on everything that remotely looked suspicious (AIG executives later revealed that they had no idea what documents they were signing.. it was like printing revenues!).

So Extreme Capitalism took its toll. The key crimes of the regulators - the US government and Federal Reserve - through the past 15 years were -
  • Being a silent observer of every conceivable excess, including leverage ratios like 1:33
  • Allowing money to flood the system through easy (loose) monetary policies of the Fed (assuming that more money into the system will help boost consumer credit, which will boost consumer demand, which will boost everything else)
  • Borrowing like mad from China (and some more nations)
  • Allowing absolutely dangerous deregulation to take place (depository banks allowed to indulge in investment banking activities) under the amazingly stupid notion that "risks have been tamed in markets for the foreseeable future, through the rigorous statistical quantitative tools used by modern risk managers!" (the failure of LTCM was forgotten all too easily)
  • Quietly allowing government officials and top corporate honchos to look like mirror images of each other (the man who was part of the gang responsible for creating the credit crisis in US (Henry Paulson, head of Goldman Sachs) was made the Treasury Secretary of federal govt.!)
  • Maintaining a huge military presence around the world to artificially keep faith in the US dollar as the ultimate reserve currency intact (in people's minds around the world.. though many spoke their hearts out against the USD's domination of the world currency system and demanding a mixed basket of currencies instead)
  • The biggest folly - despite being the land of capitalism's origin and genuine nurturing, silently allowing the system to corrode, become hostage to glib MBAs from Ivy-league institutions, and to spread the risk around the world by the fantastic tool called globalisation (so the villagers in Norway too went bankrupt when the beautifully created and fully-insured US CDOs collapsed!)
All this nonsense of the Wall street spilled onto the Main street. The pain has been felt the world over. Entire industries have suffered. Innocent workers have lost livelihoods. Young graduates are struggling to get jobs, as companies have suddenly tightened their belts, fearing the vagaries of the future. All this pain, just because the big daddies of Wall Street could not rein in their blind hunger for more.

Thankfully, the Indian government and the RBI did not heed aggressive requests from the West to open the entire Indian banking sector, and to follow policies like they did in the West. If we had done that, India would have faced a civil war now (with the banking sector gone bust, and the government in no position to offer king-size bailouts like the US govt.). I suspect, with a smile, that the RBI knew all along what was coming their (the US's) way! As a colleague beautifully said - "If you know, then ignorance is bliss!"

Today, with the European crisis looming large, big questions abound. Where is all this heading to? Some simple answers are apparent -
  • The US economic recovery will take at least 5 to 8 years. It will not happen in a hurry at all.
  • The de-leveraging of the consumer households in the US (as they pay down their debts) will create further pains in the economy. Austerity drives will do so, too.
  • Lots of loan defaults in US will happen (although, in all fairness, majority of the borrowers still pay in time)
  • Europe will remain troubled for a long time. Big nations like Germany will not succumb easily to the cries of the vultures to help unconditionally. And that's fair enough.
  • Large scale arson and rioting may lead to world-leaders sitting at the table and simply "resetting" debt terms amongst each other. That would be a ludicrous but effective way to handle a looming civilian crisis. Like always, it will be a huge disincentive for the honest captains who ran a tight ship.
  • The Japanese are headed for big trouble. Reasons - adverse demographics (too many old people, too few young earners), collapsing political structure (the new party is unable to get its act together) and huge domestic debts. So their two-decades-old recession is likely to continue through the third.
  • Sentiments of economies worldwide will remain muted. This will most deeply impact the stock markets, as the conventional wisdom of valuations has already been thrown to the dogs, with the kinds of risks companies have taken.
  • Credit rating agencies have already lost most of their respect, but surprisingly, continue to remain quoted in the media with lot of gravity. How come these idiots totally missed out on the really big crises that came about? What were they doing?
  • India will hopefully remain on a 5% plus growth path. This will generate lots of job opportunities for domestic sector, but quality of manpower will remain a challenge.
  • China is in deep trouble. With the US nowhere near recovery, the Chinese will wonder constantly about the value of the trillion dollar baby (US treasury bonds) they are holding! But since China is actually not a country but more of a private limited company (run by just one shareholder - the Chinese Communist Party) and secured by the PLA, they may ride it out through a judicious mix of guns, sticks and bullets!
You should google Joseph Stiglitz and Paul Krugman to get some real gems on this entire story, and how the US regulators failed the world's expectations of them.

The failure of US model, and its secondary European repercussions, is not a failure of Capitalism itself. It is a failure of the Western Man. His uncontrollable greed has undone him. Mahatma Gandhi was right when he reminded us that there is enough in this world for everyone's need, but not enough for even one person's greed. And so, I remain hopeful that men with reasonable ambition will again build the foundations of this wonderful creation called Capitalism.

Friday, May 21, 2010

The problem with today's problems

Centuries of evolution of the democratic systems and millennia of human evolution is proof enough for someone like me to believe that our system has been set for life, and we can expect a certain degree of predictability and safety from the way the world is run.

But all is not quite right. There are major anomalies.

Let me take an example, and start making myself clearer. I was watching television yesterday afternoon, and happened to glance through all business channels - CNBC, Awaz, NDTV Profit and UTV Bloomberg etc. The free fall of the stock markets due to Euro-panic was splashed across the screen, punctuated by the terror-struck faces of the anchors, and the sagacious tones (most of them artificial ones) and heavy baritones of many of the experts, collected from every nook and cranny of this grand nation. Each one of those experts was waxing eloquent about the reasons for the crash, and the road ahead. All of them sounded sullen and morose, sad and despondent, and "wise" at the same time!

Wait a minute. If you are so wise, and if you can analyse this crisis (this new one, the Euro-panic one) so well, you should make lots of money betting on the bearish trend already? Shouldn't you?
(Maybe you can't in Germany due to the ban on short-selling but everywhere else you can)

So it appears that these wise people are wise only in hindsight. And a surprisingly shortly timed hindsight at that. So are they really wise? My answer - NO. They are charlatans, most of them, struggling to look wise on TV, so we can keep watching their stupid analyses presented through the most slick graphics by some of the most attractively painted and dressed women and men in this country.

And something very interesting happened with me today. I started to philosophically analyse what was happening with my mind. My mind, imagine! So who's analysing whom? My mind is analysing itself! I went blank, stopped hearing anything, and looked into the vacuum of the TV that was in front of my eyes, and started seeing and hearing different things. I totally avoided listening to the economic nonsense of European crisis, and went to the basics.

There are obvious truths around us that we simply choose to ignore. We choose to rationalise.

What's this Euro-crisis anyway? Is it any different than the American crisis that started to happen just around 36 months ago?

Fundamentally, it's the same. At the root of both these crisis (and I suspect most such crisis) lie some simple things
  • Greed - more, more, more, more, more...
  • Nonsense - 'more' will not lead to collapse
  • Leverage - i can always pay back later, let me borrow now
  • Irresponsibility - i'm a sovereign, so the crime can be made to look like a veiled virtue

It so turns out that some European governments (Portugal, Italy, Greece, Spain) borrowed so much from markets (international ones) that they are in no position to pay back their debts that fall due. It also turns out that these nations are independent sovereign nations (with their own militaries, elected governments, constitutions and the entire range of paraphernalia that we count as insurance against delinquent behaviour) that have chosen not to control their rapacious greed (in borrowing and then spending the borrowed monies recklessly). Also, it turns out that the Euro currency is so designed that the bad behaviour of these nations will severely dent the currency, and so other 'good' nations must now come in to protect the currency (Read - must now come in to offer loads of monies to these stupid nations to tide over the crisis).

By the way, did you notice the wonderful poetic justice in the acronym derived from the names of these nations? PIGS.

I was wondering - decades and centuries of civilisation's hard-earned wisdom and work, all down the drain so fast? Nobody could stop this from happening?

There are some simple lessons we have to learn from these developments. These are striking, shocking lessons, that make a humble reading.

  1. Experts are mostly cheaters. They often tell you things that are untrue. Market experts, Economists and Governments cheat tremendously. Nassim Taleb (of 'The Black Swan' fame) says that the Nobel prize for Economics is one of the biggest frauds!
  2. Media does not understand the deep, intricate technicalities of any situation. They perhaps don't need to. What they do need are advertisements - desperately - and hence are forced (by the nature of their business) to present things in a "grossly simplified format" to us. This is creating huge problems of its own, as populations are getting accustomed to reading simple analysis of even extremely complex situations! Most such analyses are shorn of the subtleties and nuances that define the problem.
  3. Problems are simply rolled over, never solved. Each government (democratically elected) simply rolls the gargantuan problem (as it can no longer be solved) to the next government! And the next, and the next.
  4. Problems are fairly complex, but can have very simple solutions. Refer to the greed, nonsense, leverage and irresponsibility stuff I wrote above.
  5. Nothing is predictable at all about the world anymore, and problems - when they arise - will be big in nature, and generally beyond the immediate control of the government on the spot at the time.
Are these things the way these things are supposed to be?

NO. We are supposed to have governments and systems that work. We elect them! We pay every conceivable kind of taxes to them! We follow all rules (speaking for myself - I try to).

For what? Such irresponsible behaviour?

Now just apply this entire analysis to the Naxalite problem that India is facing. And you may find that it applies there as well! A fully-grown nation, with a strong democratically elected government, a strong military, a strong media and a hugely strong willpower is seemingly totally meek in front of those who choose to carve out another nation out of its heartlands. Amazing!

Take this entire analysis and apply it to the recent oil spill off the coast of Mexico and US, by some BP owned oil-rig. The fact that even after a month they are unable to bring it under control, despite massive political pressure from the White House to do so, speaks for itself.

So it turns out that the world's problem are getting nastier, and the solutions more troublesome than our faith in technology and modernity would warrant.

So, let me summarise the problem with today's problems
  1. We expect very quick solutions to even complex problems, due to over-simplification of communication in media channels
  2. We trust our experts too much, while most of them are relying on data from a past that no longer exists! (in most industries)
  3. We expect positive solutions always - while many solutions require a compromise
  4. We are magnifying our local problems into problems of a gargantuan scale due to internationalisation of everything
Interesting times we live in!

Monday, May 3, 2010

Power Tips for your first job

A huge change arrives the moment a student leaves college, and joins an organisation for a job. All templates that worked so wonderfully well till date, no longer exist. The comfort zone evaporates. Routines change.

I am not talking about internships, but full time jobs.

It takes conscious effort to settle in your new life. The corporate or business life. It won't happen automatically. And unless you are mentally prepared for it, the pain may be big.

To land yourself correctly in your first few weeks, months and years, here are my POWER TIPS.
  1. GET MENTALLY PREPARED - The time spent at college is usually memorable. We all tend to remember, recall and fondly share moments spent together at our college, all through our lives. As we move from college into the corporate world (or the world of business) it entails a huge shift in our lives. It's like taking birth all over again. Safely ensconced in our mother's womb, we could play brave, knowing well someone is there to protect us always. But once we are born, and the warmth of the cocoon no longer exists, we must first learn to cry. A similar experience awaits all who graduate from an institution/college and move into the corporate world. It's like moving out of the protected, warm and life-giving cocoon into the open world of uncertainties and turbulence. Surprisingly, a large percentage of graduating students (graduating from a UG college or a PG college or from any other institution) do not at all think about the life that's coming up. They assume it will be a linear extension of their present condition. It will not. It will be a step change. Everything that defined your comfort zone today, will evaporate overnight. So, start thinking about it. Prepare your mind to accept the new reality. Start imagining victories in the new life. Think of the happiness that will come to you as you move from "being a student" to "being a professional". And remember, if you behave like a joker, the world will treat you like a joker! So, start preapring mentally for a serious and successful stint ahead.