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.


sandeep anand said...

Indeed a bright spark

An astute summing up of the root cause of the economic woes of the world today.

An opportunity for India and our entrepreneurs to set an example of good capitalism by ,as you said, demonstrating reasonable ambition and not showing overt insatiability as exemplified by our western friends.

Our Mahatma demonstrated to the world that real peace comes from following the path of ahimsa and contentment and not by purchasing and displaying the Nobel Peace prize, similarly it’s an opportunity for India to show the way towards real , balanced and sustainable growth which can be achieved by investing in building real capabilities to create and distribute wealth by producing real products and services, which society wants and not by investing in financial jugglery brilliance guided by stupid greed.

Shenky Agrawal said...

Great analysis over capitalism.
The way all the points are joined like American crisis and European Crisis.
Sir,capitalism is good because the real and sustainable development comes from it. It is just like a business run by private entrepreneur and business run by government. Similarly,difference is over capitalism and socialism.
But every time there is entry of anything that is "excessive" the whole thing turn worse. So,proper regulation in everything should be there as Paul Krugman says once "I totally blame Alen greenspan for sub-prime crisis"
Mahatma Gandhi was a great thinker and prophecy and his line as tell by you is awesome.

With Regards,
PT Shenky Agrawal.

Test said...

Thanks Sandeep. My post came with a lot of pain, really! I am surprised at the sheer incompetence of politicians of these developed nations, and find the public outrage quite late, and quite insufficient. The system won't change in a hurry, it seems.

Shenky, this was a solid topic, and I love blogging on similar ones. Thanks for reading and commenting!

Shoaib Qureshi said...

Dear Sir,

The blog beautifully describes Extreme Capitalism & the global view of current economy. It was a joy to read all of it & enhance my understanding of the subject.

This entire episode of economic crises (Japan, US, Europe) is indeed very scary & seems to be creating headlines for some more time to come. But I believe there is no end to a person's greed (especially if that person is an American banker!) so I am sure we are bound to see atleast two more global economic recessions in our lifetime. However, with India emerging strongly out of this, if the mammoth corporations & the governments take a few learnings from the economic system of our country, it will be possible to stay away from Extreme Capitalism for atleast a few good decades.

Proton Shoaib Qureshi

Richa Rai said...

Respected Sir,

Thanks for sharing these technical issues.

‘What lies ahead for Capitalism - a worldview’ and ‘The problem with today's problems’ both the articles have given a fundamental understanding of present Euro-crisis, havoc of 2008 that started from U.S., right meaning of capitalism and its dangerous face in form of extreme capitalism.

Richa Rai