October 12, 2008

Saving capitalism… from the stupid capitalists!

I am taken back to the year 2000, when during the then American President Bill Clinton’s historic visit to India, I had started my seminar series called “The Great Indian Dream – India can beat America,” with a front page advertisement in leading dailies welcoming Clinton on the day of his arrival to India. The header of the ad said, “LAST DAYS OF AMERICAN SUPREMACY.” It has been seven years since then, and the time has come for people to realise the unfolding of the same in front of them and grasp the reasons behind the same. The time for the great power shift has come – the time for power to shift from the American hands to the Chinese, Indian and, dare I say, the Middle Eastern hands. As I wrote in my editorial two issues ago in The Sunday Indian magazine, on account of the cataclysmic losses that each of the US financial behemoths has been suffering, many of them have been incessantly bailed out by Middle Eastern petrodollars. So, while the investments of Kuwait Investment Authority this year have been to the tune of $2 billion in Merrill Lynch, in addition to a bailout package of $3 billion for the beleaguered Citigroup, there are monoliths like Abu Dhabi Investment Authority, whose assets globally are above $800 billion on conservative estimates. Interestingly, this company is now the largest shareholder in Citibank, through its investment of $7.5 billion, and also has a stake in Carlyle Group – one of the largest American PE players – as well as a 28 per cent share in the London Stock Exchange; no wonder then that for Americans, destroying them physically had assumed so much importance. And, if I were to put it mildly, it has all been a result of America’s stupid belief in fiscal bottom-line oriented shamefully inhuman capitalism.

For many, the current crash in the US financial system is comparable to that of the Great Depression of the 30s, while many others are stating it is nothing more than a cyclical trend that would soon get mitigated with time. But what many are not realising is the fact that this disaster is not an incident in isolation – it would invariably have far reaching repercussions and perhaps is the harbinger of the shape of things to come.

Economic disasters are nothing new and since the end of the World War II, history has been littered with instances of economies that apparently seemed very strong suddenly going bust and taking a long time to come out of it. Some actually never came out at all. The most recent, glaring and memorable incident that happened in the last decade was the financial crisis of South East Asia. Before their collapse, they were often called the Asian Tigers that could take on Japan, and would be the centre of development for Asia around which other countries of Asia – including China and India – would have their domestic growth.

Most of those Asian Tigers, like Indonesia, Malaysia, Thailand, and South Korea, were all lured by the illusion created by the US-backed financial institutions. Most of the Foreign Institutional Investors invariably overestimated the growth, and the extent to which these countries could export to the US markets. Based on their overestimated estimates, and suffering from a herd mindset, most of the companies (particularly in the manufacturing segment) made the identical mistake of borrowing short-term money for long-term projects. The world has been an audience to how their entire calculations went awry, leading to a major foreign exchange crisis. In fact, the Central Banks of those countries, following the American footsteps of free-floating of currency, suddenly realised how things had gone far beyond their control. The damage was such that most of the South East Asian countries took nearly a decade to come out of that disaster. The same is the case with Japan which, in spite of being one of the largest economies of the world, is yet to recover from the deep recession that it entered into, thanks to the same real estate bubble collapse that happened there.

The same story holds true for countries like Mexico and Argentina as well. It is intriguing that all these economies blindly indoctrinated the American lessons. No wonder that the American school of thought manifests from the Wall Street, which, in its quest to be extra bold, led many

American companies to eventually compromise with fundamentals and look at only profits at all costs. It is rudimentary that a positive growth rate is not a sufficient condition for companies, and far more so in the case of economies on the whole. But given the guiding principles, it has been observed that American companies, in their quest to keep up the growth rates, have gone for whatever means they can use to increase their sales, even if that meant keeping aside the credit unworthiness of the customers – I had referred about this impending crisis due to this system of endless credit and eating up of the future finances of the population in my book, “The Great Indian Dream”. This went on for a long time, aided by the dubious fairy tales being woven by the investment bankers, which lured the banks and financial institutions to lend as much as possible. For long, everything was fine, and the system of borrowing from one to pay the other made sure that the skeletons remained hidden, until it was all too big to hide.

For the uninitiated, the near trillion dollar loss due to subprime lending is just one of the many issues that are plaguing US. If one takes into account the massive current account deficit that US has, then the situation becomes even grimmer. While many are expecting this present crisis to tide over soon, what they don’t realize is that there is a recession in US in the offing from which it would take not less than a few years for the nation to come out... Just in case they have any chance of recovery.

Interestingly, on the flip side, economies that had always been reluctant to be indoctrinated by the American school of thought, have never gone through such recessionary trends, nor do they seem to be getting much affected now. For long, many in the West have criticised China. I’ve been to too many seminars around the globe where pretentious western funded intellectuals with a cigarette in hand made prophecies on how the Chinese bubble would burst, and unread illiterate journalists – drinking American-funded wine – nodded in chorus, pretending to be the most knowledgeable forces on capitalism. Some of them also gave their illiterate criticism on my book, which dared to differ to such uninitiated logic – in some of the financial papers they wrote. China was criticised for their ultra conservative financial policy and the strict control that the Central Bank kept on their financial systems. There was also a huge amount of criticism in terms of the kind of NPAs most of the State run banks in China were/are carrying with them.

But then, this is also true that when today, America is reeling under the crisis, Chinese are still achieving a super growth with their existing NPAs. And the same holds true for other Latin American economies like Venezuela, which had been at loggerheads with respect to American policies, and now have been performing pretty decently. And thank god for India’s original allegiance to the planned model of development and the democratic set up of opposition parties not allowing sweeping reforms, that today, the cautious pace of reforms has kept us safe. It can thus be safely said that America and American business principles have created the biggest ever crisis for the globe and those who blindly believed in the same. Had this been even 20 years ago, things would have been very different. But today, as the world stands so very integrated, it stands to collectively pay in some way or the other for this gargantuan mistake of the Americans. However, while I might believe that socialism is the ideal form of economic system that we must all believe in, yet, what is also true is that as a socio-economic system, nothing has more appeal to the human mind than capitalism. So, the way ahead for the world is not anything else but capitalism itself. And this is where the question of saving capitalism from the capitalists comes from.

And here are my very precise and brief thoughts on the same (very brief, because after this point I would tend to get too philosophical and academic. However, for those interested in details, please refer to the book my father, Dr Malay Chaudhuri, and I wrote together in 2003, titled, “The Great Indian Dream”).

If you want to save capitalism, you have to change the rules of capitalism completely and, dare I say, write them all upside down. Beginning from the term capitalism itself; and rename it as “Happy Capitalism.” We have to realise that prosperity of a society is not the sum total of the prosperity of its listed companies and the top 20 per cent people. Prosperity of a society is about the prosperity of the bottom 80 per cent of population. It’s only when they have real purchasing power – and not falsely induced credit based purchasing power – that the society will prosper and be happy, the ultimate goal of any humane society. Therefore, instead of the basic tenets of capitalism like ‘Survival of the Fittest’ and the ‘Trickle Down’ theory, we need to start believing in “Survival of the Weakest” and “Trickle Up” theory – both of which speak of the humane face of capitalism through systems of national economic planning, and about growth with equity and growth with control mechanisms to control shameless greed of the capitalists, wherever required (All the three theories, that is, ‘Happy Capitalism’, ‘Survival of the Weakest’ and ‘Trickle-Up theory, have been well elaborated in our book, “The Great Indian Dream”). And I end with a confident assurance that we would have a much better and humane system devoid of such humongous upheavals... And that it is Happy Capitalism that will save Capitalism!

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