Tuesday, September 14, 2010

Back away from the tipping point

It wouldn’t have been out of place if Anatole Kaletsky’s Capitalism 4.0 was called “The Moral Obligation To Be Financially Intelligent” and I say so knowing I risk lining Kaletsky’s pockets. At a time when US President Barack Obama is urging his countrymen to improve their financial knowledge, this improvement on a famous Lionel Trilling essay is fitting enough. If you aren’t piqued yet, the book’s subtitle might get you interested, “The Birth Of A New Economy”.

Kaletsky, a senior journalist, says that the world has already been through three financial epochs. The first one started in 1776 when the US Declaration of Independence happened right up till 1932 when capitalism came closer to genuine collapse. Capitalism 2.0 saw its genesis in Roosevelt’s New Deal experimentation of 1933 and ended in 1979 owing to breakdown of the postwar gold-backed currency system. Capitalism 3.0, a 30-year epoch, started with Thatcherism in 1979 and ended with the crisis of 2007-09.

Relying on the writings of great economists as well as on a drawerful of articles from various magazines and policy documents, Kaletsky’s diagnosis of the past three “Capitalisms” is as enlightening as his 4.0 is. He concludes that boom-bubble-bust cycle grows ever swifter and more calamitous. Without placing the blame of recent financial collapse entirely on the bankers’ shoulders, Kaletsky rightly indicts the political establishment too. “The Bush administration’s failure to recognise the essential role of government in stabilising and underpinning the modern financial system brought every bank in the world to the brink of failure and threatened the global economy with an unprecedented depression.” Mr Kaletsky, how do you say touché in Russian?

The book takes a Sophoclean turn in its 10th chapter titled “The Economic Consequences of Mr Paulson”, a swipe at former US Treasury Secretary Henry Paulson, who took tough decisions when the world was on the brink of the financial equivalent of bungee jumping. With the possible exception of Andre Mellon, Paulson’s predecessor at the Treasury from 1921 to 1932, Kaletsky says that “this disaster was not the stupidity of regulators, the greed of bankers or the improvidence of speculators in low-income real estate but a series of misjudgments by one man: Paulson”. This particular chapter makes one wonder if the $767 billion Troubled Asset Relief Programme was the right thing to do at that time. Kaletsky says no private business would like to depend on the milk from government’s tits. Little wonder if the same businesses are trying to wean themselves off the milk. General Motors is raring to shed the “Government Motors” tag.

4.0 promises to be a different beast though, a benign one at that. Kaletsky predicts an overriding trend of “a view that politicians could be held accountable for wars but not for financial crises was a typically market fundamentalist confusion of the kind that is likely to be swept away by Capitalism 4.0”. Kaletsky is one of those rare economists who can tell his Bukharin from Bakunin and that apparently stood him in good stead while writing this book. He says that conservative parties tend to do better when societies are under stress because “as voters see their incomes and wealth eroding… the generalised demands for change escalate but the willingness to embrace any specific changes tends to disappear”. With the Tories winning in England and Republicans’ bright prospects at the coming US Senate elections only confirm Kaletsky’s theories.

Kaletsky says health-care reform will be an important issue in 4.0. Referring to Obama’s recent health-care reform Bill, Kaletsky says, “Had President Obama focused more attention in the health care debate on costs and less on coverage of the uninsured, he might have managed to convince Americans that their present health-care system was unsustainable and threatened bankruptcy not only for the government and individual businesses but for the entire nation.” He makes a few dire observations too: “Facing up to the inevitable choice between significantly higher taxes and major reductions in health and pension entitlements will be the greatest political challenge of the post-crisis years.”

However, Kaletsky paints the finance and banking structure in 4.0 in broad strokes. “Managements and investors will need to discover new ways to reconcile financial and political investors” and many such are the kind of statements that make the reader wonder if Kaletsky read his own book. While he exhorts the Americans to increase their savings, he thinks that those savings will be “lent to businesses for investment and expansion” and that they would also cut the Americans’ demand for consumer goods. However, he fails to factor in the fact that the rich don’t necessarily invest their earnings and savings in the American economy; they send them around the globe where they’ll get the highest returns. Kaletsky laments that the rich are better off with a smaller percentage of a fast-growing economy than a larger share of an economy that’s barely moving.

Kaletsky’s lucid prose is his strength but still he wouldn’t be everyone’s cup of tea. For a casual reader, reading the whole book feels like a marathon unfairly imposed on a jogger. Having said that, invest your time in this tour de force of information and speculation, and you’ll be richly rewarded. That’s capitalism of a sort too, which I am sure Kaletsky would approve of.

Roubini's prophet motive

CNBC often plays disco music when New York University’s party-boy economist Nouriel Roubini appears on air. And why not? The man earned the moniker of Dr Doom for his pessimism about the world economy when other economists were busy heralding a new financial age. Not surprisingly, when the recession happened, Roubini was belatedly hailed as a prophet. As the Portfolio magazine said of him, “Ridicule turned into respect, not to mention countless television appearances, speaking engagements, invitations to testify before Congress, new clients for the consulting firm he runs, and parties packed with young, beautiful admirers.”

The reason for a lengthy introduction of Roubini, an Iranian-Jewish, is his new book is as much about his analysis of the financial future that beckons the world as about himself (more on that later). Written along with Stephen Mihm, a University of Georgia historian, the writers spill a lot of ink to either hark back to the halcyon days of the post-War era or give an overview of the key factors that led to the 2008 financial crisis. Roubini and Mihm spend the second half of the book discussing financial sector reform and key aspects of global trade imbalances. Drawing on the parallels from many countries and centuries, right from the 17th century tulip craze to Japan’s Lost Decade, the writers show that financial cataclysms are as old and as ubiquitous as capitalism itself.

The writers found a possible solution to grapple with the inherent instability of the global financial system in the thinking of economists as varied as John Maynard Keynes and Joseph Schumpeter. “Indeed, the successful resolution of the recent crisis depends on a pragmatic approach that takes the best of both camps, recognising that while stimulus spending, bailouts, lender-of-last-resort support, and monetary policy may help in the short term, a necessary reckoning must take place over the longer term in order to achieve a return to prosperity.”

If books on recession are a genre in themselves, then Crisis Economics would wear out its welcome even with the most tolerant genre buff because the writers take just too long (three-fifths of the book precisely) to deal with the book’s subtitle. And even those predictions (“outlooks” as the book says) are not transcendental. Sample these: “exploding fiscal deficits may prompt some countries to default on their debt, or to resort to the printing press to mitigate it, triggering the sort of high inflation last seen in the 1970s”, “Japan might return to deflation and near-depression, triggering a major sovereign debt crisis”, “China faces growing risks: its investment-led recovery could lose steam, possibly triggering a rise in non-performing loans and, ultimately, a banking crisis”, “no double-dip recession”. Did Roubini write this book with his left hand?

Also, the thesis that asset bubbles and ensuing crises are part and parcel of capitalism isn’t new and is explained in a more articulate fashion in Kenneth Rogoff and Carmen Reinhart’s 2009 book This Time Is Different: Eight centuries of Financial Folly (the book is referenced in Crisis Economics too). The much talked about thoughtful reforms that the book purports to suggest are middling at best: breaking up the banks and more reforms of the International Monetary Fund.

One look at the book cover and you would know that Mihm’s name in smaller font size gives him a direct entry into the pantheon of greatest sidekicks who include Sancho Panza. Roubini jumped onto the Dr Doom gravy train that even if the economy were to rebound, there is more to him than the one-time doomsday scenario that he predicted. Thus comes this book where Roubini seems to have conjured it up by swallowing an entire dictionary of economic terms. Swathes of text are dedicated to explain as to how “credit default swaps” and “mortgage-backed securities”, once obscure expressions, have now become household terms, even if their exact nature remains mysterious. Roubini’s glibness (explaining what assets and liabilities are is being borderline lazy) in the first half of the book sets in such weariness that he comes across as a one-trick pony who acts in every page as if he’s discovering the trick for the very first time. Having said that, this book is highly recommended to those who have been living under a rock since circa September 2008. Those few can suck out the maximum juice.

If anything, the prose, which seems like a love progeny of Economist and John Le Carre, redeems the book. Roubini is a brilliant quote hanger and that can be seen from the disparate quotes that he peppers his arguments with, to a good effect. But then, that’s it. I’m sure, some would argue that the ability to raise money is just as important as the ability to write well or frame a shot. While that may seem to be nonsense, Roubini’s book got me terrified that it might be true.

Earlier this year, when the Eyjafjallajokull volcano started blurting cinders as if it was the world’s biggest broken toaster, people couldn’t fly in Europe at all and had to go back to boats. Roubini doesn’t have an equivalent situation to see through this financial disaster. An argument that the United States must use the recent crisis as an opportunity to make deep and meaningful reforms to its financial system only affirms that at heart Roubini remains a permabear.

Facebook fatigue

Exactly a day after I wrote an anti-Facebook rant in this blog space, my account in the social networking site got disabled. A few questions instantly crossed my mind while I was mourning the death of my digital alter ego: Is Mark Zuckerburg the new-age bearded mullah who issued a digital fatwa against me? Should I have sought refuge in Salman Rushdie’s sock drawer? Facetiousness apart, in my case Zuckerburg will not have the last laugh.

Here’s how. I feel liberated by the fact that I don’t need to update my status with a Bertrand Russell quote that I might comfortably pin over my desk or an Updike poem that would befit my epitaph. I’ve realised that I am this passive aggressive status update guy, who wants to show his estranged high school flames what a brilliant quote hanger he has turned into.

The ‘Like’ button was my crack cocaine. Whenever my 160-odd friends don’t ‘like’ the latest foreign article or the elusive indie song that I post on my Wall, the withdrawal symptoms set in. What else, I place one more link filched from the news aggregator sites. I can now concentrate on my work for time immemorial at a stretch without having to refresh my page every five minutes to see if anyone ‘liked’ my latest post or not.

With benefit of hindsight, the reality has dawned on me that a tweet-size review of latest Bollywood drivel or recommending the just-released Sigur Ros album is not exactly altruism the way, let’s say, donating blood is. It needed a bolt out of the blue to make me understand that for every page or group that I ‘like’, I am actually walking into a corporate’s trap, who will place ads accordingly. It’s almost as if it’s not ‘my’ Facebook profile. It is Facebook’s profile about me. Whoever said benign corporate is an oxymoron!

I really had to stop wanting to look at other people’s photos and updates. I was almost stalking them, spending hours a day looking at their pages without actually saying hello. I felt detached from my Facebook buddies because I rarely directly contacted them. This kid is tired of his new toy. Many others are not, as yet. According to comScore, Facebook attracted 87.7 million unique visitors in the United States in June. Traffic to two of the most popular blog-hosting sites, Blogger and WordPress, is stagnating, according to Nielsen, a media-research firm. By contrast, Facebook’s traffic grew by 66 per cent last year.

If blogs’ ability to absorb the dime-a-dozen knee jerk reactions isn’t pathetic enough, the Facebook is spawning a totally different beast — slacktivism. Urban dictionary defines it as: “One of those feel-good internet campaigns that doesn’t actually help anybody or has political impact.” Mir Hossein Mousavi, one of the main opposition leaders in Iran, has 128,000 Facebook followers. Too bad that joining such groups is being deemed as the hippie equivalent of burning money in a trash can. Regina Spektor nailed it with the beautiful lines in ‘Hero’: “And we’re going to these meetings. We’re not doing any meeting”.

I wonder why there’s no campaign against Facebook’s corporate interests that saw its erstwhile beloved Scrabble application, Scrabulous, pulled amid copyright issues. The Facebook fatigue seems to have caught up with its users though. According to the website www.insidefacebook.com: “Facebook’s growth slowed down in the United States in June, following a burst of activity through April and May. The country picked up only 320,800 new monthly active users in June, compared to the outstanding 7.8 million it gathered in May.”

You, the Facebook user, will feel the fatigue when you realise that a News Feed full of constantly updating ‘friends’, like a room full of chattering people, is no substitute for a conversation. Meanwhile, ‘friends’, e-mail me.