Monday, 13 October 2008

Exit the dragon

By Noah Tucker

This crisis is not the end of capitalism. But the main ideas which underpin capitalism have already been slain by the system itself.

Nobody knows how bad this disaster will prove to be, except that it is already very much worse than anybody, barring a few Marxists and other lonely radicals, predicted. But it is no longer merely a crisis of finance, or even of the functioning of the global market economy.
Let us consider the best-case scenario: that over the next few days, weeks or months, the combined action of the governments of the USA, the EU and the other developed countries, by throwing trillions of dollars, pounds and euros of taxpayers money into the hitherto privately-owned system of financial speculation; in contradiction of their deepest beliefs, re-regulating much of what was de-regulated; and even nationalising huge parts of that imploding system; that, by these draconian anti-market means, the state succeeds in rescuing the financial markets from complete meltdown, prevents the 'real economy' (ie, the production of material products and recognisably useful services) from a terminal crash, and thus avoids the likelihood that hundreds of millions, rather than scores of millions of people in the 'West', who have until now been living a relatively comfortable existence, are cast into unemployment and poverty.

Even in that scenario, in which the people of the developed world will suffer only from an economic crisis rather than an economic catastrophe, the damage inflicted on the ideas which underpin the support for the capitalist system will be catastrophic.

Writing on 12th September- after the seizure by the US authorities of the giant mortgage corporations Fannie Mae and Freddie Mac, but before the nationalisation of AIG and the subsequent '700 billion dollar bailout'- Anatole Kaletsky, the Principal Economic Commentator and Associate Editor of The Times, remarked wistfully:

Whatever happened to the triumph of global capitalism? Even more than "the end of history", the idea that "we're all capitalists now" became an article of faith around the world from the early 1990s onwards...

Noting what he described as the "complete failure of the biggest, most dynamic, most innovative and competitive markets that have existed in the history of capitalism", Kaletsky wrote:

Their failure has been so obvious, that even the most capitalist administration ever, in the world's most capitalist country, had decided to wipe out the private owners of its biggest and most important financial companies and replace them with state-appointed bureaucrats.

The reasons for these failures - related, ironically, to the dogmatic belief among regulators, politicians and financiers that "the market is always right" - have been much discussed. Much less widely considered have been the consequences of this justifiable disillusionment with market forces.

Even more than the mind-boggling $5,500 billion size of the two US mortgage companies, it was the political significance of their nationalisation that marked it out as an historic turning point.

In his conclusion, the Associate Editor of The Times clarified what he meant by the political significance of the events:

If the US loses faith with free markets, compromises the protection of property rights and hobbles its financial markets - all of which it has dramatically done in the past seven days - then Europe will surely follow suit. Emerging economies such as China and India will become even more ambivalent about market economics. Instead of We Are All Capitalists Now, There Are No Capitalists Left may become the ideology of the next decade.

Changing my religion

As Kaletsky remarked, there has been much discussion on the reasons for the spectacular failure of the capitalist financial institutions; with many other commentators and politicians joining him in expressing their 'justifiable disillusionment with market forces'. On 8th October 2008, the prime minister of Britain justified his latest nationalisation and bailout plan, secured by negotiations which had concluded at 5am that morning:

"Our stability and restructuring programme is comprehensive, it is specific and it breaks new ground. This is not a time for conventional thinking or outdated dogma but for the fresh and innovative intervention that gets to the heart of the problem."

Gordon Brown has a proud record as an opponent of outdated dogma. It was in 2003, in his most explicit theoretical exposition, his lecture at the Social Market Foundation, that he declared:

For the left historically it has been a matter of dogma that to define the public interest – opportunity and security for all – as diminishing the sphere of markets [...]

Why? Because for the left markets are too often seen as leading to inequality, insecurity and injustice. In this view, enterprise is the enemy of fairness, and the interests of social justice are fundamentally opposed to the interests of a competitive economy. The left's remedy has therefore been seen to lie in relegating the impact and scope of the market through greater public ownership, regulation and state intervention [...]

In opposing this doctrinaire remedy, he averred:

It is ever more important that markets are strengthened [...] Instead of being suspicious of enterprise and entrepreneurs, we should celebrate an entrepreneurial culture – encouraging, incentivising and
rewarding the dynamic, and enthusing more people from all backgrounds and all areas to start up businesses. Here again, enabling markets to work better and strengthening the private economy.

Instead of thinking the state must take over responsibility where markets deliver insufficient investment and short termism in innovation, skills and environmental protection, we must enable markets to work better and for the long term...

Thus the markets- especially the financial markets- were ever more strengthened, their entrepreneurs were no longer subjected to suspicion; instead, they were incentivised, celebrated, and given ever more scope. A proportion of the increasing proceeds accrued via taxation to the state, allowing the government to promote a degree of fairness and social justice- in distinction from the previous hard-hearted and purely neo-liberal Conservative regimes of Margaret Thatcher and John Major.
The gains to the people arose not only from the increased provision of state services and welfare payments; but also- through the exponential rise in property prices and the co-incidental industrialisation of China- the bountiful affordability of material goods to the majority of the population. A new paradigm had been created, the marriage of market freedom to social fairness, a match made in the evangelical but materialistic heaven of New Labour.

So the long boom was not merely economic, but ideological- and the bust was abrupt.
In the vengeful rhetoric of the right-wing populist press, the dynamic entrepreneurs went straight from 'go' to 'jail', without even passing through the due process of suspicion. On 30th September, the Daily Express published an editorial which denounced as 'greedy renegades' the senior bankers who it blamed for the crisis. The editorial was headlined 'Jail Rogue Fat Cats who Caused Financial Turmoil', but the text suggested a rather more drastic recourse than this modest proposal, hinting darkly: "In China they'd be executed."

Some others, whose views have remained consistent, have suddenly found an eager audience. The Conservative Party's intellectual magazine The Spectator has printed an article by the chief of one of Britain's few remaining nationalised industries outside the banking sector, Archbishop Rowan Williams of the Church of England. In its pages, the Right Honorable Most Reverend Doctor Williams, who was appointed to his post by Mr Tony Blair, espoused his analysis of the immorality and greed of the de-regulated capitalist market, which he denounced as a form of 'idolatry', a heresy against the true God.

This has always been the opinion of Dr Williams, but until recently nobody cared about it; of his ardent views, only those about homosexuals and Muslims were considered worthy of mention. In his Spectator article Rowan Williams, who is is an honorable man not merely in his official title but in his words and deeds, cited as his intellectual ally a certain Dr Karl Marx- though, as he conceded, Marx was only partly right.

We should have no problem with that. As the the doctrine of that very moderate body the Church of England also concedes, even Moses and Jesus were only partly right.

Exit the dragon

But back to reality. In his poignant remark that we may be entering a period in which 'There Are No Capitalists Left', Anatole Kaletsky suggests that the myth that economic decisions can safely be left to the market will no longer have any believers; hence the capitalist market will be restricted, subject to increased direction by the state, and its field of operation reduced by nationalisations.
That alone would be a huge change. But the defeat in practice of capitalist ideology, which will be combined with the material effects of the crisis on the population- a reduction in prosperity and an increase in misery in the leading capitalist countries- could have a further, and even more significant effect.

This present crisis is not merely the result of personal wrong-doing by the insatiably greedy characters who gained by the worship of the masses at the satanic- and now all of a sudden, discredited- shrine of capitalist individualism.
It is the bitter eventual fruit of the roll-back, over the last several decades, of the nationalisations, regulations, repression of financial speculation and other state economic interventions which were implemented following the experience of that previous catastrophic downturn, the Great Depression.
The reforms which were instituted in the wake of the terrible crisis of the 1930s- including the New Deal under Franklin D. Roosevelt in the USA and the radical measures of the post-1945 British Labour Government under Clement Atlee- by reducing the economic scope of capitalism, thereby made that fettered and limited capitalism more economically stable than its previous unrestricted form.
Those reforms also allowed a drastic improvement in the conditions of working class people, which had hitherto been miserable, even in the richest capitalist countries; connected with this, by means of progressive taxation and the increased scope for the trade unions, there was a reduction of the gap in living standards between the very rich and the majority.

As Doug Henwood, editor of the Left Business Observer, has noted: the yawning gap which has opened, since the 1970s, between the incomes of most of the people and those of the wealthy elite, was key among the major factors which have contributed to the current debacle.

Why was the decision taken that the restricted model of capitalism, social-democratic capitalism, could and should be rejected and replaced with an updated version- recently becoming a turbo-charged version- of the pre WW2, dangerously unstable, 'free-market' capitalism?
The various factors included not only the lust for unrestricted opportunities for individual enrichment through the market, but the perception that it was the workers, strengthened by nationalisation and their trade unions, who were becoming the greedy ones, avaricious for ever-larger slices of prosperity and power; in other words, millions of people were increasingly discovering that collective means could yield them a decent and improving quality of life.

But those workers were no longer motivated by desperation. In Britain, the country which would become the Western crucible of privatisation, de-regulation and the liberation of financial capitalism from its shackles, the chief ideologue of the return to the unbridled market was Sir Keith Joseph, a man whose personality did not suit him for the direct leadership of a nation; nevertheless, Sir Keith found an able and eager student in Margaret Thatcher.

In girding himself for intellectual battle against the social-democratically resticted version of capitalism- which had by the 1970s even banished its own name, 'capitalism', from the vocabulary, instead defining itself with some justification as 'the mixed economy'- Keith Joseph fought to banish an image from his own mind, a ghost which still frightened his less audacious colleagues. As he recalled:

Our post-war boom began under the shadow of the 1930s. We were haunted by the fear of long-term mass unemployment, the grim, hopeless dole queues and the towns which died. So we talked ourselves into believing that these gaunt, tight-lipped men in caps and mufflers were round the corner, and tailored our policies to match these imaginary conditions. For imaginary is what they were.

The spectre of the impoverished working class, with little to lose but their chains and many of them becoming drawn towards revolutionary means of salvation, was banished from the historical imagination of the ruling elite. Thus the dragon of the free market, for three decades imprisoned by the chains of nationalisation and regulation, could be released from its hiding place in the theories of a few anti-Marxists and other lonely radicals, and breathe fire again on the real world.

Keith Joseph, and his increasingly poweful proteges, were encouraged and empowered also by the decline, and then the fall, of the Soviet Union.

Like it did on a regular basis before it was institutionally moderated after the 1930s, the capitalist monster is again undermining the conditions for its own existence. It is bringing down the financial aristocracy which it created, and along with it the idolatrous religion of their admiring cheer-leaders.

And what will result? As history teaches, the proceeds may encompass the worst as well as the best. From the crisis of the 1930s, Hitler arose, backed by the desperate capitalists, and a World War which killed fifty million human beings.
But also, that terrible crisis resulted in the aggressive advance of socialism, from the isolated Soviet Union to Central Europe, China, and even eventually to a small island in the Caribbean.

Cuba's survival, against all odds since the 1990s, gave hope for the the masses in Latin America- who have revolted since the start of this Century against capitalism and for a better life.

The current crisis will inflict millions of casualties, almost all of them innocent. But among the collateral damage will be the invincibility of the capitalist system, even in its heartlands.

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Sunday, 12 October 2008

What MFIs can teach Wall Street

12 Oct 2008, 0116 hrs IST,
Swaminathan S Anklesaria Aiyar

Big financial institutions of all sorts are in dire straits across the globe. But one category remains unaffected - micro-finance. Even as the global financial system freezes and giants like Lehman Brothers collapse, micro-finance institutions (MFIs) are expanding unfazed. Famous financiers face defaults big enough to wipe them out, but MFIs report virtually zero default.

This is extraordinary. Big financiers lend against collateral, a back-up if their borrower defaults. But MFIs lend with no collateral at all. Big financiers lend to the most creditworthy corporations. MFIs lend to poor women whom nobody in history considered creditworthy before. Yet, the secured loans to big corporations are bombing, while unsecured loans to poor women are being repaid in full.

How so? What lessons does micro-finance have for Wall Street? I distilled some answers from feedback from promoters of three MFIs that i myself have a stake in: Shubhankar Sengupta of Arohan, Kolkata; Rakesh Dubey of Sonata Finance, Allahabad; and Manab Chakraborty of Mimo Finance, Dehra Dun.

The big lesson for Wall Street is that lending against collateral, supposedly prudent, can blind you to the need for checking the repayment capacity of borrowers. US banks happily gave mortgages of 100% of the value of houses during the housing bubble, and suffered when house prices fell. So did august institutions buying mortgage derivatives. Some, like Lehman Brothers, borrowed massively to invest in AAA mortgage-backed securities, and went bust when value of these securities plummeted. A trillion-dollar house of cards was built on collateral. When the collateral value fell, the house of cards collapsed.

Lesson: don't just depend on collateral, assess the cash flow of borrowers, and leave a cushion to ensure repayment. The housing bubble induced banks to give NINJA (no verification of income, job or assets) loans, secured just by house value. As house prices rose, their value exceeded the repayment capacity of borrowers. The rest is history.

Microfinance, by contrast, has no collateral at all. MFIs deliberately keep loans small, well within repayment capacity. Some MFIs give first loans of just Rs 5,000 a year. Those who repay qualify for a higher second loan, maybe Rs 7,000, and the third loan can be still higher. But MFIs set an absolute loan limit, ranging from Rs 12,000 to Rs 25,000, depending on local economic opportunities, to guard against over-borrowing. Wall Street needs similar safeguards.

US housing brokers get commissions from banks based on the size and interest rate of loans. This gives them incentives to fiddle documents and data to lend excessive sums at excessive rates of interest, increasing default risk. But MFIs have a fixed interest rate, and fixed ceilings on the first, second and subsequent loans. MFI field agents are trained to ensure that loans do not exceed repayment capacity. Mimo Finance, for instance, gauges the cash flow of borrowers by taking a quick look at the quality of their houses. Wall Street needs similar safeguards.

MFIs lend to groups of poor women. If any borrower defaults, the whole group is barred from credit, so other members put social pressure on the defaulter to repay. This is remarkably effective.

By contrast, defaulting home-owners in the US are treated as victims, offered subsidies and write-offs by politicians. Some home-borrowers may have been duped by brokers, but many others over-borrowed on the assumption of ever-rising house prices. Many bought houses to re-sell at a profit. Some can afford to repay but have decided not to, since default attracts no social opprobrium.

High inflation in India has not caused MFI defaults. MFIs report that worker-borrowers have demanded and got a 20% increase in wage rates, while small-businesses' borrowers running tea shops have raised their prices from Rs 2 per cup to Rs 3. By contrast, home borrowers (or even giant corporations) in the US are unable to increase their incomes in line with borrowing costs. So, the MFI model is small but sound. But don't lavish excessive praise on it. Western banks lend far too much. But Indian lenders - including MFIs -lend far too little. Rural studies suggest that poor rural households need Rs 25,000 of credit per year. MFIs provide far less. The balance is made up by borrowing from relatives and moneylenders. The system cries out for more formal credit.

The aim must be to enable capable but capital-starved entrepreneurs to move beyond ownership of buffaloes and tea-shops. At an MFI meeting in rural Dehra Dun, i saw an enterprising village woman pleading for a loan of Rs 50,000, saying (rightly) that this was the minimum needed for a decent shop. But the MFI regretted that this was beyond its lending limit.

So, don't get too excited by the fact that we've avoided the excessive lending of Wall Street. Bemoan the fact that our stunted financial system fails to reach hundreds of millions. Microfinance has its merits, but is not enough. The big challenge is to move from micro-loans to mini-loans of Rs 50,000 to Rs 2 lakh. These alone can transform poor borrowers from objects of pity to objects of envy.

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A new order must be imposed on the City

Amid all the reckless gambling of recent years, British banks did make one sound bet: they guessed that they were so vital to the economy that politicians would never let them fail.

Sure enough, as crunch turned to crisis and crisis turned to panic, the Prime Minister and the Chancellor last week announced a rescue package of breathtaking scale: £50bn to rebuild banks' capital stores; at least £200bn of cash available through the Bank of England's 'special liquidity scheme'; a guarantee worth £250bn of further borrowing by banks on wholesale money markets.

It was the right thing to do. Since the economy depends on a flow of capital from banks to businesses and households, and because mutual distrust has stopped banks lending to each other, it falls to governments to put money back into the system.

While the US Treasury was faster to act in a manner appropriate to the scale of the crisis, the British response is smarter. The American plan, worth $700bn, was essentially to purchase toxic debt from failing banks - turning the taxpayer into the buyer of last resort for assets that the market had rejected. The UK approach puts money closer to the heart of the problem, pouring capital directly on to bank balance sheets and taking part ownership in return. Instead of bailing water out of the leaky vessel, Alistair Darling and Gordon Brown are trying to plug the leak.

Given the global nature of the crisis, the British initiative will only work if the rest of the world follows suit. Henry Paulson, US Treasury Secretary, said last week that he was prepared to do just that. The US government may now invest directly in the nation's banks for the first time since the 1930s.
European governments have been less ambitious, some because they prefer to deal with bank failures on an ad hoc basis, and some because they doubt the crisis will hit them as hard as it has the 'Anglo-Saxons'. They are mistaken. No financial institution is safe. Only a systemic rescue will stabilise the situation. Politicians cannot wait for the market to signal trouble and then react; they must wrest control of the economy away from panic-stricken markets.

But bankers resist government involvement in their affairs with something like religious zealotry and the Brown-Darling rescue plan contains no clear strategy for bringing them to heel. The Prime Minister said that public investment will come 'with strings attached', but added that the detail would be negotiated on a case-by-case basis.

It is asking too much of taxpayers to put their money up front without explaining what they will get in return. Some concessions should be non-negotiable.

First, the banks should accept the presence of a government official or civil servant on their boards of directors and remunerations committees. The banks will need constant reminding that they owe their survival to public money and that they should start running their businesses with more respect for the public interest.

Second, the banks should not treat the government's equity stake like a simple loan. They cannot expect that, when the current crisis has passed, government will step back from its investment without extracting a profit. Having part-nationalised the banks, the state must manage its shareholding to yield the best return for the taxpayer.

Third, the banks must not hoard their new capital. The rescue is only justified if it brings liquidity back to the economy. That means lending on the High Street again.

That is the minimum required to make the package palatable to voters. It would be a fair exchange for government ramping up the national debt, blasting a hole in its spending plans and facing down public rage at the sight of rich financiers piling into state-sponsored lifeboats while everyone else must swim through the coming recession or sink in it.

Having stabilised the banking sector, the government will have to embark on wider reform of the City. It must make financial services more transparent, more accountable and subservient to the wider economy.

That means, for example, curtailing the anonymous trade in complex securities and derivatives. Those arcane instruments are at the heart of the current crisis because they were used to disguise liability for debt defaults - spreading hidden risk across the global system. If they are to survive at all, they should be swapped on a regulated exchange, where traders are identifiable and their accounts open to scrutiny.

The rating agencies, which failed to identify how risky many widely traded assets were, must also be reformed. The conflict of interest whereby the agencies take fees from the banks whose investments they are supposed to analyse must be addressed.

The banks must separate their investment and retail arms. They must decide whether they want to be taking deposits and lending to customers or managing funds and speculating on financial markets. They must also be forced to maintain healthy ratios of capital to debt - storing cash during a boom so they can lend in a downturn.

None of that can be achieved without the banks' co-operation. But there seems little prospect of that when the bankers are not showing any remorse. While politicians are accountable at the ballot box, the bankers face no equivalent public judgment. While the Chancellor and the Prime Minister take to the airwaves to defend their actions, City bosses have gone to ground. Not one executive has owned up to presiding over a catastrophe, apologised and resigned. No bankers have put themselves in a public forum to explain, for example, why they deserved to be paid multimillion pound bonuses for decisions that led to the biggest economic crisis in living memory, or what drove them to make those decisions, if not arrogance and greed.

If the bankers will not volunteer to give an account of themselves, they must be compelled to do so before a public inquiry. It will take a forensic examination of how this crisis came about to design a regulatory system to prevent it being repeated. It will also take some show of contrition by bankers before public confidence and trust in the financial system can be restored.

For a generation, politicians have taken orders from the City, creating tax breaks and cutting regulation lest the captains of global finance flee to softer jurisdictions abroad. Some bankers think their power will not diminish. Some have even complained that the government was not quick enough to respond to their needs, that Mr Brown and Mr Darling 'dithered'. That cry for help marks an abrupt change in tone from the old demands for freedom from interference.

The City seems to believe it can turn to the state for aid in a crisis and the return to business as usual. Wrong. The bankers also seem to think they enjoy indefinite protection by the dwindling band of politicians, mostly Conservatives, who still opine on the benefits of deregulation and gigantic pay incentives for the City. Wrong again.

With £500bn of taxpayers' money keeping them afloat, the banks are in no position to be giving orders, nor to be paying themselves exorbitant sums. With public money must come public accountability. The banks thought they were too big for politicians to let them fail and they were right. But if voters get no explanation and nothing in return for their money, their fury will be too great for politicians to ignore.

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The meltdown holds up a mirror to market fundamentalists

KAUSHIK BASU

The global financial meltdown that we are in the midst of is set to go down in history as one of the worst economic disasters. Despite the US government's $700 billion rescue package, the financial crisis is likely to spill over into the real economy, causing job losses and rising prices. This downturn is also expected to wash ashore in distant nations . India's growth rate is expected to drop from the recent 9 per cent to 7 per cent.

The mystifying feature of financial crises is 'contagion'. A problem in one industry or region can leap and escalate to others, like an influenza epidemic. The present crisis began in the US housing market. Starting eight years ago, there was a large expansion of loans to homebuyers in the 'sub-prime market', that is, the segment of borrowers who are considered 'high-risk'—people with uncertain incomes, for instance.

There were two factors behind this credit expansion. Mortgage companies discovered the art of packaging bundles of different mortgages and selling them off to large investment banks. These miscellaneous bundles were difficult to value, leading to genuine miscalculations and the under-estimation of risk. But there was another, less understood problem. Each lender calculated that, in the event of a default, it would foreclose on the mortgaged property and recover much of the loan. When, comforted by this, lots of mortgage companies and banks began extending credit to the sub-prime market, one important constant changed.

Since the new home-buyers were more risky and many of them had taken 'teaser loans' (where the repayment burden is low to start with but grows rapidly later), the overall default rate rose. With so many homes coming back on the market, housing prices began to tumble. Suddenly the property that the banks were foreclosing on had less value, and the banks saw their own asset position deteriorating. Once news of this got out, there was a crisis of confidence with firms cutting back on investment and long-term contracts. That is when the big banks and insurance companies started collapsing.

The role of confidence in financial markets is complex. The broad outlines are best conveyed by a well-known Bengali short story by Shibram Chakraborty: one Saturday morning the narrator finds himself in desperate need of Rs 500. He goes to a gullible friend named Gobar and, by promising to return him the money by Wednesday, gets him to give the loan. Predictably, when Wednesday comes, the narrator is in crisis. So he goes to his old school friend Harsha, borrows Rs 500 with the promise of returning it by Saturday, and repays Gobar. On Saturday, he is back to Gobar for a loan once again. And this becomes a routine: take from one on Saturday, give it to the other; take from the other on Wednesday and return it to the former.

Crisis strikes one day at a street crossing when the narrator bumps into both of them. But he quickly recovers his equanimity, and says he is glad to see them together and has a simple suggestion that will save him a lot of time and leave their situation unaltered. Every Saturday, he tells Gobar, give Harsha Rs 500; and, every Wednesday, he tells Harsha, give Rs 500 to Gobar. Never stop and nothing will change.

Facetious though the story is, it explains the role of confidence well. If Harsha believes that the narrator will always have access to a loan from Gobar, it is safe for him to lend the money, and likewise for Gobar. The moment doubt enters one of their heads, the game is lost. The fear of a stoppage in lending can cause lending to stop.

It is this fragility of financial markets that makes intelligent regulation on the part of government so vital. In the US, the Glass-Steagall Act of 1933 was the bulwark of good finance.Wanton liberalisation of the law over the last several years and the failure of regulation to keep up with the growing complexity of markets prepared the brew for this crisis. Conservative thinkers, who say that it should all be left to the market, stand out not so much for their extreme ideology as for their stupidity. It is true that no one fully understands these crises, but there is enough research in economics now for us to know that if these fluctuations are to be kept within limits, there is no escape from intelligent regulation.

(Kaushik Basu is chairman and professor, Department of Economics, Cornell University. He will write a monthly column for Outlook).

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Saturday, 11 October 2008

Castoffs of the universe

Where's the rescue plan for the banks' unwanted human capital? Try this rehabilitation package

The Guardian,
Saturday October 11 2008
larger | smaller
Article history

For the first time for a long time the masters of the universe, our big banking friends, are finding that the universe is actually a cold, dark and generally inhospitable place. The government has very kindly bailed out the banks, but not much thought has been given to the bankers themselves. Fortunately I have given this a great deal of thought and have worked out a rescue plan for these individuals which will guarantee long-term growth for them personally.
The first thing I did was some simple maths. I stress simple as opposed to the highly complex maths that the masters of the universe did which came up with such brilliant algorithms as 0x1 =3. I have calculated that for the salary of one master of the universe you could pay for 200 bank clerks. Personal banking would be immeasurably improved by having real people involved, in the same way that policing would come on in leaps and bounds if it involved actual police where you needed them.
In my plan, everyone's current account would come with a clerk attached. This person would be your personal financial butler who would do everything for you stopping only slightly short of ironing your bank notes. They would be taught that their wages depended on your money and would very quickly become as interested in your financial health as you were. Getting money from a hole in the wall is very much like receiving your prison meal through a hole in your door. Much more satisfying would be a clerk in the window system, wherein a smiling official would sit behind a window and give you cash when you needed it. This would cut down substantially on chip and pin fraud as the clerk would ask for your mother's maiden name or, ideally, would actually know your mother.
Heartening though the sight of your own bank clerk waiting at the bus stop in the morning would be, it still leaves the problem of what to do with the redundant masters of the universe. My rescue plan sees fund managers reassigned as fund raisers. They would be in charge of jumble sales. Not once a year but every weekend. This would mean they would spend much of their working week collecting boxes of junk from people's garages and then delivering the junk back to different garages after it had been displayed all Saturday afternoon without selling. I know these guys are highly motivated and competitive so I would put them on performance-related pay. They will get 10% of the price they can get for the plastic baby doll with one arm. In this way they will get a new and finer appreciation of what it means to sell "junk".
As anyone with a useful trade will tell you, it's not easy to move from one trade to another. With this in mind I would keep hedge fund managers' job descriptions almost intact except for the letter "d". They would become a new business called Hedge Fun. As the name implies this would be a gardening and landscaping service with special emphasis on hedge and shrubbery maintenance. Having promised endless growth to their customers, they would now be in charge of controlling the only real source of endless growth, nature. Every hedge they trimmed would be a Promethean reminder of the limits of growth elsewhere.
I have given a lot of thought to short sellers. My immediate solution was to insist they wore shorts as a badge of honour for service to the community. But that would be short-changing them, which we wouldn't want to do as that would mean that we were no better than them. Short sellers are highly motivated and intelligent types who make their money spotting, encouraging and betting on failure. There are many roles open to this sort of person. One such would be an operative whose sole task would be informing people about personal failures such as their driving test, being dumped by their partner or contracting a terminal illness. The short seller would always be on hand to share the bad news. Their income would come from tips.
The heart of darkness of the current financial crisis is the nasty little derivatives that turned sow's ear mortgages into silk purse bonds. These perfectly married individual greed to corporate greed by removing the simple 1+1=2 equation from banking. Happily my plan will also help derivative traders. I estimate that there is about £1bn worth of coppers in circulation that no one's using. I think we should give all these coppers to the masters of the universe to help them out of their troubles, on the understanding that they count it. By hand. I am confident that by the time they've finished, if not before, they will have rediscovered the forgotten art of adding up.
• Guy Browning writes the How to column in Weekend magazine and is the author of Maps of My Life

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“Where Will The Money Come From?”

By Devinder Sharma

10 October, 2008
Countercurrents.org

Only a few months back, the day Finance Minister P Chidambaram in his budget speech announced Rs 60,000-crore loan waiver for the beleaguered farming community, there was an orchestrated outcry: "Where will this money come from?" Television anchors were visibly angry at this 'supposed windfall' for the farmers, the print media was outraged at this 'political and not economic' decision just before the ensuing elections, and the industry leaders were seen sulking.

Six months later, no one is asking the same question. With the global financial crisis failing to work itself out, the Reserve Bank of India (RBI) is under pressure to intervene. Soon after the Wall Street mayhem, the RBI had pumped in Rs 84,000-crore in the domestic banking system through liquidity facility adjustment. An additional Rs 20,000-crore has been released through a 0.5 per cent reduction in cash reserve ration (CRR).

Sounds technical but let me simplify. Liquidity in layman term means 'fund availability' or in simple words making available more cash. All over the industrialised world, governments are stepping in to provide more cash in the hands of the private banks, and India is no exception.

Despite the Finance Minister saying that the fundamentals are strong, the banks are on a massive borrowing spree. In the first week of October alone, they borrowed Rs 90,075-crore every day from RBI through liquid facility adjustment. In the days to come, the RBI is under pressure to release another Rs 30,000-crore through the CRR, and also to cut repo rate – the rate at which it lends to banks. And thanks to the loan waiver, the banks will receive another Rs 50,000-crore in the coming weeks as part reimbursement for the farm loan waiver and fertiliser loan.

Isn't it a fact that Rs 60,000-crore loan waiver (later enhanced to Rs 71,000-crore) was actually a relief to the banks? What seemed to be a 'political' decision in the name of pulling out the indebted farmers was actually meant to maintain and sustain the health of the banking system. If the government had not provided the loan waiver, banks would have been in terrible liquidity crisis. With farmers unable to repay, these banks would have been saddled with massive non-performing assets (or a shortfall in liquidity) or non-availability of Rs 71,000-crore in cash.

In other words, the loan waiver was a partial bailout for the banks. Now no one is asking: "Where will this money come from?" On the contrary, most analysts are asking for more 'speed and sagacity' to tide over the crisis.

If only such 'speed and sagacity' was shown to tide over the terrible agrarian crisis sweeping throughout the country for over a decade now, thousands of farmers would have been saved from committing suicide. If only the RBI had stepped in to make more cash (or liquidity) available, the nation could have easily provided an assured employment to each and every Indian not only for 100 days but for all the 365 days in a year. The National Rural Employment Guarantee Programme (NREGA) can be easily extended to bring every unemployed Indian under its gambit.

And it is here that I fail to understand the sagacious logic of keeping the poor hungry and then expecting a higher economic growth trajectory; of paying a multi-million dollar salary (in addition to lucrative perks) to the bosses of the banks and corporate houses and then make the man on the street pay for the losses; in other words the logic behind privatising the profits and socialising the losses.

Take the case of the bankrupt Lehman Brothers. While the shareholders in the company have been wiped out, Richard Fuld, its chief executive, walks away with US $ 480 million as his personal remuneration over eight years, and this includes a $ 14 million ocean-front villa in Florida, and a home in an exclusive ski resort. Lawmakers investigating the bailed out insurance company AIG, were shocked to learn that days after the government rescued the company, it unashamedly spent US $ 44,000 on a posh California retreat for its executives, complete with spa, banquets and golf outings.

Why blame the American corporate leaders when US president George Bush himself had given them a free rope: "Government should not decide the compensation for America's corporate executives." Probably what he meant was that come what may, the US government will continue to provide funds to meet obscene corporate salaries and perks.

Prime Minister Manmohan Singh too had removed the upper ceiling on corporate salaries. According to Merril-Lynch and Capgemini, driven by impressive economic gains and robust market capitalism growth in 2007, India led the world in High-Net-Worth-Individual population growth at 22.7 per cent. Two year earlier, in 2005, there were 83,000 high net worth individuals with a wealth of at least $ 1 million (and this does not include immovable property).

This brings me back to the same question. How long will the world go on encouraging an economic system that makes the rich richer and the poor poorer? While 36 billionaires in India have a collective economic wealth equivalent to one-third of the country's GDP, the country's 600 million farmers collectively account for only 17 per cent share. With every passing year, the share of agriculture in GDP continues to slide down still further. No wonder, the average monthly income of a farm household (which includes five members of a family and two cattle) does not exceed Rs 2,400.

Bailing out the farmers from a distressing situation is always considered to be bad economics. It is branded as a political compulsion, and the sooner politicians emerge out of it the better it would be for economic growth and development. This economic prescription, which every economists worth the name is willing to endorse, is invariably for the farming community, the landless workers and the marginalised communities. They need to learn to be enterprising, and therefore must stop living on government subsidies.

When it comes to the enterprising millionaires -- corporates and the banks -- government bailouts are not only a must, but should be done speedily. "Where will the money come from?" is not a question to be asked when you are subsidising the rich and the elite. It is their birth right. You need to understand.