Fallout of the COLLAPSE of Merill and Lynch and Lehman.
Francis Fukyama might be eating his own own words about the end of History , as the present financial meltdown as a result of the subprime crisis ,has resurrected the role of the Govt. as the lender of the last resort.
Before we get into the futile debate about the role of derivatives and other financial instruments in engendering this crisis, it was always my contention that laissez faire , a euphemism for unbridled Capitalism,does have its own pitfalls, what with its faster wealth creation , albeit with large disparities.
It is too farfetched to make comparisons with the events of 1929 (as bete noires of the presently besides themselves with glee) but a market economy is always tested for its resilience to bounce back given the nature of business cycles, as it did after the Asian financial crisis of 1997,the failure of LTCM, collapse of World Com, Enron, and the Dot Com crash of 2001 etc.
One disquieting feature of the present meltdown is that no one has a clue as to the extent of the malaise, and many seem to be watching with bated breath as events unravel. This confusion is a result of the opacity of the derivatives market which has now become the subject of morbid jokes about how the security holders themselves being ignorant about these exotic risk management instruments.
One way out to mitigate the effects of these buisness cycles is to put systems in place to check irrational exuberance ,which entities and individuals are prone to, when the going is good ,.i.e strengthening the regulatory framework, which may not necessarily be another Sarbanes Oxley law for the financial markets and investment banks.
There is nothing which can be done to rein in rogue elements like Mike Milliken,Ivan Boesky, Nick Leeson who are motivated by pure unadulterated greed.
I was inspired by Arun Maira's writings , who, as Chairman of the Boston Consulting Group, highlighted the eventual evolution of Capitalism into a middle path wherein the focus is more on the Corporate Social Responsibility part , rather than focussing entirely on TQM or the bottomline.
The after effects and its introspection.
The present meltdown should have a sobering effect on the I-bankers who over leverged themselves starting with the $27 billion leverged buyout of RJ Reynolds by KKR, which marked the beginning of brazen greed on Wall Street and glamourization of LBOs and which was captured in the book 'Barbarians at the Gate'. Wall Street high finance entered a new aggressive phase from then on and the value of the such M& A's increased exponentially over the decade and terms like,hostile takeovers,poison pill, white knight , breaking up the company, hiving off unprofitable divisions became the lingua franca in Wall Street and I banking acquired a sexy image compared to staid and stodgy conventional banking.
Privatization of profits and nationalization of losses is the latest sneer among tax payers who will be picking up the estimated $700 billion -1 trillion tab.
This is not the first instance of State intervention in the bastion of Capitalism post 1929. It started with $ 1 billion federal guaranteed loan to Chrysler , teethering on the brink of bankruptcy in 1978, by a Democratic Administration and this action was critisised by the rival Republican challenger ,Ronald Reagan, during the 1980 presidential Campaign.It is another story that Lee Iacocca, who engineered the remarkable turnaround after being fired from Ford Motors went on to become an iconic business legend.
All these throw up a larger question on the present set of values set by a few oligarchs from the blue blooded Business Schools, who through a clever world of networked contacts, keep alive this system of 12 hour workdays ,unjustifiably high starting salaries, mind boggling seven figure performance bonuses which are largely dispropotionate to the 'value addition' in the outrageously expensive B-Schools, which literally preclude raw intelligence and keeps out a large section of the masses from its hallowed portals through its formidable fee structure.
Many are not aware how subtly they are being manipulated by the present oligarchical system, for whose glamourisation, the mainstream respected business journals are no less responsible.
Why the recovery wont be as swift as the 1983 recovery.
The present slowdown/meltdown cannot be classified as a classical recesion or the trough of a business cycle in the conventional sense, as the previous recessions took place during high inflationary times and the last three ones( except the 2001 dot com burst) coincided with oil shocks and high commodity prices.The meltdown came about as a result of binging on cheap credit amidst an unprecedented flood of liquidity,and was triggered by the greed and recklessness of the financial system ,which like a rising tide ,lifted all boats.Now since the party is over with the bubble bursting, as result of the global imbalances , which in turn had to be addressed for the successful conclusion of the Doha round of WTO talks.
These global imbalances,which were a result of undervalued currencies, as a result of the manipulation of exchange rates mainly by China, to flood the world with cheap imports and use the ensuing buildup of reserves to fund the gargantuan needs of the huge trade and budget deficits in the US, thus keeping interest rates low and keep the consumption juggernaut going.
This symbiotic relationship suited everyone fine, and little heed was paid to clarion calls to addrsss this issue which was building up as a bubble.The swing from politically induced supply side policies in the US and Great Britain to crass Keynesianism, along with the crash in commodity prices, all within a space of months, and fighting the subsequent defaltionary pressures is simply breathtaking.
The extent of the leverage and the disaster it has wrought, alongwith the ensuing malaise can be gauged from the speed of the spread of the contagion globally ,and subsequent crash in commodidy prices within a span of a month , alongwith the unprecedented coordinated global response to infuse liquidity.This not having the desired effect , and ,instead the world is heading for a global deflationary spiral amid zero interest rates and widening credit spreads,similar to what Japan experienced in 1989. This coordinated global response did however stave off a major collapse or catastrophe of the financial system, but it is high time they brace themselves for a debasement of their currencies as these efforts at near zero Interest rates and monetisation of their deficits, can have adverse consequences.
The collapse of the stock markets alongwith the trillions wiped out in pension funds will ensure that Americans will cut down their consumption and drastically deleverage themselves and start saving like their European brethren, as many are having an uncanny feeling that that their social security and pension system is under threat due the meltdown in the stock markets and no amount of federal intervention is going to change the fundamental reality.
It is high time for global decoupling amid this global deleverging, and the rest of the world ,sans the US and Europe, starts growing faster and increase their share of world GDP and consumption, so that in future ,nations can be insulated from the 'cold' effect of a nation which accounts for 24% of the world GDP , and avoid catching a 'pnemonia' by reducing dependence on it gradually.
Since 'The World is Flat', as per Thomas Friedman,the slack from this slowdown will be filled by the developing nations, as the level playing field and the competitive advantage of nations is a bit levelled after globalisation and epochal change in communications like the the Interent, unlike in 1982-83.
Before we get into the futile debate about the role of derivatives and other financial instruments in engendering this crisis, it was always my contention that laissez faire , a euphemism for unbridled Capitalism,does have its own pitfalls, what with its faster wealth creation , albeit with large disparities.
It is too farfetched to make comparisons with the events of 1929 (as bete noires of the presently besides themselves with glee) but a market economy is always tested for its resilience to bounce back given the nature of business cycles, as it did after the Asian financial crisis of 1997,the failure of LTCM, collapse of World Com, Enron, and the Dot Com crash of 2001 etc.
One disquieting feature of the present meltdown is that no one has a clue as to the extent of the malaise, and many seem to be watching with bated breath as events unravel. This confusion is a result of the opacity of the derivatives market which has now become the subject of morbid jokes about how the security holders themselves being ignorant about these exotic risk management instruments.
One way out to mitigate the effects of these buisness cycles is to put systems in place to check irrational exuberance ,which entities and individuals are prone to, when the going is good ,.i.e strengthening the regulatory framework, which may not necessarily be another Sarbanes Oxley law for the financial markets and investment banks.
There is nothing which can be done to rein in rogue elements like Mike Milliken,Ivan Boesky, Nick Leeson who are motivated by pure unadulterated greed.
I was inspired by Arun Maira's writings , who, as Chairman of the Boston Consulting Group, highlighted the eventual evolution of Capitalism into a middle path wherein the focus is more on the Corporate Social Responsibility part , rather than focussing entirely on TQM or the bottomline.
The after effects and its introspection.
The present meltdown should have a sobering effect on the I-bankers who over leverged themselves starting with the $27 billion leverged buyout of RJ Reynolds by KKR, which marked the beginning of brazen greed on Wall Street and glamourization of LBOs and which was captured in the book 'Barbarians at the Gate'. Wall Street high finance entered a new aggressive phase from then on and the value of the such M& A's increased exponentially over the decade and terms like,hostile takeovers,poison pill, white knight , breaking up the company, hiving off unprofitable divisions became the lingua franca in Wall Street and I banking acquired a sexy image compared to staid and stodgy conventional banking.
Privatization of profits and nationalization of losses is the latest sneer among tax payers who will be picking up the estimated $700 billion -1 trillion tab.
This is not the first instance of State intervention in the bastion of Capitalism post 1929. It started with $ 1 billion federal guaranteed loan to Chrysler , teethering on the brink of bankruptcy in 1978, by a Democratic Administration and this action was critisised by the rival Republican challenger ,Ronald Reagan, during the 1980 presidential Campaign.It is another story that Lee Iacocca, who engineered the remarkable turnaround after being fired from Ford Motors went on to become an iconic business legend.
All these throw up a larger question on the present set of values set by a few oligarchs from the blue blooded Business Schools, who through a clever world of networked contacts, keep alive this system of 12 hour workdays ,unjustifiably high starting salaries, mind boggling seven figure performance bonuses which are largely dispropotionate to the 'value addition' in the outrageously expensive B-Schools, which literally preclude raw intelligence and keeps out a large section of the masses from its hallowed portals through its formidable fee structure.
Many are not aware how subtly they are being manipulated by the present oligarchical system, for whose glamourisation, the mainstream respected business journals are no less responsible.
Why the recovery wont be as swift as the 1983 recovery.
The present slowdown/meltdown cannot be classified as a classical recesion or the trough of a business cycle in the conventional sense, as the previous recessions took place during high inflationary times and the last three ones( except the 2001 dot com burst) coincided with oil shocks and high commodity prices.The meltdown came about as a result of binging on cheap credit amidst an unprecedented flood of liquidity,and was triggered by the greed and recklessness of the financial system ,which like a rising tide ,lifted all boats.Now since the party is over with the bubble bursting, as result of the global imbalances , which in turn had to be addressed for the successful conclusion of the Doha round of WTO talks.
These global imbalances,which were a result of undervalued currencies, as a result of the manipulation of exchange rates mainly by China, to flood the world with cheap imports and use the ensuing buildup of reserves to fund the gargantuan needs of the huge trade and budget deficits in the US, thus keeping interest rates low and keep the consumption juggernaut going.
This symbiotic relationship suited everyone fine, and little heed was paid to clarion calls to addrsss this issue which was building up as a bubble.The swing from politically induced supply side policies in the US and Great Britain to crass Keynesianism, along with the crash in commodity prices, all within a space of months, and fighting the subsequent defaltionary pressures is simply breathtaking.
The extent of the leverage and the disaster it has wrought, alongwith the ensuing malaise can be gauged from the speed of the spread of the contagion globally ,and subsequent crash in commodidy prices within a span of a month , alongwith the unprecedented coordinated global response to infuse liquidity.This not having the desired effect , and ,instead the world is heading for a global deflationary spiral amid zero interest rates and widening credit spreads,similar to what Japan experienced in 1989. This coordinated global response did however stave off a major collapse or catastrophe of the financial system, but it is high time they brace themselves for a debasement of their currencies as these efforts at near zero Interest rates and monetisation of their deficits, can have adverse consequences.
The collapse of the stock markets alongwith the trillions wiped out in pension funds will ensure that Americans will cut down their consumption and drastically deleverage themselves and start saving like their European brethren, as many are having an uncanny feeling that that their social security and pension system is under threat due the meltdown in the stock markets and no amount of federal intervention is going to change the fundamental reality.
It is high time for global decoupling amid this global deleverging, and the rest of the world ,sans the US and Europe, starts growing faster and increase their share of world GDP and consumption, so that in future ,nations can be insulated from the 'cold' effect of a nation which accounts for 24% of the world GDP , and avoid catching a 'pnemonia' by reducing dependence on it gradually.
Since 'The World is Flat', as per Thomas Friedman,the slack from this slowdown will be filled by the developing nations, as the level playing field and the competitive advantage of nations is a bit levelled after globalisation and epochal change in communications like the the Interent, unlike in 1982-83.
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