Through this blog I want to raise a conceptual discussion amongst economists of all stripes as to how the markets should run or be made to run. Why can this world not have an economic model which is more inclusive of the frailties of human nature? The motive for this conceptual discussion came from reading Berkshire Hathaway Inc’s annual report of 2008, and an article on Bloomberg.
Warrant Buffet is one of the richest persons on this planet, and his perspective on money matters has always been very insightful. His narrative in Berkshire’s annual report is always a treat for its readers – its report for 2008 was no exception. But then, what has Oracle of Omaha’s document got to do with the heading of this blog? Plead read on, you will see the connection.
Let me quote Buffet from page 11 of the report which deals with home mortgages: “At that time (Y2008?, italics added), much of the industry employed sales practices that were atrocious. Writing about the period somewhat later, I described it as involving 'borrowers who shouldn’t have borrowed being financed by lenders who shouldn’t have lent'”.
He further states on same page: “To begin with, the need for meaningful down payments was frequently ignored. Sometimes fakery was involved……..The resulting mortgages were usually packaged (“securitized”) and sold by Wall Street firms to unsuspecting investors. This chain of folly had to end badly, and it did.”
Wait! What the hell was going on in the United States – lenders happily making out loans that borrowers couldn’t repay out of their incomes?! And, Wall Street selling mortgages to unsuspecting investors?! Is this what free market is supposed to be – that any organisation can do anything to rack up huge profits, at least in the short-term, and the top executives can fill their pockets with millions of ill-gotten bonuses?
Is free market concept supposed to have no oversight on the diabolical and self-serving CEOs who may be going berserk in the market tearing down ethics and honesty to shreds? Is this what economist Milton Friedman’s concept of free markets was or is? Is Friedman feeling happy in his grave watching what unbridled greed of human nature has done to the world?
Did it never occur to the ‘great’ Friedman that free market concept should also bequeath on the top executives (of organisations which deal with tonnes of money) some kind of responsibility towards the millions of people working in hundreds of thousands of organisations which could directly or indirectly get potentially exposed to risks and losses due to the shenanigans of the people who run the said (financial) organisations?!!
Today millions and millions of people have lost jobs because of an imploding market around the globe caused by the shameless, villainous ‘confidence tricksters’ of United States (and some of their ilk in Europe) who funnelled hundreds of billions of dollars in a housing bubble. Do these immoral wicked rotten executives of the mortgage lending companies and the various banks realise the pain, the tears and the suffering of the millions – the shattered dreams, disrupted future, lost opportunities of those hapless people?
Why did the policy makers in US in different periods of 1900s not pay heed to the sane concept of another top economist – James Tobin? It seems Tobin’s experience of the depression as a teenager in the 1930s gave him a lifelong loathing of unemployment.
The Bloomberg article, referred to above, writes: “As a young professor I did a paper where I analyzed the optimal unemployment rate,” said Joseph Stiglitz, a professor at Columbia University in New York, who knew Tobin at Yale. “Tobin went livid over the idea. To him the optimal unemployment rate was zero.”
The article mentions at another place: “Like Keynes, Tobin was an advocate for the role of government in maintaining full employment, said James Galbraith, an economist at the University of Texas in Austin. The current economic and financial crisis has validated that philosophy, said Galbraith, a former Tobin student and the son of the late John Kenneth Galbraith, who was a friend of Tobin.”
“It’s clear that the position that the federal government has a responsibility for the level of employment, for the economy, has prevailed,” Galbraith said. “The position that the Fed can walk away from the level of employment has completely collapsed….”
My question is: why couldn’t Friedman’s and Tobin’s ideas be married and a governing economic model more inclusive of the frailties of human nature be developed and implemented – in US and other economies? Has the current economic crisis not demonstrated that any economic model ignoring the role of frailties of human nature is incomplete and flawed, if I may?
The issue is not whether Friedman is great or Tobin is greater. The issue is there got to be a economic model that is practical in nature, and not one which is predicated on idealistic premises – idealistic premises, like, humans will always act responsibly, humans will never succumb to greed, self-aggrandisement etc.
Tobin (Nobel Prize winner in 1981) in an essay written for the Nobel committee mentioned, “The miserable failures of capitalist economies in the Great Depression were root causes of worldwide social and political disasters.” Economics “offered the hope, as it still does, that improved understanding could better the lot of mankind.”
Tobin’s friend and colleague William Brainard says, “He (Tobin) believed financial markets could serve a valuable service in diversifying risk and moving capital in efficient ways.” “But he was not someone who believed the market always got it right and that private incentives were always aligned with the public good.”
Almost a clairvoyant, Tobin seems to be now in hindsight. But what he said and believed in appears to be more prescriptive and applicable for the ways we humans behave. We must keep in mind that this world is still not made up of people like Mr. Spock of Star Trek who was paragon of logical mind.
After this massive economic bloodletting can we now decide to mend our thinking and redefine the way the markets ought to run so that people don't lose jobs again at such a massive scale? Or, will we again relapse in complacency once we are out of this horrible downturn?
Mistakes teach us to learn from it so that we don’t repeat them. Ideology of any political party or of an individual should not be allowed to cloud the objectivity of human thinking. The greater good of the society is supreme and should be so. Let the political leaders of the present realise this and lay the foundation for the future.
Showing posts with label free market. Show all posts
Showing posts with label free market. Show all posts
Sunday, March 1, 2009
Saturday, October 25, 2008
WILL FREE-MARKET SUPPORTERS PLEASE SHUT UP!
John McCain, the Republican presidential candidate, is trying to paint his Democrat rival as a socialist by saying that Obama's so-called "spreading the wealth" phrase essentially aims to kill capitalism in US. What McCain is trying to do is to scare American voters in whose psyche 'capitalism' resides at a sub-conscious level.
Not that every American understands the nuances of capitalism, free market theories or what socialism actually means but probably every American equates uncontrolled free enterprise with capitalism and somehow thinks that it is synonymous of democracy. And, when the Arizona senator creates the sceptre of socialism in his speeches he is trying to touch that part of American psyche and create a fearful revulsion in the voters' minds.
It is a good tactic for McCain, and it may work to some extent. But if this guy really believes in "Country First", he should understand that the so-called free-market mechanism without any oversight has brought US to this economic cataclysmic state. First, let us quickly recap what one of the staunchest supporter of unregulated free-market said the other day.
Alan Greenspan, who was Fed Chairman from 1987-2006, while deposing in front of US House of Representative's Government Oversight committee on Oct 23 acknowledged under questioning that he had made a “mistake” in believing that banks, operating in their own self-interest, would do what was necessary to protect their shareholders and institutions. Greenspan called that “a flaw in the model ... that defines how the world works.”
He went to admit that the "flaw" in the assumptions he used over the past 40 years were that banks and other financial institutions were best able to protect the interest of their shareholders.
The financial crisis even prompted the Republican Greenspan, a cheer leader for free markets, to propose that government consider tougher regulations, including requiring financial firms that package mortgages into securities to keep a portion as a check on quality. He said other regulatory changes should be considered, too, in such areas as fraud.
Now, let me mention some relevant excerpts of what the Prime Minister of India, Dr. Manmohan Singh, said at the Asian-European leaders' meet on Oct 23. Singh, a noted economist himself, stated:
"The international financial crisis has resulted from three failures:
(a) A regulatory and supervisory failure in major developed countries;
(b) A failure in risk management in private financial institutions;
(c) A failure in market discipline mechanism
These are not my views but those of the distinguished Managing Director of the IMF, with which I agree. We must analyse objectively how and why these failures have occurred with such ferocity. This is necessary to put in place a new set of rules which will prevent recurrence of such failures. The sad truth is that in this age of globalisation we have a global economy of sorts but it is not supported by a global polity to provide effective governance."
What the aforementioned people - Greenspan and Dr. Singh - are essentially trying to say is: stop the chest thumping stentorian pro-free market assertions; recognise the inherent greed in human psychology and put in place mechanisms that will prevent such financial melt-downs.
What is said above does NOT by any means usher in socialism, nor does it mean that capitalism is moving towards ultimate death, all this means is - for God's sakes don't remove the referees from the hockey game and allow the players to regulate themselves, the result will be chaos on the ice!
I am not sure McCain, who is intellectually challenged, will understand all that is stated above. On his part, the Republican candidate, who has his back to the walls, will clutch on to anything by which he can scare the voters away from the Democrat nominee. 'Scare the voters' tactics has been used by Republican in the past, they are trying this again.
Do the American voters see through the Republican tactics? I don't know for sure. But one hopes for America's sake that they do. Because, if they don't they will end up with a Prez and a Veep who are a disastrous combination of senility, dis-ingenuity, shamelessness, pathological abhorrence for truth, one-upmanship, utter lack of intellectual ability and gargantuan incompetence. God help America!
Not that every American understands the nuances of capitalism, free market theories or what socialism actually means but probably every American equates uncontrolled free enterprise with capitalism and somehow thinks that it is synonymous of democracy. And, when the Arizona senator creates the sceptre of socialism in his speeches he is trying to touch that part of American psyche and create a fearful revulsion in the voters' minds.
It is a good tactic for McCain, and it may work to some extent. But if this guy really believes in "Country First", he should understand that the so-called free-market mechanism without any oversight has brought US to this economic cataclysmic state. First, let us quickly recap what one of the staunchest supporter of unregulated free-market said the other day.
Alan Greenspan, who was Fed Chairman from 1987-2006, while deposing in front of US House of Representative's Government Oversight committee on Oct 23 acknowledged under questioning that he had made a “mistake” in believing that banks, operating in their own self-interest, would do what was necessary to protect their shareholders and institutions. Greenspan called that “a flaw in the model ... that defines how the world works.”
He went to admit that the "flaw" in the assumptions he used over the past 40 years were that banks and other financial institutions were best able to protect the interest of their shareholders.
The financial crisis even prompted the Republican Greenspan, a cheer leader for free markets, to propose that government consider tougher regulations, including requiring financial firms that package mortgages into securities to keep a portion as a check on quality. He said other regulatory changes should be considered, too, in such areas as fraud.
Now, let me mention some relevant excerpts of what the Prime Minister of India, Dr. Manmohan Singh, said at the Asian-European leaders' meet on Oct 23. Singh, a noted economist himself, stated:
"The international financial crisis has resulted from three failures:
(a) A regulatory and supervisory failure in major developed countries;
(b) A failure in risk management in private financial institutions;
(c) A failure in market discipline mechanism
These are not my views but those of the distinguished Managing Director of the IMF, with which I agree. We must analyse objectively how and why these failures have occurred with such ferocity. This is necessary to put in place a new set of rules which will prevent recurrence of such failures. The sad truth is that in this age of globalisation we have a global economy of sorts but it is not supported by a global polity to provide effective governance."
What the aforementioned people - Greenspan and Dr. Singh - are essentially trying to say is: stop the chest thumping stentorian pro-free market assertions; recognise the inherent greed in human psychology and put in place mechanisms that will prevent such financial melt-downs.
What is said above does NOT by any means usher in socialism, nor does it mean that capitalism is moving towards ultimate death, all this means is - for God's sakes don't remove the referees from the hockey game and allow the players to regulate themselves, the result will be chaos on the ice!
I am not sure McCain, who is intellectually challenged, will understand all that is stated above. On his part, the Republican candidate, who has his back to the walls, will clutch on to anything by which he can scare the voters away from the Democrat nominee. 'Scare the voters' tactics has been used by Republican in the past, they are trying this again.
Do the American voters see through the Republican tactics? I don't know for sure. But one hopes for America's sake that they do. Because, if they don't they will end up with a Prez and a Veep who are a disastrous combination of senility, dis-ingenuity, shamelessness, pathological abhorrence for truth, one-upmanship, utter lack of intellectual ability and gargantuan incompetence. God help America!
Saturday, October 18, 2008
"McCAIN EQUATES OBAMA WITH SOCIALISTS" - WHAT A FOOLISH STRATEGY!
One of the cable news reported that after grouping Obama with socialist European leaders in his weekly radio address on Saturday morning, at a rally later in the day McCain accused his opponent’s campaign of waging an “attack” on "Joe, the Plumber" and small businesses across America.
How confused McCain is! What is he trying to convey to his audience? How is Obama a 'socialist'? And, by the way, is any debate on socialism or capitalism relevant at this point in time when US is facing the worst economic turmoil since the Great Depression?
First, the day President Bush's administration decided to buy stakes in top 9 profit making Banks of US (Citi Group, Bank of America etc), it marked the end of so-called free market reign in US. Because, the buying of stakes in the banks is indeed partial nationalization of the said banks.
The above move of US administration came after the European nations of G-7 group had already implemented that strategy starting with Britain. In reality all these European nations have also partially nationalized their banks. But are these industrialised G-7 nations crying about socialism having entered their systems? No, they are not.
If partial nationalization smacks of socialism, then surely Mr. Bush has converted in to a 'socialist'! Mind you, he is an avowed Republican.
So, what is the sense in raking up 'socialist' word in the current context? Gordon Brown of Britain, Angela Merkel of Germany, Silvio Berlesconi of Italy, these leaders are not perturbed, even remotely, about 'socialism' supposedly creeping in. Because, socialism is not creeping in - either in Europe or US.
Then, what is McCain's plank of logic when he is using the 'socialist' word in an attempt to scare people away from Obama. And, therefore, where in God's name will there be any logic in trying to connect Obama with any past or present socialist leader of Europe? What will be its relevance? (Is there any socialist leader in Europe at present?)
This then begs the question: Does McCain know what is he talking about? The 72 year Senator doesn't seem to have any idea of how UK, and the G-7 European countries are trying to tackle the present economic crisis. How pathetic! This again goes to show the hopeless shallowness of McCain's knowledge about foreign affairs - an area in which he touts his 'deep' knowledge.
Now, the 'Joe, the Plumber' issue. By now every American knows that Joe is neither a plumber nor his annual income is more than $100,000. So, to cite Joe-the-Plumber case to build any argument regarding Obama's proposed tax strategy is utterly meaningless.
Moreover, how many small businesses make more than $250,000? Ans: Less than 1-2% of all small businesses. Therefore, Obama's proposal to tax people earning more than $250,000 is surely not going to impact the small businesses segment. Hence, it is clear that Mr. McCain has got it wrong here as well.
So, what is the conclusion? The conclusion is that the middle-class segment of USA is not going to be taxed more under Obama's tax plan. On the contrary the American voters need to remember is that Obama proposes to provide monetary help to the middle class segment.
So, how is Obama a socialist? And, how does his tax plan even remotely seem to sneak in socialism? Btw, is it a crime to provide relief to that segment of society which is in dire need of help, namely, the middle-class?
In all the Presidential debates not once did McCain mention the word 'middle-class'. He seems to be totally averse to providing help to this largest segment of American society. And he claims that he going to do good for the people at large, how sickening is that!!
One hopes the US voters will see through the charade of this Republican candidate and provide him a befitting reply by planting a footprint on his posterior on Nov 4.
How confused McCain is! What is he trying to convey to his audience? How is Obama a 'socialist'? And, by the way, is any debate on socialism or capitalism relevant at this point in time when US is facing the worst economic turmoil since the Great Depression?
First, the day President Bush's administration decided to buy stakes in top 9 profit making Banks of US (Citi Group, Bank of America etc), it marked the end of so-called free market reign in US. Because, the buying of stakes in the banks is indeed partial nationalization of the said banks.
The above move of US administration came after the European nations of G-7 group had already implemented that strategy starting with Britain. In reality all these European nations have also partially nationalized their banks. But are these industrialised G-7 nations crying about socialism having entered their systems? No, they are not.
If partial nationalization smacks of socialism, then surely Mr. Bush has converted in to a 'socialist'! Mind you, he is an avowed Republican.
So, what is the sense in raking up 'socialist' word in the current context? Gordon Brown of Britain, Angela Merkel of Germany, Silvio Berlesconi of Italy, these leaders are not perturbed, even remotely, about 'socialism' supposedly creeping in. Because, socialism is not creeping in - either in Europe or US.
Then, what is McCain's plank of logic when he is using the 'socialist' word in an attempt to scare people away from Obama. And, therefore, where in God's name will there be any logic in trying to connect Obama with any past or present socialist leader of Europe? What will be its relevance? (Is there any socialist leader in Europe at present?)
This then begs the question: Does McCain know what is he talking about? The 72 year Senator doesn't seem to have any idea of how UK, and the G-7 European countries are trying to tackle the present economic crisis. How pathetic! This again goes to show the hopeless shallowness of McCain's knowledge about foreign affairs - an area in which he touts his 'deep' knowledge.
Now, the 'Joe, the Plumber' issue. By now every American knows that Joe is neither a plumber nor his annual income is more than $100,000. So, to cite Joe-the-Plumber case to build any argument regarding Obama's proposed tax strategy is utterly meaningless.
Moreover, how many small businesses make more than $250,000? Ans: Less than 1-2% of all small businesses. Therefore, Obama's proposal to tax people earning more than $250,000 is surely not going to impact the small businesses segment. Hence, it is clear that Mr. McCain has got it wrong here as well.
So, what is the conclusion? The conclusion is that the middle-class segment of USA is not going to be taxed more under Obama's tax plan. On the contrary the American voters need to remember is that Obama proposes to provide monetary help to the middle class segment.
So, how is Obama a socialist? And, how does his tax plan even remotely seem to sneak in socialism? Btw, is it a crime to provide relief to that segment of society which is in dire need of help, namely, the middle-class?
In all the Presidential debates not once did McCain mention the word 'middle-class'. He seems to be totally averse to providing help to this largest segment of American society. And he claims that he going to do good for the people at large, how sickening is that!!
One hopes the US voters will see through the charade of this Republican candidate and provide him a befitting reply by planting a footprint on his posterior on Nov 4.
Tuesday, October 14, 2008
PERILS OF UNSUPERVISED FREE MARKET
US finally had to reconcile to the harsh reality - it will be foolhardy to continue to be the breast-thumping champion of the so-called free market.
To buy 'significant' stakes in 9 US banks which are apparently in good health is in other words govermentalization of these institutions. It was a silver bullet that was hard to swallow for the current Republican administration.
Republicans have been strong votaries of the concept that free market mechanism will work fine on its own, and no oversight is necessary. They somehow formed a notion in their minds, of course naively, that people will self-regulate and things will always be hunky dory.
May be some of them were really NOT so naive and may have felt in their heart of hearts that left to themselves the human nature can create mayhem in the free market realm, but probably they were not so bold to rock the boat, as they say.
It is impossible to believe that Republican thinkers were too dumb to visualize the scenario of free market mechanism spinning out of control one day or the other given the increasing financial greed. Anyway, eventually the present dispensation in Washington came around to realize the importance of oversight of free market operations.
But it was sad to see that US which boasts tens of living Nobel Laureates in Economics could not come out quickly with steps to meet the current financial turmoil. Consequently, the US administration became a poor copy cat of their British and European counterparts who came out first with the idea of buying stakes in big banks and implemented without dithering.
Whether you support the philosophy of Party A or Party B, what is of paramount importance when you are presiding over a country's affairs is that you do what is best for your country. You don't remain doped by the ideology of the party you support or remain obstinately shackled to its illogical tenets. But, unfortunately, the Republicans in last decade or so did exactly that. The result: US ended up becoming camp followers of Europe, and fell from the grace of being the most powerful economic nation on this planet.
Wall Street will not be same as it used to be in terms of clout in the world of financial goings-on. And, the Americans will have to get used to be part of pack, not the leader. The sooner it happens the less pain they will feel to adjust to new world order.
To buy 'significant' stakes in 9 US banks which are apparently in good health is in other words govermentalization of these institutions. It was a silver bullet that was hard to swallow for the current Republican administration.
Republicans have been strong votaries of the concept that free market mechanism will work fine on its own, and no oversight is necessary. They somehow formed a notion in their minds, of course naively, that people will self-regulate and things will always be hunky dory.
May be some of them were really NOT so naive and may have felt in their heart of hearts that left to themselves the human nature can create mayhem in the free market realm, but probably they were not so bold to rock the boat, as they say.
It is impossible to believe that Republican thinkers were too dumb to visualize the scenario of free market mechanism spinning out of control one day or the other given the increasing financial greed. Anyway, eventually the present dispensation in Washington came around to realize the importance of oversight of free market operations.
But it was sad to see that US which boasts tens of living Nobel Laureates in Economics could not come out quickly with steps to meet the current financial turmoil. Consequently, the US administration became a poor copy cat of their British and European counterparts who came out first with the idea of buying stakes in big banks and implemented without dithering.
Whether you support the philosophy of Party A or Party B, what is of paramount importance when you are presiding over a country's affairs is that you do what is best for your country. You don't remain doped by the ideology of the party you support or remain obstinately shackled to its illogical tenets. But, unfortunately, the Republicans in last decade or so did exactly that. The result: US ended up becoming camp followers of Europe, and fell from the grace of being the most powerful economic nation on this planet.
Wall Street will not be same as it used to be in terms of clout in the world of financial goings-on. And, the Americans will have to get used to be part of pack, not the leader. The sooner it happens the less pain they will feel to adjust to new world order.
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