Desicritics Category: BizTech: Money

The Grand Bailout- Part 2

Blokesablogin — Thu, 12 Feb 2009 19:41:54 EST

The Senate and Congress haggled while Mr. President went public, spurring support for his Stimulus Bill. Mr. Bush's TARP has yet to be accounted for and we have gone ahead and approved yet another colossal spending bill. In Tamil we say- jaan pona enna muzham pona enna- meaning once you lost a foot who cares if you lost a yard? Right now in America we pass bills to pay bills with printed bills! Now here is a wonderful way to teach children homonyms.

What is interesting to me, being in California, is that our state budget also is on the floor of the house. Unlike Mr. President's gentle but firm arm wrestling tactics, using his powerful oratory skills, Mr. Governor is unable to budge the folks in Sacramento with his real muscle power! He threatened them with no pay if they did not approve the state budget by this week and they are still out until this Friday.

Mr. President will give us some money back, and if I went to college, some tax credit. Being a 1.2 income family, we certainly fall within the eligibility of being "middle class", as defined by the President.

Sacramento will take away my check from the President as we will pay 1% more sales tax and a 5% surcharge on personal income tax. DMV fees will double and gas will go up by 12 cents/ gal. The irony cannot be missed. The democrats in DC are lowering taxes while the republicans here are raising them!

While the local drama continues, the national drama has been sealed and delivered for Mr. president to sign. He is thrilled that this Stimulus Bill is ready by Lincoln's B-day, today.

The State should get some relief from DC. The rise in taxes here will wipe out the tax relief check we will get from the President. Oh well, life continues...

The Grand Bailout

Blokesablogin — Tue, 3 Feb 2009 06:55:03 EST

They say that the US is the capital of capitalism! Given the new numbers of Obama's bailout package, it certainly smacks of nationalization of banks - even if you do not call it that. The Congress has approved it and the Senate is considering it before more money can be printed and passed around.

The bailout tag is set at almost $900 billion. Let us divide this number by the US population. That gives us about $3000 per person (approximately), cash (if at all). But this will not help me pay my mortgage for more than a month, then what do I do for the next month? Let us say, each of my family member, 4 of them, get this, then, I can pay 4 months worth of mortgage and have nothing to eat, if I do not have a job. Already, the consumer debt per capita is an astronomical $38,000 (approximately).

I think this entire bailout business is very wise on Obama's part. He knows that the US economy can handle such a big bailout over and above the one burped down by Bush, before he left office. But there needs to be a new vision plan.

It may actually be better if America learns to pay its debts, stop all its war spending and learn to build a wise society based on educating its children and caring for its sick and protecting the environment. Enough of this macho game of being a "super power". Even the adoption of the fiat money accentuates this self-aggrandizement of self-worth. Let the feminine shakthi prevail until all this mess is cleaned up. That means getting down to WORK.

For too long, America has learned to "tell" others to work and stopped working themselves. Of course, they got paid by others to tell them how to work!LOL! Now it is time for America to roll up her sleeves and get to work- the way she has done every time she has confronted historical moments. Time for new barn raisings.

However, the time calls for human values of compassion, trust, hard work, sacrifice and service. There needs to be a return to bartering of skills and work. You clean my house for an hour and I will tutor your kid for an hour. Neither has to exchange "money". For a change, this valuable exchange will deflate the ridiculously high "salaries" of some people and certain professions.

(aside) The banks need to stop charging any fees for some transactions as long as you trust them enough to put your money in them. The CEOs and the rest can learn to make do with minimums (and return their gold waste paper baskets). The previous bailout that our friend Bush initiated ensured that the CEOs could redecorate their offices and order private jets with tax money. Oh well.

This can be taken as a great opportunity to clean up the inflated self-worthiness of "great" financial institutions who have gone around the world insisting on "their" way of business and "their" rules that furthered swindling across the globe with political support from those respective countries. Wow! Now the kid has cried, "The emperor has no clothes!"

HOWEVER, if we look at the amount of debt carried by America after WWII, the current debt seems paltry, when compared to its income. Of course, America exploited earth's resources the last time (after WWII) to get up and fly. Tis time around, she cannot afford to not be green. So, we have got to think "outside" the proverbial box.

Having heard stories from my neighbor, who is 82 and had lived through the depression as a child, I know the American spirit is unbeatable and can handle this mess. For an obese nation, eating humble pie for a while may be just the right diet ordered by the doctor for a healthy, wealthy life ahead. And I know she will soar up to the skies once more like her eagle.

California is Becoming the Pakistan of the USA

Dr Bhaskar Dasgupta — Sun, 25 Jan 2009 02:49:11 EST

I read on a hedge fund report which said that California is the Pakistan of USA, the idea being that it is becoming seriously economically mismanaged and is in danger of imploding. This comparison with a country is not too far fetched, whatever you say. You hear statement after statement that California, if an independent country, would be the 6th or 8th biggest country in the world in terms of economic metrics. Since then, I have been keeping an eye on that state.

But this state is peculiarly badly governed. Its brand of democracy, the demographics of the state, the high reliance on income taxes, the way the political parties have carved up the state with the constituency units, all combine to make it a fascinatingly amazing place. Because of the fact that the boundaries of the electoral seats are carved out in such a way that they appeal to the extremist wings of the two political parties, the idea of appealing to the centre and doing bi-partisan work is strangely missing. Consequently, the parties are not willing to compromise. Add the "proposition" business and what you end up with is a stream of dollars which are tied ruthlessly to single spending streams. And let us not forget the public sector which is, simultaneously pathetic in terms of efficiency and horribly expensive.

So when faced with a huge economic slowdown, the republicans are refusing to let the governor raise taxes while the democrats are refusing to cut spending. And the credit crunch means that trying to raise money from the markets is nearly impossible because the markets fear the state will not be able to honour its rapidly rising debt. Result? Deadlock. Let me quote some results of this stupid set of circumstances:

California’s state controller said he won’t make $3.7 billion of payments due next month, cutting off income-tax refunds and money for welfare programs amid a record budget shortfall battering the most-populous U.S. state

And from here,

To conserve cash, Schwarzenegger has ordered state offices shut for two days a month and all workers to take two days of unpaid leave each month. The impasse forced a state panel on Dec. 18 to halt funding for $3.8 billion of construction on schools, roads and other public works, a decision officials said might cost tens of thousands of jobs.

And here:

The governor also said he and lawmakers should go without pay for every day they fail to enact a budget past its due date.

(Which might not be such a bad idea).

Schwarzenegger, a multimillionaire, has declined his $212,179 a year salary since he was elected. Lawmakers each make at least $116,208 a year plus $162 per day per diem; legislative leaders make more depending upon their position.

So the bunch of girly men and manly women have effectively driven the state to near fiscal disaster. Some say that people get the leaders they deserve, but surely this isn't the case here? Not sure what is the future of this problem nor the solution, but I can see muchas problemo's in this fiscal train crash of a state.

What do the resident Californians think?

Technorati Tags: USA, Economics

Shareholder's Dissatisfaction at Satyam's Board

Ashish — Fri, 19 Dec 2008 10:10:40 EST

If you have been reading the financial papers for the past two days, you would have realized that suddenly something seemed to be happening at Satyam, and if you were more interested, you would have read that suddenly Satyam seemed to be in the eye of a storm regarding issues of corporate governance.

It all started when Satyam announced that it was planning on spending $ 1.3 billion on diversification, and that too, this amount would have been spent on buying Maytas, a company in which the promoters of Satyam hold a 35% stake. This was not a deal that was approved by shareholders, and apparently not even by the board.

The shareholding of the promoters in Satyam is only 8%, with institutions holding a majority, and this action by the promoters saw an incredible reaction on the stock exchange. Immediately after this move, there was a reaction from shareholders, with the ADR on the US market falling by 52%. The next day, financial newspapers unanimously denounced this move as a gross violation of all norms of corporate governance, and in moves that would have scared the promoters, institutions threatened to review whether there is a trust in the management of the company.

Now, this proposed move has been withdrawn, but has left a mark on the management of the company that is difficult to get away; it will take time before the trust quotient can be restored:

Even as Satyam's deal to buy Maytas had to be hastily annulled in the wee hours of Wednesday morning as the company lost 52% on its ADR listed on the New York Stock Exchange (NYSE), a credibility crisis has begun to grip India's fouth largest IT company. "How can we trust the management of this company and its board of directors after it tried to enter into a deal that prime facie would benefit only the promoters who just own 8% of Satyam ? We have to examine whether the management needs to be changed," cried analysts in a reflection of the deep anguish caused by the now stymied move.

"58% of Satyam is owned by FIIs and they had no inkling that such a deal was in the works. There were questions about the future of Satyam after acquiring these companies when it doesn't have any experience in these businesses. It makes more sense to deploy your funds in related businesses or pay your investors," said Sourav Mahajan, analyst with Karvy.

The company is doing fire-fighting, but this is not the US. In the US by now, with company promoters holding 8% and with such a move, there would have a far more critical reaction. Here, institutions typically do not show much emotion even when they hold a majority of the stake in the company; in fact, the public and private displays of reaction is unprecedented. This reaction is obviously not what Satyam was expecting.

However, one expects that with the share buyback announced after this as an attempt to mollify shareholders, there may not be much beyond what has been stated; the only difference being that the management of Satyam (and other companies) would be a bit wiser about what they can do or cannot do. What remains true in this case is that the board of the company proved ineffectual, and needs to be looked afresh.

Citibank - The New State Bank of America

Aaman Lamba — Mon, 24 Nov 2008 08:03:44 EST

The United States Government took a giant step towards nationalization of the American banking system by announcing a plan to fund and backstop Citigroup, the beleaguered financial giant that has lost over $160 billion in market cap. The guarantees being provided include an additional capital infusion of $20 billion, loss guarantees up to $306 billion in a layered manner between Citi, the Federal Reserve, and the FDIC.

In return, Citi would issue $7 billion of 8% preferred stock to the government and additional stock warrants of about $2.5 billion. It would also promise not to pay out more than 1 cent dividend on common stock for the next three years. Finally, and most notably, the government would have final approval over all executive compensation and bonuses.

This last point is perhaps the most far-reaching, and as we all know the adage about paid pipers and their tunes, Vikram Pandit is henceforth a Federal Government employee, with hopefully greater job security than he had before this weekend. This mechanism gives government regulators a greater say over banking operations, and potentially opens the door to similar measures being adopted for other banks, or even other industries.

President-elect Barack Obama might end up appointing an auto czar, a music supremo, and perhaps even look to employ Bill Gates as CIO. The corporatization of the state will have an impact on the way it is run, which could work positively, but states have been corporatized for a long time, and this will only accentuate the incestuous relationship between neo-liberalism, corporatism, and statism.

Unfortunately, the victim in this circle jerk will be liberalism. Friedrich Hayek put it well when he noted,

If we ever again are going to have a decent money, it will not come from government: it will be issued by private enterprise, because providing the public with good money which it can trust and use can not only be an extremely profitable business; it imposes on the issuer a discipline to which the government has never been and cannot be subject.... The monopoly of government of issuing money has not only deprived us of good money but has also deprived us of the only process by which we can find out what would be good money.

Consider a humble bank manager in the Midwest a year from today having to evaluate between a loan to a start-up promising to improve productivity by over 20% with more efficient outsourcing automation. He is about to sign on the dotted line when he gets a call or a buzz from his friendly neighborhood Congressman, suggesting it might be a better idea instead to fund the local chapter of the UAW.

Welcome to Citibank, the new State Bank of America.

Swiss Bank Accounts

Blokesablogin — Wed, 12 Nov 2008 09:57:02 EST

This small article in the Washington Post brings yet another angle to the economic crisis that the US is facing. Hopefully, part of the money salvaged from these accounts can reduce the bailout money put up by taxpayers.

According to Transparency International, an anti-corruption agency, the estimated value of Indian individuals' worth of "funds" stashed away in Swiss Banks are to the tune of over $ Trillion. It is not surprising that the poor and rich divide has increased in the past few decades.

Reading these articles makes me wonder what anyone can DO with these "ill gotten" wealth? We all have an expiration date invisibly stamped on us. So, we cannot carry any material wealth along with us. The Reliance story is one of many that shows how money, left behind, creates schisms amongst the most cordial of relations.

Why, then, the insecurity of wanting to stash funds away for whatever purpose? Like the story of Tolstoy reminds us, at the end of the day, all we need is 6 feet of land (not even that if you are cremated!).

I sincerely hope that people who have these mysterious accounts put that money in circulation. If auction houses like Christie's existence are to be validated, many of these account holders use grand sums to buy art and such that have very little value in the "real" world and are "dead" investments. A vacation, on the other hand, would help support the tourism business including travel, stay, food and other activities.

Sometimes, when I see the pro-rich agendas of law and policies, I wonder if it is not a bad idea to ensure the demise of the poor by starving them or working them to death and the few remaining rich can have the earth to themselves- It sounds like a good plan. A perfect epilogue to the small-scale genocides we are reading about world-wide. And someone like me will not be there to write such a blog either!

Bubbles and The Current Financial Crisis

Ravi Kulkarni — Tue, 21 Oct 2008 14:36:55 EDT

"Bubbles! Bubbles!... My bubbles!"
-a cartoon character from Finding Nemo

Is there an end to the current financial bloodbath that is plaguing the world markets? Like a recursive nightmare, you wake up from one nightmare to find yourself in the middle of another. I am still in the middle of my productive career, and I don't find it amusing that my life savings go down 5% everyday. I just can't imagine what it must be for those who are staring retirement in the face or who have already retired. The only light I see at the end of the tunnel is the proverbial headlight of an approaching express train.

Folding banks, closing auto dealerships, collapsing companies, massive layoffs, government defaults; the looming specter is stunning. Many pundits are saying that this will be a mild recession and we should be back on track in a couple of years. In particular let me quote the following:

'Standard & Poor's chief economist David Wyss expects a mild recession that ends next spring. "Gradually we will regain confidence in the market. Lower oil prices and a falling trade deficit will help," he says. "This is a financial panic, not an economic one." '

I don't know what weeds these people are smoking. A lot more bad news awaits us. What we are seeing today is a result of 60 years of unbridled growth and reckless spending. The dominoes are falling and there is no telling when or where they will stop. They blame it on many factors: corporate greed, extreme leverage, wall street excesses, mortgage crisis and so on.

I remember reading this article by S Gurumurthy of RSS. Though the article itself has been ridiculed by the economists and intellectuals in various forums, and there are some factual errors in the numbers quoted, I felt there was an element of truth in it. This article was written in 2002 or thereabouts. Common sense tells me that I can not continue to spend more than I have. A day will come when the bill collectors come calling. This is true for individuals and also true for institutions. But there is a white elephant in the room everyone seems intent on ignoring.

I laughed out loud when President Bush doled out money to people as a stimulus package. The trouble with the economy was not that people were not spending enough; it was that people have spent way too much and they can no longer finance their profligate ways. During the last several years rate of personal savings by Americans has turned negative. The so-called stimulus package only inflated various bubbles a little more. Besides it encouraged people to be even more reckless with their money.

Since the 1940s, America has managed to build a huge economy based on consumer spending. It starts with how money is created (primarily through bank lending, see here). Every time someone borrows money (say to pay for a new car), the system creates a little bubble and new money is injected into the system. This money is supposed to be taken out at a later stage when the loan is paid off, but people keep spending money all the time so the money is never really destroyed except during serious economic contractions. This is not specific to the US economy, most of the modern economies have grown in this way.

This bubble creates other bubbles. Consider this: when there is more economic activity, the governments have more tax revenue and therefore bigger budgets. The current political wisdom tells us that the money should be spent immediately on populist and not-so populist schemes such as the earmarks. After all, one must get elected again in a few years. Once a particular expense head has been created by a government, it seldom goes away. Many economists argue that deficit financing is good for the economy. Wars and natural disasters have contributed by further expanding the budgets. Among certain quarters, there is almost a macabre glee whenever natural disaster such as an earthquake or a hurricane hits.

Without intervention this unstable system will seek some stability through cyclical economic downturns and many of the bubbles will gradually deflate. There have been downturns in the American economy, such as the recession of 80s and 90s, hyper inflation of 70s, stock market crash of 1987 and dotcom crash of 2000. Every time the government intervention has been short sighted with no attention paid to long term consequences of these actions. None of these events convinced the political leaders, financial leaders and individuals that they must spend less than they have or else...

If you remember the dotcom bubble of the 1990s, many people believed that the stock market will never go down. Ditto with housing markets of early 2000s. Similarly for too long, investors all over the world have nursed a belief that dollar is a safe haven and Americans will never default. This has caused them to send money to America in unrealistically large amounts of money through real estate investments, government bonds and lately purchases of assets of large financial institutions. This has significantly contributed to the financial bubble.

To keep this bubble inflated, governments and institutions have to spend more money and foreigners have to keep pouring their savings into American economy. To encourage these events, the lowest pillar that is bearing the weight of all these bubbles, our friend Joe, must keep spending. The trouble is that Joe can't spend any more money because his account is overdrawn. Nobody is willing to lend him either.

The credit crisis is a sign that people have understood the true nature of our economy. Money in my pocket is better than money in yours. Nobody trusts the bogus credit ratings of individuals and institutions anymore. At some level one can blame the banks for lending to one and all, but the blame must be shared by everyone; legislators for not providing enough oversight; bankers for not ensuring the borrowers have capacity to repay; borrowers for being greedy.

Americans have a total debt of about 120% of the GDP. The companies collectively have a debt of 160% of the GDP. Total American debt reached 53 Trillion dollars. That's about $176,000 of debt for each resident of the country. People and institutions have leveraged way beyond their means to pay back. To paraphrase Nouriel Roubini, now "the housing bubble, the mortgage bubble, the equity bubble, the bond bubble, the credit bubble, the commodity bubble, the private equity bubble, the hedge funds bubble are all now bursting at once in the biggest real sector and financial sector deleveraging since the Great Depression".

The casino culture has taken over the American financial markets. Short selling of stocks is the most obvious and glaring example of the gambling that savvy stock market players indulge in. There is also the futures market for commodities. For example the much maligned speculators who have presumably driven up the price of oil and other commodities. In the 1990s new instruments of financial trade called derivatives were created. These are the CDOs, the CDSs and many others from the alphabet soup, which Warren Buffet famously called financial instruments of mass destruction. That bubble is now worth 55 Trillion dollars. To put it in perspective, it is more than the annual gross product of the entire world. This is nothing but suicidal gambling by large financial institutions hedge funds, and wealthy individuals with no added benefit to the society at large. This is another bubble that is waiting to burst and who knows what happens then.

If my hypothesis about the economy is correct, then there are three ways this crisis will resolve itself. Firstly the obvious one, in which there will be a catastrophic crash of markets and institutions all over the world. This will be too chaotic for anyone to predict the sequence of events accurately. The consequences are too horrific even to contemplate, but humanity will survive. It may take a decade or two to recover to some semblance of normalcy.

Second way is that the current patchwork of interventions will work and somehow the world markets will be stabilize. However, I think this only be temporary and we will come back to the same situation sooner or later, perhaps with a bigger bubble, because we not really addressing the underlying causes.

Third way is when our leaders act responsibly, the markets respond in a sane manner and people correct their ways. Government will stop wasteful spending, wall street will stop being greedy and people will start saving more responsibly for their retirement and their children's education. If by some miracle this sequence of events comes to pass, then it will still take a couple of decades for us to come back to stability. The reasons are obvious, the the bubbles are simply too large and they can't be deflated in a short time. However the likelihood of this happening are extremely remote. Consider:

Law makers are short sighted and often ignorant
Government likes to keep borrowing to spend even more money and has zero credibility with the main street having spent all of its political capital waging pointless wars
Washington is full of wested interests, but none protecting Joe's interests
Wall Street has a short memory and within a few years it will retrace the history
Regulators have no credibility as they are either corrupt or ideological but almost never right

This problem is not unique to America. I am only using her example because I have lived here for the last 8 years or so and seen what is happening first hand. I am sure similar things are happening in many other countries as well.

The situation is rather bleak, but people change only when there are catastrophic events that overtake them, or a JFKesque leader guides them. Is Obama the JFK of our generation? I sincerely hope so, but I am very skeptical.

What are the lessons for India in this crisis? Unfortunately I don't believe India will escape it unscathed. The only silver lining is that India is not yet that highly leveraged that it will suffer as deeply as the US. However, India is following the path that US took in the '50s and '60s. We can yet avoid it by ensuring that the truly important issues are addressed and never compromised in the name of capitalism. These issues are, savings for retirement, ensuring universal health care and providing good education to all those who want it. Most importantly we should not build our future on bubbles.

The American Financial Crisis -- Dejà vu?

Moid — Tue, 7 Oct 2008 15:03:45 EDT

No sooner did signs of the crisis dawn upon the "market makers", the blame game started, and with more signs of an economic depression, the game only got messier. However, being a market outsider, if you ask me... who is really at fault, I would say that it is neither the Investment Banks nor the Financial Lending Institutions nor the Federal Government nor the average American nor the global citizen. WTH??? Who would it be then? The Aliens?

Nope, it is a vicious circle and all players in the market are to blame... collectively. So, what we see today as the crisis is a result of the greed and gambling of the investors (through I-Banks), lending institutions, borrowers (the average American) and not the least, the US Federal Government. The lending institutions created the environment. The investors took the bait with some help from the I-Banks - the average American saw his long-term dreams getting fulfilled, and the government decided to keep quiet and not even look their way.

This is precisely what in theory was defined as "neo-liberalism" - a concept which eliminates government regulation and oversight under the pretext of a free market economy with minimum federal intervention. Not that, this phenomenon took roots under the present US regime - it has been followed since the Nixon days but then Bush took it too far.

This economic crisis began in the real estate sector and spread its tentacles to the financial sector which was being its god-father. However, the cycle is not gonna stop there. In my judgment, these problems are gonna percolate into the actual economy - which will then break the insulation for every global citizen. And if u ask me, will the famous seven-o-o bailout stem the tide? NO! not at all. I think it is just trying to push the waste under the carpet.

So, for us as common middle-class people - what happens to our lives?

1. CAREER
Somewhere or the other, the uncertainty in our careers is gonna go up... either by our industry of work directly facing the ire of the crisis or pushing up job seekers in our sectors which are still insulated or worse still pushing the salaries down.

2. PERSONAL INVESTMENT
This is surely gonna be a big mess - after all, even a LN Mittal with his hawk advisers couldn't avoid 16Bn USD getting wiped off his balance sheet. It is high time you evaluate your investment - and best, if you can divert it into a low-risk, low-return bank deposit. However, one question worth asking the US Feds is... who will pay us for the loss we have incurred by investing in the stock markets for no fault of ours? I know what answer you will get - IGNORANCE / at best SILENCE.

3. FAMILY LIFE

The biggest lesson for us is to not rely on "fake" liquidity and always plan our lives based on the "real" liquidity we possess. This reminds me of my dad's advice when I joined IIM - and many banks realizing our future earning potential ran to us offering credit cards and loans - he said one thing, "Never fall into the trap of credit cards. It is not free money which you can use without any accountability. So better pay with what you have in your hand". I did heed his advice albeit having a couple of credit cards years later, but just to manage online transactions. Nevertheless, I would give the same advice to all - avoid credit cards as much as you can and also try to plan your asset acquisitions (house, car, etc.) based on what you can afford and not based on speculation.

As for the US economy, it is in a very dangerous situation - with no disclosure, no oversight, no transparency. The suspicion levels are so high that even a bailout approval couldn't keep the markets from falling. Because, behind the big facade of the financial sector is the real American economy which has been the lifeline for the financial sector and that itself is now reeling in pain.

Why Don't we Get Help for Depression?

Kavita Chhibber — Tue, 7 Oct 2008 14:46:50 EDT

At first it was just a headline - Unemployed man kills five members of family, then shoots self.

I was talking to a couple of friends on a conference call, when the news flashed before my eyes. As I read the headline out aloud, one of them said, "Must be one of those lower middle class Americans behind on payments. The other said, "Or maybe he lost a lot of money in the stock market."

As I clicked on the link to open the story, it turned out that the man, Karthik Rajaram, had an MBA in finance, had worked for Sony and Price Waterhouse, and lived in a house worth just under a million dollars in a gated community. He had been unemployed for a few months, and in a premeditated plan, killed his 19 year old son a Fulbright scholar and Honors student at UCLA,who was home for the weekend, two younger sons aged 9 and 7, his wife and his mother in law before turning the gun on himself. And he was from India.

India? Both my friends gasped- What? India?

Indeed, this so called model minority that is known for its super achieving academicians and is among the most affluent in America, also has a dark side-that of struggling to keep up a pretence, of always worrying about what would people say, and not seeking help.

There is denial - What? I'm not mad. Why should I go for counseling? There is fear - What if anyone finds out?

Evidently Rajaram, too did not seek help. Instead he bought a gun last month, wrote three detailed notes, see sawed between killing himself and killing every member of his family. He chose the latter. Perhaps he thought he would have peace of mind if they all went with him.

I looked at the story and felt incredible sadness and anger. What right does a human being have, to snuff out 5 other lives against their will? Why should they pay the price of one man's anguish and depression.

But it's not an easy question to answer. The close ties that bind an Indian family and the responsibilities that come with it can often be back breaking. Add to that the time bound expectation that it's the man who is the main bread winner. In trying times, when a crisis sweeps you off your feet, the sense of failing all those expectations are over whelming and can result in such tragedies.

I also realized as I sat thinking-it's really not just an Indian problem. The sense of shame and inadequacy someone feels when they don't meet expectations-of others close to them or their own cuts through barriers of color, race and cultures.

Another thing that is a continuous refrain is the sentence that I read-it said, the family kept to themselves and seemed like nice people. This lack of inclusiveness that I see in society today seems to be a big reason while people are lonely and depressed-angry and frustrated.

I remember growing up in India and the entire sub division was our extended family. Every one knew how everyone else was. People chipped in to help each other in times of need and joined the revelry on every happy occasion.

Do we have to face such extreme tragedies to really appreciate what is truly important in life or will we all continue to run helter skelter popping sedatives to sleep, another pill to wake up, and chew anti depressants like candy to just get through each day?

Something is really really wrong with the way we live today.

Wall Street - Cold, Flat, and Broke

C R Sridhar — Mon, 6 Oct 2008 11:40:33 EDT

“Dreamed about AIG and the stock market, woke up with the urge to stock up on canned goods and shotguns.” - Michele Catalano of Long Island, an angry blogger.

The month of September was cruel for Wall Street. Stormy winds blew away the venerable institutions of Wall Street and they collapsed one by one like a pack of cards. Lehman Brothers, the 158-year investment global investment bank, went belly up. Merrill Lynch was swallowed up by Bank of America. American International Group (AIG), a $1 trillion insurance company, had to be rescued by $85 billion dollar deal by the Federal Government on the ground that it was too big to fall. Capturing the mood of panic in Wall Street Mike Whitney, a widely quoted freelance writer, wrote ‘Lehman gone; Merrill Lynch swallowed up; AIG Going… Who’s Next for Madam Defarge?’¹

Madam Defarge and the tumbrels were kept busy while heads rolled in the basket in a grisly fashion. Fannie Mae and Freddie Mac, the biggies of Mortgage lenders, became terminally ill requiring a massive bail out at a cost estimated to be in the region of $5.3 trillion. Washington Mutual went bust followed by Wachovia. Earlier in March, Bear Stearns became insolvent after bad bets turned into bad debts requiring Fed intervention. The concept of Wall Street investment banking was blown sky high when the remaining Goliaths Morgan Stanley and Goldman Sachs haemorrhaged sustaining huge losses and took the unprecedented step to covert themselves into low risk and tightly regulated commercial banks. The pervasive mood of despair and anger of Main Street was reflected by the black humour on Wall Street, one of the most popular being-“Question-What is the difference between a pigeon and an investment banker? Answer- Only a pigeon can make a deposit on a BMW.”

The dour looking, Harvard educated economist Nouriel Roubini was one of the early sceptics to predict the financial meltdown in Wall Street when he dropped the bombshell way back in 2006 that US would be heading towards the most serious financial and banking crisis since the Great Depression. His dark prophecies were met with derision and disbelief earning him the epithet- the prophet of doom. But Roubini had the last laugh when the US financial system melted down as he had predicted and he became an instant celebrity on media channels.

A bipartisan blunder

One of the contributing factors for the financial meltdown was the reckless financial deregulation that led to financial concentration and inefficient markets. The perception of regulation as hampering the animal magnetism of Wall Street bankers was a dangerous delusion that fostered the irrational drive to take unacceptable risks. As the economist Arthur MacEwan explains-“When financial firms are not regulated, they tend to take on more and more risky activities. When markets are rising, risk does not seem to be very much of a problem; all—or virtually all—investments seem to be making money. So why not take some chances? Furthermore, if one firm doesn’t take particular risk—put money into a chancy operation—then one of its competitors will. So competition pushes them into more and more risky operations.”²

Moreover, the extent of deregulation reached dangerous levels with the repeal of Glass- Steagall Act of 1933, which was passed after the financial debacle of 1929. This act separated investment banking from commercial banking and protected the investors from risky speculation of investment banking. Thus a commercial bank could not be in both insurance and/or investment business.

Hectic lobbying for Wall Street by Phil Gramm -the Republican Senator from Texas and the economic advisor for John McCain - and Robert Rubin in the Clinton administration were the guiding forces for the repeal of the act. This repeal became law when it received President Clinton’s assent in 1999. In 2000 another nail was driven in the regulatory coffin when Gramm introduced the Commodity Futures Modernisation Act, which excluded the scrutiny of counter derivatives, credit derivatives, credit defaults, and swaps, by regulatory agencies. Many economists hold the view that the repeal of the Glass –Steagal Act was instrumental in causing the 2007 subprime mortgage crisis.

The crucial point is to note that Wall Street enjoyed the support of both the Republicans and the Democrats for the repeal of the act. Even today both the presidential candidates Obama and McCain receive campaign money from Wall Street bankers and executives. This prompted Ralph Nader, the consumer activist, to acidly comment that there are no significant differences between Democrats and Republicans on major issues pertaining to Wall Street.

A flawed business model

The reward system is skewed in favour of brokers who make money for their Wall Street employer and not how well the client portfolios perform. As Pam Martens, an insider of Wall Street, says “A Wall Street broker receives remuneration that rises from approximately 30 to 50 per cent of the gross commission based on their cumulative trading commissions with zero regard to how well the clients’ accounts have done.” This attitude is responsible in her words for “ the industry to be irreconcilably incentivized to corruption just as brokers have been socialized to silence.” This is on account of the fact that the broker receives more commission on investing junk bonds in client portfolios rather than investing in safe treasuries.

The other questionable practice is housing a trading desk inside the same company that is supposed to give unbiased research to the public. As Pam Martens points out “For example, let’s say that XYZ Brokerage buys a big stake in ABC Company on its proprietary trading desk (the desk that trades for profits for the firm) on Wednesday afternoon. On Thursday afternoon, it could almost guarantee profits for itself by issuing a research report upgrading the stock. Conversely, it could short the stock on Wednesday and issue a negative report to drive down the price on Thursday, also guaranteeing itself a profit. Other than a fictional Chinese Wall, there is absolutely nothing to stop this type of public looting.”³

Perils of a casino economy

While greed, corruption, and an excessively deregulated financial market offer interesting explanations about the systemic collapse of Wall Street, they remain unsatisfactory as they not explain or explore the deeper malaise afflicting the US economy. For a rigorous and conceptually sound analysis, one must turn to the series of extraordinary essays written by Harry Magdoff and Paul Sweezy in Monthly Review during 1970 and 1980’s.

The main thrust of the articles was to show that the general economic tendency of mature capitalism is toward stagnation. The main challenge of capitalist economy is surplus capital, which has diminishing opportunities for profitable investment. Deploying investment in the mature productive economy yields fewer returns as the markets are saturated. A number of strategies such as military spending, government spending, consumer spending, exploitation of third world economies as sources of cheap labour, raw materials and markets are used to counter stagnation in capitalist economies but do not resolve the problem of stagnation. As the authors point out “The tendency to stagnation is inherent in the system, deeply rooted and in continuous operation. The counter-tendencies, on the other hand, are varied, intermittent, and (most important), self-limiting.”⁴

The problem of surplus capital finding suitable avenues for profitable return is sometimes solved by key inventions and technologies, which provide economic stimuli. The invention of automobile in the “early twentieth century led eventually to huge developments that transformed the U.S. economy, even aside from the mass ownership of automobiles: the building of an extensive system of roads, bridges, and tunnels; the need for a network of gas stations, restaurants, automotive parts and repair shops; the efficient and inexpensive movement of goods from any location to any other location.” But the new information technologies such as computers, software, and the Internet do not appear to provide the same epoch making long-term economic stimuli as automobiles did.⁵

In the productive economy, money is used to purchase raw materials, machines, and labour to produce commodities, which are sold, with the capitalist receiving back money (M-C-M). While in speculation, money makes more money directly, represented as M–M. A significant change in the way banks and financial institutions operate today as opposed to the past lies in the fact that the massive borrowed money goes into speculative finance and very little is invested in the productive economy. There is practically no stimulatory effect on the economy as there are few jobs created as there are relatively fewer people employed in the speculative economy. The profits generated by speculation are rarely invested in factories or the service sector but finds its way for financing more risky financial schemes creating speculative bubbles.

This sorry state of affairs is evident when one examines the failed financial institutions of Wall Street. One common denominator linking these institutions is that all were under capitalised and over leveraged. As Mike Whitney points out “when Bear Stearns went down, it was levered at a ratio of 26 to 1. When Carlyle capital blew up, it was levered at 32 to 1. And when Fannie and Freddie were finally taken over by the US Treasury; the two behemoths were levered at 80 to 1, which is to say that they had a one dollar cushion for every $80 they had loaned out.”

With huge quantity of money sloshing around the world and being invested into financial speculation there has been an explosion of speculation. One mind-boggling figure is “the daily trading on the world currency markets, which has gone from $18 billion a day in 1977, to the current average of $1.8 trillion a day! That means that every twenty-four days the dollar volume of currency trading equals the entire world’s annual GDP!” Moreover, “Today financial analysts frequently pretend that finance can levitate forever at higher and higher levels independently of the underlying productive economy. Stock markets and currency trading (betting that one nation’s currency will change relative to another) have become little more than giant casinos where the number and values of transactions have increased far out of proportion to the underlying economy.”⁶

This flight of investment from the productive economy to the casino economy is made worse by the availability of easy credit to persons who are least credit worthy. Many Americans who had little financial stability to buy houses took on mortgages, which were attractive on the face of it but carried a heavy debt burden. As real wages declined for the American household, it took on more debts for meeting the consumption needs. Total household debt stood at the end of March 2006 at 11.8 trillion.

Prudence in lending money to credit worthy persons was thrown to the winds as the banks encouraged people to borrow more and spend more. As the report in Wall Street Journal says “The banks are more aggressive because they rarely keep the loans they make. Instead, they sell them to others, who then repackage, or securitize, the loans and sell them to investors in exotic-sounding vehicles, such as CLOs, or collateralized-loan obligations. Every week brings announcements of billions of dollars in new CLOs, created by traditional money-management and hedge funds, which then sell them to other investors.”⁷

The toxic power of optimism

The belief in alchemy led mankind in the futile quest of converting base metal into gold. The bankers and traders in Wall Street were the practitioners of the alchemy of finance, which was the elusive quest of converting junk bonds into real wealth. There was an incorrigible optimism and conviction that ordinary people were meant to be rich. There was also goodwill for the captains of finance whose investment schemes were magic wands to transport investors to prosperity. Such a feeling of trust, as Galbraith reminds us, is essential for the boom.

The media played its role by lulling us into a false feeling of comfort by assuring that the fundamentals of the economy was strong and invincible. Critical views were suppressed in debates as the effusions of malcontents. A financial disaster was merely technical correction and there was more money to be made in depressed stock prices. As the financial pillars collapsed in Wall Street last month, a pie hit the glum faces of the financial analysts. The malcontents were right. As Galbraith again reminds us wisely-“when people are cautious, questioning, misanthropic, suspicious, or mean, they are immune to speculative enthusiasms.”⁸ In the aftermath of the melt down, the sceptics were rehabilitated quickly and became instant celebrities on talk shows. They taught us an important lesson, which the financier Bernard Baruch learned during the Great Depression: “ Any one taken as a individual is tolerable sensible and reasonable- as a member of a crowd, he at once becomes a blockhead.”

Plus ça change, plus c'est la même chose.

From the financial bubbles of the Mississippi scheme and South-Sea Bubble to the delusions of Tulip mania and the Great Depression nothing much has changed. As Charles Mackay says in his book Extraordinary Popular Delusions & the Madness of Crowds, “Money, again, has often been a cause of the delusion of multitudes. Sober nations have all at once become desperate gamblers, and risked almost their existence upon the turn of a piece of paper.”

But there is very little that one learns from speculative disasters, as human memory is short and unreliable. The Great Depression taught the American public the perils of unregulated market and the elected representatives passed the Glass- Steagal Act to protect the ordinary investors from financial ruin. The Act was repealed in 1999 when the memory dimmed about the Great Depression. Then another financial disaster hit Wall Street. Now there is talk of imposing controls on financial markets again.

“Wall Street”, a cynic once said, “ is a Street with a river at one end and a graveyard at the other.” Perhaps it would be appropriate to inscribe on the tombstone the words, Plus ça change, plus c'est la même chose. The inscription in French simply means, the more things change, the more they're the same.

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1 The Tumbrils Roll at Dawn- Mike Whitney
2 The Greed Fallacy- Arthur MacEwan-Dollars & Sense.
3 The Wall Street Model: Unintelligent Design- Pam Martens- Counterpunch.org
4 Stagnation and the Financial Explosion- Monthly Review Press.
5 The explosion of debt and speculation- Fred Magdoff- Monthly Review
6 The explosion of debt and speculation- Fred Magdoff- Monthly Review
7 Wall Street Journal, March 3, 2006.
8 The Great Crash 1929-J.K.Galbraith- Pelican Book.