Capital (ism) Punishment

The financial market meltdown in the US has shaken the world. The big names of the Wall Street are licking the dust. It all started with the subprime crisis and now the problem appears to have reached its nadir with the collapse of firms like Lehman Brothers. The globalization of financial capitalism and interconnectedness of financial markets mean that the crisis will cast its spell well beyond the boundaries of the United States. A lot of questions hover over our heads. How can everything go so wrong? Is the world of finance so complex and beyond the reach of regulators and governments? It is not rocket science, isn't it? Let us try to decipher how this earthquake happened.

Yes. The world of finance is indeed a complex one. The most worrying aspect is the amenability of financial products to a bewildering possibilities of engineering and re-engineering. An underlying asset may not be a prime one. Or it may be a junk bond which your regulator may now allow you to dabble in. But what if you bundle the prime loans with sub-prime loans and try to offload them to some other lender? This lender might be completely oblivious to the default risk lurking around every such exotic structured product. Worse still, this lender may find some aggressive and smart chaps who provide funds to facilitate such transactions also. After all, your Central Bank has slashed interest rates to help you guys prop up the sagging economy and credit has got cheaper. And who does not want to earn 'risk premium'? You are not here in this world of high finance to dabble in T bills only. You may not like to imagine that real estate boom is not going to be there always. You continue to innovate and repackage securities and loans. You take other decent guys also on board who are sick of doing the mundane job of taking deposits and lending money. Don't banks find their task a 'no brainer'? Why shouldn't they also fuel the creativity triggered by the mortgage market? And who is watching? Most of these innovations are off balance sheet transactions. The Central Banks and governments (if these two entities are indeed considered independent and separate !) are busy reversing the slowdown and burning midnight oil to inject liquidity in the system. And the regulators are still learning the ropes. Let the party go on until, of course, you find yourself at the end of your rope.

The thriller does not end here. Banks are smart enough to insure their exposures with the likes of AIG. You go under. You drag down the system with you. And you look to the governments to pay for the follies which, but for this crisis, would have passed off as creativity and ingenuity. The game starts with a small time home loan borrower who may miss his repayment but stops when the giant insurer finds itself gasping for breath. And you have a government who willy nilly extends an olive branch called a bridge loan worth USD 85 billions to AIG. But the same government, weary of bailing out failed 'innovators' and 'alchemists', turns away, somewhat enigmatically, when it comes to salvaging Lehman Brothers.

AIG has been nationalized. Now we know nationalization is not something which can happen in India only. The state is not in retreat. Governments are still relevant to our lives.

So, that is how the Wall Street has been disgraced. Capitalism does not look confident. Thus, the world of complex high finance, though resting on the foundation of something as predictable and straightforward as mathematics, is still fraught with grave dangers. And here, human inventiveness is the main culprit besides greed and ever expanding desire for netting arbitrage.

Will we learn lessons from this debacle?

MetroNation Attacked

The capital has been bombed again. Terror is visiting our cities with a nauseating regularity. The sense of helplessness has once again overpowered us.

I have been to the Central Park in CP a few months ago. The divine sounds of a Sufi music performance going on in the amphitheatre of the Park almost mesmerized me. As the evening fell and darkness intensified in spite of the soft lights of Central Park, the spiritual ebullience peaked and the listeners appeared to be transported away from the humdrum metropolitan life. Everything was just perfect to create a kind of ecstasy one would never expect to achieve while strolling around the hub of this busy political capital of India. Right beneath the Park is the Connaught Place Metro Station, the epitome of modern infrastructure. The Park seemed to suggest how craftily the government had tackled the so called development and environment trade off.

The bombs have gone off on 13th Sep at the Central Park also hurting and killing innocent people. The terrorist attack on Central Park like the one on Parliament has a lot of symbolic importance. The attack has taken place right under the Government's nose. The Indian state is helplessly watching the sad stories unfold in various cities- Delhi, Varanasi, Jaipur, Bangalore, Hyderabad, Mumbai, Ahmedabad, Surat. And many more may be in the offing. When such gruesome attacks happen with undiminshed force and frequency, you can't help but laught at the talks of our superpower status. We are good at winning software contracts. We are good at economic growth. We are almost the best at holding free and fair elections and running democracies at various levels. How about national secutiry? Why are these challenges not taken seriously?

What we need is a professional and technocratic response to crimes like terrorism. We do not need any inputs from politicians to combat this problem. It is a war like situation. Do generals consult political parties to frame strategies during war? Just leave the professional agencies and forces alone to deal with terrorism.

There is nothing political or ideological about terrorism. It has a lot to do with national security. It is a crime that bleeds civil societies and claims lives of innocent non-combatants. And governments just cannot faff about or fool around.

For me, the pictures of the blood stained lawns of the Central Park have replaced the memories of that divine musical evening.

Good Bye, America?

The world has started dreaming of a strange but exciting future, the future where America is no longer a leader. Most of us may call this a pipe-dream. Some of us have already predicted the contours of this brave new world. The succession planning is already underway and the likely candidates are China and India. There are other emerging players also in this 'leadership pipeline'.


The US has dominated our imagination in almost every walk of life since the World War II. Its rising power, prowess and influence continued to awe us. We looked to US for almost everything a developing nation is normally concerned with: education, military technology, nuclear power, industrialisation, administrative efficiency, electronics and computing, economic aid, space science and the like. Our IITs and IIMs are modelled upon the US institutions of excellence like MIT and Harvard Business School. Our research institutions and industries have profited from their association with the US technology and knowhow. We have toyed with an idea of adopting US-style presidential model of political executive many a time. We are fascinated by the success of private initiative and entrepreneurship in the US. And Indian parents are still anxious to send their children to American universities for higher education. The US consulate in Mumbai issues about 1,80,000 nonimmigrant visas every year.

Why then do we all dislike America to some extent? Do we envy them or are we sure of never scaling the dizzy heights this country has achieved? Is America invincible? Does this notion of invincibility put us off? Is this how we start grudging against every point the country scores? Does it make us realize how slothful and contented we have been all these years?

The degree of US-bashing varies from country to country and it is really an interesting idea to think up an index to measure a country's anti-US sentiments at regular intervals. Notwithstanding our general stance of skepticism towards US policies and accomplishments, we know deep down that this nation can show the way. And every developing nation ends up emulating the US and nurses a hope to achieve parity with this global superpower inspite of what the noisy nationalistic rhetoric says back home. Here are the leaves a country like India can take out of the US book:

(1) Though our constitution does draw upon the US one to some extent, there is a need to borrow more from this exceptional document of democratic spirit and social justice. The US Constitution is relatively simple but rigid and has been successful in holding the nation together. Also, it is harder to run a Constitution than to frame one (Woodrow Wilson). The US has toiled enormously to raise administrative effectiveness to a level needed to achieve the lofty goals of the Constitution. India has been content with inventing 'All India Services' only. No other significant innovation has been tried in the area of public administration since independence.

(2) Even in the late '90s the US had an inkling of what Osama Bin Laden was upto. (The world hardly knew how to spell his name). And post 9/11, the US government has put terrorism on the global political and security agenda with the kind of fervour the world has never witnessed in the recent political history. Every government and national leader began talking terrorism. That's how you get 66.1 million entries of 'terrorism' on the Google. Pursue the goal and have a heart for any fate. Work hard and wait. That's the message the US sends out. The country stands for unrelenting pursuit of objectives you believe in and convinced about.

(3) Don't dump science, technology and innovation, no matter how high you have started ranking yourself in the global order. The US universities are the greatest tribute to the spirit of scientific enquiry and knowledge. India cannot afford to remain smug in this critical area. IT is just the first chapter of the 'superpower in the making' story of India. Just think how poor we are at research in defence, industrial automation and engineering, pharmaceuticals, medicine, environmental protection, clean energy solutions and numerous other fields of basic science and technology. We have found an easy way out. Build as many IITs as possible and the picture will improve dramatically.

We may secretly smile at the waning global influence of this so called hegemonistic world power but we all would do well to remember what America stands for. It may have devastated Iraq but look at how it is toiling to bring Rwanda back to health after being ravaged by one of the most horrific ethnic carnages of the last century.

We will look over the downside of Uncle Sam in the next post.