Capitalism model

This week’s turmoil in the US Financial industry, Fannie Mae (FNM) and Freddie Mac (FRE) included, has thrown new light on the kind of capitalism that is being followed. It makes me wonder where the world, and Uncle Sam in particular, are headed towards, economically speaking. The collapse of Indy Mac, a US Bank, is symptomatic of the malaise that has been affecting the US Financial markets, and is an ideal fodder for the socialistic turkeys.

For those amongst us who do not know them, FNM stands for The Federal National Mortgage Association (FNMA) or Fannie Mae in short, and FRE stands for Federal Home Loan Mortgage Corporation ("FHLMC") or Freddie Mac in short.

Both of them are GSE or Govt. sponsored enterprises. Along with other GSEs, they buy mortgages on the secondary market (Banks and Housing companies like Countrywide Finance), pool them, and sell them as mortgage-backed securities to investors on the open market. This secondary mortgage market increases the supply of money available for mortgages lending, and increases the money available for new home purchases.

These companies were created in the 70s, and were meant to be stand-alone commercial. Over the years, these companies have become the backbone of the American housing dream, accumulating about $5.5 trillion worth of housing debt between them. That is, roughly about 40% of the $13.7 trillion GDP of the US in 2007 !!!

Due to the housing market meltdown, the mortgages they had bought, especially the subprime ones, have cllapsed in value. They now need to raise capital, to put themselves afloat, prompting the US govt to come out with “bold measures” to prop them up, over the weekend. Reason? Treasury Secretary Paulson very well knows that people’s hard earned 401K money is at stake, and any possible collapse of these “icons” could lead to a quick implosion and seizure of the great American engine – Financial markets. The results could well be cataclysmic, perhaps even worse than the Great Depression.

Fair enough, one would say? Come to think of it…two commercial orgs. were created back in the 70s with the intent of managing housing mortgages and providing guarantees on housing mortgages( much like Lloyds of London… a sort of reinsurance, to put it crudely) They were expressly meant to stand on their own feet. One of the hall-marks of capitalism is that companies are allowed to fail if the business model is not sustainable. Only in Socialist economies does one find government intervention… so then, in this case, whatever happened to “free market economy”? After all, everyone was lauding the great American innovations and the ever “novel and innovative” financial products that these companies churned out all these years. Something that kept the great American juggernaut moving all these years. When things were going up, the corporations were allowed to take the profits and distribute to “shareholders” and pay fancy CEO packages to run them.

Why then when things turn sour, the tax-payer is expected to pitch in and help out? Remember, there are only 3 ways that the likes of FNM or FRE can get out of the hole they are in:

Govt opens the “discount window” of credit … tax payers money being used up here.
Govt steps in with “equity participation” … again tax payer’s money
Govt buys out the private players by paying them cash, takes over the companies’ assets and liabilities and runs them on it’s own… this is either with tax payers money or simply by printing more $$$$$ !


In other words, the US Govt all along let these “financial wizards” come up with fancy products, to which credit rating agencies like S&P and Moody’s coolly looked the other way. Banking companies continued to provide loans based on inflated market values of properties, and FNM and FRE backed them up. Seemed fine, as things were Northbound. But when things turned sour, the Govt decides to use taxpayer money to bail out the wrongdoings of these corporates. So much so, that it is wiedly expected that shareholders will now demand that the Govt take over the Operations of FNM and FRE and run them…

The most amusing part is- taking over and running ( for a different reason, though) is what Hugo Chavez did exactly, last year to the big oil firms in Venezuela… so did the Russians… so did Indira Gandhi in the 70s in India, to the Banks… in “Socialist” parlance , this is called Nationalisation !!! Something that was frowned upon by Uncle Sam… “ goes against the very grain of free market economy”… “ companies should be allowed to fail”… etc etc…. the Fed and the Treasury are now made to eat humble dollars ( thanks to food prices, the humble pie remains humble no more!!)

To me, America is on the throes of Capitalist cross-roads. The signs on all four directions, unfortunately, are, rather ominously, pointing to anything but Financial Nirvana!!! Bertie would be tempted to quip, " Ah, Jeeves! Nowhere to hide would be right phrase".

Weak Rupee policy of the RBI

Back in Jan 08, India’s forex reserves were about $220B, the INR USD Exchange rate was Rs.39 to the greenabck and oil was trading at $100 a barrel. None of the countries were particularly perturbed over the high price of oil let alone India. The Reserve Bank of India(RBI) kept on propping up the Dollar by buying dollars in the open market even as the weakness of the dollar made it more attractive to buy. Exports were surging at around 22%, and no one other than the exporters including the IT exports lobby complained. Fiscal deficit was precariously high, though inflation was more under control at around the 4% mark.

Cut to June 08. Inflation has shot up to over 11% more due to global factors beyond the Govt’s control, and is expected to remain so for some time to come. This has forced the RBI to increase interest rates to beyond the tipping point where economic slowdown is imminent. An economic slowdown will lead to lower tax collections, widening the already dangerously high fiscal deficit. And profligate loan meals like the ones announced by Madame Sonia Antonio Maiyo, which will put a further strain of $ 15B on the already stretched Govt Rupee, don’t make matters easier. With global economic slowdown comingfast and furious, exports are bound to be affected, though some people still argue that such an slowdown is actually beneficial to the IT Outsourcing business, which I very much doubt.

However, the most interesting happening in all this melee is, the RBI continues to buy the Dollar even after the Rupee has fallen to more than Rs.43 to the Dollar!! Today, the forex reserves stand at about $305B … which means that while Rupee fell all the way from Rs 39 to Rs.43 ( about 10%) , the RBI has continued to mop up Dollars in the market, further helping the weak Rupee policy, a major beneficiary which is the exports lobby, including the IT captains.

But what perhaps no one realizes is the following. Even in Jan 08, and right through in the apst, India has always been a nett importer, meaning imports have been much higher than exports, unlike, say, China, where the exports have outstripped imports significantly, creating records rates of Trade surplus. Oil has been the single biggest item in India’s import list. With ONGC and the private sector boys failing to meet even 65% of India’s burgeoning oil requirements, we had no other choice. But in this 6 month period, a lot of oil has flown in various petro pipes. Oil has shot up to $145 now ( 45% increase). This, coupled with the 10% drop in the Rupee value , has bloated the oil import bill by at least 55% for us !!

Granted that we perhaps could have done nothing to control the $45 per barrel in crude prices, but all the RBI could have done is to liquidate a big portion of the $95B dollar holdings that they accumulated over the past months, to put a lid on the free fall of the rupee. That could have controlled our oil import bill by at least 10% … clearly the RBI seems to have switched over from a strong Rupee policy that it has has been holding over the past 3 years to a consistently weak Dollar policy. And I suspect the Exports lobby and perhaps the NRI lobby are behind this move, since they were the ones crying foul all these momths when the Rupee appreciated…

Maybe the RBI is hoping that those NRIs who were so eager to jump into the growth bandwagon of India will now find it more attractive with a weaker rupee, and use this opportunity to pour their hard earned monies back into mother India’s “growth engine”.
If that indeed is their thinking, then I am sorry to say that they are totally mistaken. NRI inflow is of 3 types – those whose families are dependent on their remittances for day to day sustenance ( mostly from the Gulf, and this continues to be the single biggest chunk), those who want to “give back something” to their motherland , for emotional reasons deciding to remit either for the purposes of charity or for business , which I suspect is only a minority, and the third, who typically invest in any place where it makes business sense ( and if they are NRIs, they may favour India, to the the comfort factor, as long as business prospects are conducive).

There may not be much change in categories 1 and 2, but no businessman is stupid enough to pump his money into something being touted as a great growth story, if it does not make business sense.

Interest rates shooting through the roof to around 13% now ( base rate, excluding the real cost of capital computation)
Fiscal deficit going out of control, with irresponsible loan melas and similar non plan expenditure increase, and high oil prices.
Economic slowdown being imminent, with all sectors likely to see a slowdown ( agriculture continues to be in the hands of God… He willing, we may see good monsoon yet again and Argi sector may well hold up).
Inflation over 10% consistently may mean the real worth of any earning will be significantly eroded quickly.
Continued fall in Rupee vis a via the Dollar, may make it less attractive currency to invest, in terms of dollar returns.

I don’t know of many businessmen who are brave or foolhardy to say” well, India is a long term growth story, let me continue to invest in it notwithstanding all the above short term effects”. Forget investment in business, even stock markets are witnessing flight of capital for the past 3 months consistently (to be fair, not just in India but across all developing countries), as part of the global stock market meltdown.

But then, who cares? With polls round the corner, the ruling parties may want the powerful exports lobby to fund election expenses, and therefore are perhaps trying to pander to them. It does not matter that the common man is paying a higher price for petrol by about Rs5 now…. The Govt and RBI could perhaps have averted this increase, but elections come right on top, above the common man or the country…

Long live our politicians!!!

"Art of Living" in today's fast world

On the topic of Sri Sri Ravishankar, yes, he is extremely popular everywhere, including here in Singapore. His teachings are nothing new, but a refreshing level of packaging and applied spiritualism does the trick… much like Osho, or Vivekananda. I had realized fairly long back ( but am doing nothing about it due to sheer complacency) that part of the Hindu prayer for padaiyal or Neivedhyam are a set of mantras which invoke the panchapranas (or five different breaths that every human body has).. infact most people think that the mantram is towards God… but it is not… it dedicates the food to the panchapranas and Brahman ( or the Utlimate truth, or God or Holy spirit… whatever one wants to call it as). It is a clear reminder that the right food is essential for getting the right breath, and thereby a long and calm life … in Hindusim there is nothing really called happy life… it is calm, contented and equanimous life that one aspires for. Controlling the breath, and by extension, the mind and intellect, have been proven scientific ways to achieve this. What Sri Sri and others do are to take this practical message to today’s fast world, and get some sanity back into people’s otherwise harried lives. By the way, this “meditation” is not unique to Hinduism. I have observed that muslims who do namaz devoutedly 5 times a day in the true muslim way, tend to get similar sadhvik qualities. One of my closest friend is a Christian, and I observe that their entire family is always calm and quiet, take happiness and sadness with equanimity, and dedicate everything to Jesus. Their secret? All of them pray for 10 minutes together, silently, every morning… and I have known this happen for at least 30 years in their families now.. Nett nett, it does not matter what religion one follows.. or for that matter, if one is an atheist or an agnostic ( Mammu, I do not know which category you fall into). If one can keep his mind calm and clear then a lot of things can be achieved in this material world… I am not surprised at 2.5 million people following him… guru Ramdev in India has similar number of followers for his yoga… the point is, people today want simple quick-fix solutions to their teething troubles… anyone who can make is simple for them becomes a hit. In fact, one of Business 101 in Harvard business school principles is, if you can take a complex idea or task, and make it simple through your product or service then that can become a great business proposition ( no disrespect to Sri Sri intended).

I will be really surprised if any school or public institution in India will ever introduce a course in such “exotic” disciplines such as Art of Living. Sadly, the media in India, and the political parties would want to make us believe that giving prominence to anything that is considered “Indian” is akin to blatant promotion of Hinduism, to the detriment of “minorities”. This, to me, is absolutely ridiculous, but then that is the way the media and polity in India act today.

I just now returned from a 10 day trip to Beijing/ Hongkong with my family. We had a rollicking time climbing the Great Wall, something that I will write about, separately. The new airport terminal 3 in Beijing is a masterpiece by itself… huge, dragonshaped, and perhaps about 20 times the size of the “state of the art” airport which we claim to have in Bangalore now. Even as one deplanes, the first things that strike are two mammoth paintings, each about 25 metres long and about 3 metres wide. On these paintings, are intricate depictions of the ancient Chinese way of life .. a village on a riverside, replete with a teacher ( like Confucius) teaching an attentive audience of students, attired in traditional Chinese dress… and then people working away in Smithy’s, weavers, farmers, fishermen etc etc… in India, if one were to try putting up a statue of Gomateshwara in the new Bangalore airport, it would provoke immediate rebuke from the likes of Karat& Co. Similar “religious” depictions/ statues can be seen at the airports in Bangkok and Jakarta… in fact, the most astonishing thing is, in Bangkok, one can actually see a huge statue of the Devas and Asuras using Vasuki the snake as rope and tying to whip up Paarkadal… a scene from the Dasavatharam… no kidding guys.. you can go to the new Suvarnabhumi airport to see this.. Can we imagine this in India? No way.. we would rather be “secular” and have Annadurai or Karl Marx… because they are the true representations of ancient India, you see!!!! God bless us!!!

Strange are the ways of the West

I was amused to read the CNBC article dt. 9th July 2008.

http://www.cnbc.com/id/25606039

Read this section in particular.


"But because their counterparts in developing countries across the globe continue to fill their tanks at will, often with gas priced artificially low because of government subsidies, there's likely to be little relief on the way".

The author ( whoever it is) has almost an accusing tone of the developing countries ( read: China and India) of "consuming all the hard-saved last drop of oil by the drivers in our country".

I do not see any rationale behind. When these same drivers were happily criss-crossing the country in their Hummers, Cherokees and other SUVs, falunting what they could then aford and were capable of, they expected nobody to complain... in fact their ostentatious ways of driving exacerbated after the 1973 oil crisis. It is still not uncommon to find a lonely lady driving a half lorry all for herself, even in these days of $150 oil.

This, to me, is like the devil quoting the scriptures.

Remember, the boom century in America was started off with the Automobile revolution, when people were able to spread themselves into the countryside for a living, and were still able to enjoy the fruits of big cities, courtesy Henry Ford and Co. That boon is now turning into a bane, since public transport is now virtually non-existent in the US.

Now, the US can use all the oil in the world for their development ( in the earlier part of the 20th Century).... but now when China and India are attempting to do the same, they are being scorned at.... what a hypocrisy!!