“Dictatorships do not grow out of strong and successful governments, but out of weak and helpless ones” and other links

On September 15, 2008, Lehman Brothers filed for bankruptcy. That marked neither the beginning nor the end of the financial and economic crisis of 2008. Yet, there has been such a deluge of coverage in the last one week of the crisis. That is part of the crisis. Excessive event-oriented attention that does little to improve the process.

Central bank hubris and complacency and the ‘Rise of Finance’ (the title of an upcoming book authored by Yours Truly and Gulzar Natarajan) played a part in the 2008 crisis. They are still around and alive. The world is unprepared because of the protagonists of the crisis of 2008 are unrepentant. That is the burden of my column in MINT on Tuesday.

Ben Bernanke summarises his own research published by the Brookings Institution (he is a Senior Fellow there) in this post. He is partly right. I have alluded to that in my column above. Why did the financial panic become global? The role and the rise of Finance have a lot to do with it. He does not go there. That is where my column went.

It is obligatory to refer to the piece that Paulson-Bernanke-Geithner wrote because it contains nothing of meaning except this passing ‘mea culpa’ reference:

Although we and other financial regulators did not foresee the crisis, we moved aggressively to stop it. [Link]

It is instructive to see the links that come up below the article. They sum up the failure of their post-crisis efforts too:

NYT Headers.png

Staying with Ben Bernanke and his former colleagues, we note the speech by Peter Fisher (not to be confused with Richard Fisher, former President, FRB Dallas) at James Grant’s Symposium last year. Peter Fisher has served in the U.S. Treasury and in the Federal Reserve. See his profile here.

A key extract from his speech delivered in March 2017:

Curiously, the Fed has acknowledged no failures. All the experiments have been successful, every one: no failures, no negative side effects, no perverse consequences, only diminishing returns.

The third claim, inviting us to imagine how much worse things would have been had the central banks not done exactly what they did, suggests exactly the opposite of the scientific method and a striking lack of imagination. It implies that the only other possible courses of history would have been worse. It leaves no room for perverse consequences or negative side effects. It claims the counterfactual all to itself, leaving no room for doubt….

… So, as I see it, forward guidance is the process through which the Fed – through its more explicit influence on the expected rate of interest – becomes the much more explicit owner of the “conventional valuation” of asset prices.

One person who referred to this speech is John Authers of FT. His remarks:

Ten years ago many of us, myself included, thought a rerun of the Great Depression was very likely, and some of the actions taken in desperation during the crisis hold up slightly better than might have been expected. But long waves of monetary ease, fiscal austerity, and legal leniency for the guilty did not need to follow from this, and have left the bulk of the populace angry and embittered. [Link]

What John Authers has done in the piece linked above is something similar to what I am attempting here. He has linked to several pieces of writing on the crisis. The good thing for you, dear reader, is that his coverage and mine have only few common elements. So, if you read this blog post and his column, you will have covered a pretty good range of the writings that marked the 10th anniversary of the global financial crisis.

But, pieces such as these were not very common. We have another one by Peter Doyle, former IMF staffer in FT Alphaville. A key extract from his post:

But these ex-firefighters cannot bring themselves to say — though let’s hope it hasn’t entirely escaped their attention — that: public debt has more than doubled, curbing critical fiscal capacity (even if only due to political constraints) to respond in future; that policy interest rates are barely off their floors and QE is barely off its ceiling, so they are not much in reserve for the future either; that banking concentration has increased since pre-crisis; that no-one has any idea if international bank resolution frameworks will actually work in the heat of battle; and that the whole policy response to the crisis has emphatically underscored to big institutions that they will collectively be bailed out — spurring herd, concentration, and moral hazard behavior further. Focussing only on policy actions taken (raising the flood barriers) and ignoring the increased moral hazard and other impairments arising from the crisis response itself (the higher tide), everyone wants to agree that things are “safer” now; but absolutely no-one wants to be asked if things are safe.

However, I believe that Peter Doyle lets bankers off too lightly. He does not ask the question that John Authers asks. He is dismissive of the fact that no real big cat banker went to jail.  Peter Doyle is happy with political accountability.

Also, I am not quite sure that China bailed out the world economy and that they did it out of their generosity or enlightened public interest. Of course, policymakers who were part of the G-20 deliberations at that time tell me that those who had the capacity to stimulate were asked to stimulate their economies (those with external surpluses). China had one of the largest external surplus.

But, central bankers have their defenders too. A prime example is Neil Irwin of NYT. The header of the article gives the story away:

The Policymakers Saved the Financial System. And America Never Forgave Them [Link]

It comes across as a pathetic attempt to paint policymakers as victims of irrational, ungrateful lynch mobs.

I think Peter Fisher demolishes the argument that they saved the world. Assuming that American policymakers did indeed save the world, the question that comes to mind is this:

If a firefighter puts out the fire dousing the house with water, one will be thankful. But, what if he continues to douse the house with water, long after the fire is put out?

Joseph Sternberg in Wall Street Journal asks the right questions:

After decades of financial transformation, globalization and policy experimentation, central banks know less than they used to about the effects they have on Main Street. It’s likely to be some time before we figure out what central banks actually did to the economy after the Lehman crisis, let alone whether it worked. [Link]

He says that central banks lost control of the transmission to the real economy after the 1970s. Quite true. They never admitted to it. The change happened with the Rise of Finance as banks created money (credit) plentifully since then.

Matt Stoller of the Open Markets Institute contrasts the Roosevelt bailouts with that of Geithner-Obama bailouts. He says that the Paulson-Geithner-Bernanke bailout eroded the social contract that lies behind the capitalist America – home-ownership. He has a pithy quote from Roosevelt:

In 1938, Franklin Delano Roosevelt offered his view on what causes democracies to fail. “History proves that dictatorships do not grow out of strong and successful governments,” he said, “but out of weak and helpless ones.” Did the bailouts of ten years ago work? It’s a good question. I don’t see a strong and vibrant democracy in America right now. Do you? [Link]

I have to agree with Franklin Roosevelt there. Obama administration is responsible, in more ways than one, for the economic and social polarisation of the American society.

Anand Giridhardas takes a different but related line about the elites (ht: Rohit Rajendran). The burden of his song is that philanthropy is a very poor (even morally wrong) substitute for self-aggrandisement of the elites in their normal lines of business or commerce. Quite true. Their true philanthropy will come through or should come through in the manner in which they run their businesses and treat their employees. You can read his interview and his article here and here.

But, the interesting thing – no fault of Giridhardas – is that he has very few cogent answers’ to elite aggrandisement. His ideas – assuming student loans and doing some affordable housing – sound too naive. I do not blame him. That is the nature of the world. Even democracy is only a symbolic fig leaf for the dominance of the elites. It gives the ordinary folks a belief (false) that they have a stake in the process and they shape it. It is far from the truth. They benefit when the tide is so big that it lifts all boats. But, they fail to notice that some of the boats are lifted higher and those are bigger and more powerful boats too. The second time their needs get some attention is when a crisis like the ‘Great Depression’ strikes.

In a way, by preventing the ‘Great Depression II’, the crisis managers – Paulson, Bernanke and Geithner – prevented meaningful benefits and better lives for the ordinary masses which Teddy Roosevelt managed to deliver using the Great Depression as the trigger.

Barry Ritholtz, a bear (Pre-2008) turned bull (post-2008) has a short and pithy column on ten things that people still get wrong about the crisis. One tends to agree with most of what he had written. Talking of Barry Ritholtz, one should read this column by Joshua Brown (ht: Rajeev Mantri) who had commented on how he met Barry and benefited. The column is about how intellectually open-minded Bary was (and, if I may add, lucky) after the crisis and turned bullish. That merits a separate blog post. I shall do it after this one.

Aaron Brown of AQR Investments wrote (ht Rajeev Mantri) in Bloomberg that crisis autopsies asked the wrong questions. He wonders why banks accumulated illiquid assets, cut loan-loss reserves and raised dividend payments after 2006 when the problems were beginning to manifest already. That could be due to poor risk management, complacency and indefinite extrapolation of near-term optimistic trends.

In India, Ila Patnaik could not resist taking potshots at RBI for claiming to have handled the crisis fallout far better than other countries did. But, that is true. Not only did RBI do well in the immediate aftermath but some of its pre-crisis measures are only now becoming de rigueur in the Western world.

This sentence is too clever by half:

It (India) was at the other end of the spectrum, where instead of worrying about sophisticated derivatives products being traded, most derivative products have restrictions, or are banned, and the bulk of the population has no access to bank loans. [Link]

It is too clever because ‘non-access to bank loans’ is a serious problem but not trading derivatives is not. It is gambling by another name. Putting both in the same sentence or mentioning them in the same breath is to draw an utterly false equivalence between the two.

If India had absorbed the lesson from the crisis that financial sector liberalisation had to be pursued even more deliberately than before, it was then a lesson well learnt, unlike what Ms. Patnaik thinks.

Niranjan Rajadhyaksha (now with IDFC Institute) wonders if there is so much a need for a new economics as there is one for a dialogue between different schools of economics, in the wake of the 2008 crisis:

Too many critics have lazily equated modern economics with a certain style of macroeconomic thinking that was dominant in the financial markets as well as in central banks, especially the ability to forecast future outcomes. It is a bit like criticizing all of modern medicine because oncologists are not yet capable of predicting when cancer will strike. [Link]

He praises Olivier Blanchard for intellectual honesty. But, Blanchard has not deviated from the Washington – New York consensus as much as he made us believe that he has done so. Niranjan’s praise is not fully earned, yet.

Ira Dugal has a good conversation with Dr. Subbarao, who stepped into RBI and stepped into the crisis, into G-20, etc. His entire tenure was marked by a series of global and local crises. Her interview with Dr. Y.V. Reddy is here.

My favourite academic-politician Yanis Varoufakis was part of a panel of experts whose views ‘The Guardian’ newspaper sought. I had not read all their views. But, here are his proposals to make the world better:

What should be done? First, we need a global green investment programme to put the global glut of idle savings to useful purpose. A multilateral partnership of public investment banks could issue bonds in a coordinated fashion, which their respective central banks would support in the secondary markets. In this manner, global savings would be energised into major investments in jobs, the regions, health and education projects, and the green technologies that humanity needs.

Second, trade agreements must commit governments of poorer countries to minimum living wages for their workers. Third, we need a new Bretton Woods agreement to rebalance trade, re-couple trade and capital flows, put the financial genie back in the bottle, and create an international wealth fund to alleviate poverty and support marginalised communities across the world. [Link]

His ideas make sense to me. But, that also means that they won’t be taken up seriously. Comments by rest of the panel also, at the headline level, make sense. But, one has to dig deeper. I have not done that.

The panel by FT – a novel one – was not a panel. It simply asked seven people as to how their lives changed post-crisis. Each one was interesting and human in its one way. Comments by Nick Bayley, who was the Head of Regulation at the London Stock Exchange are appropriate in this context.

This episode alone would make for an interesting case-study:

I was on the Sunday night conference call on September 14 2008 when Paul Tucker from the Bank of England told representatives of all the big City firms and infrastructure that the Barclays acquisition of Lehman had failed, and Lehman was going to go down the pan the following morning.

It was just a monumental time. Lehman was a global titan. The idea that it would collapse was unthinkable. We knew there were issues in the market; prices were all over the shop. But we went into that weekend assuming that someone would step in and a deal would be done.

There must have been 30-odd institutions on that Sunday night call. When Paul told us that Lehman would go down the next day, nobody said anything. He said he wanted to go around the call and hear that we were ready and this wouldn’t cause a problem. He said he’d start with the London Stock Exchange, so I was the first person to speak.

When in doubt, keep it short. I made a few noises about Lehman’s important role in the equity markets and that we have default rules that come into play, and then I shut up. We went around the call and everybody said the same thing. Nobody told Paul Tucker, ”This is going to cause huge problems, and there will be a major domino effect.” [Link]

No one says what every one knows to be true because no one wants to be the bearer of bad tidings! Nor does Paul Tucker probe them (based on this recollection here, of course).

Andy Kessler (I have read one of his books but forgotten which one it is!) has a good piece on the politics of the collapse of Lehman Brothers. His concluding words:

There is more concentration in banks today than pre-Lehman. They’re better capitalized with better reserves, but it’s still fractional reserve banking. And the shadow banking business that got drenched in derivatives may be larger today than it was before the crisis. Leveraged loans are rampant. That doesn’t point to stability.

In downturns, equity hurts but debt kills. Like an electrode-implanted rat that can’t stop pushing a pleasure lever, banks will lend until they implode. A decade ago, the Fed failed as the lender of last resort. It’s still failing at preventing the next crisis. [Link]

This is the best quote (by Nick Bayley) to end this blog post:

We live in a bubble in financial services. Anyone who tells you otherwise is probably kidding you. We get paid more than most industries do. Do we deserve it? Not in my view. Are people much cleverer in financial services than in other industries? No, not in my view.

Kissinger on Artificial Intelligence

I am no fan of Henry Kissinger. One cannot be, after reading ‘The Blood Telegram’. But, his comments on Artificial Intelligence were very thoughtful. They were written in ‘The Atlantic’ three months ago. I do not know why I never got around to posting the extracts from that article here, although I had saved the extracts for posting as soon I had finished reading that piece. Today, when I read the well-written review of Yuval Harari’s latest book by Manu Joseph in MINT, I resolved to post it here today:

Inundated via social media with the opinions of multitudes, users are diverted from introspection; in truth many technophiles use the internet to avoid the solitude they dread. All of these pressures weaken the fortitude required to develop and sustain convictions that can be implemented only by traveling a lonely road, which is the essence of creativity. ….

………….  Before AI began to play Go, the game had varied, layered purposes: A player sought not only to win, but also to learn new strategies potentially applicable to other of life’s dimensions. For its part, by contrast, AI knows only one purpose: to win. It “learns” not conceptually but mathematically, by marginal adjustments to its algorithms. So in learning to win Go by playing it differently than humans do, AI has changed both the game’s nature and its impact. Does this single-minded insistence on prevailing characterize all AI?…

…….  Through all human history, civilizations have created ways to explain the world around them—in the Middle Ages, religion; in the Enlightenment, reason; in the 19th century, history; in the 20th century, ideology. The most difficult yet important question about the world into which we are headed is this: What will become of human consciousness if its own explanatory power is surpassed by AI, and societies are no longer able to interpret the world they inhabit in terms that are meaningful to them?

…………  Ultimately, the term artificial intelligence may be a misnomer. To be sure, these machines can solve complex, seemingly abstract problems that had previously yielded only to human cognition. But what they do uniquely is not thinking as heretofore conceived and experienced. Rather, it is unprecedented memorization and computation. Because of its inherent superiority in these fields, AI is likely to win any game assigned to it. But for our purposes as humans, the games are not only about winning; they are about thinking. By treating a mathematical process as if it were a thought process, and either trying to mimic that process ourselves or merely accepting the results, we are in danger of losing the capacity that has been the essence of human cognition….

….. the scientific world is impelled to explore the technical possibilities of its achievements, and the technological world is preoccupied with commercial vistas of fabulous scale. The incentive of both these worlds is to push the limits of discoveries rather than to comprehend them. [Link]

So, what did Manu Joseph write about Artificial Intelligence that triggered this post?

To draw our attention to the impending darkness, Harari mentions a chess contest that was held in December last year. One of the contenders was known to chess players around the world. Stockfish, believed to be the world’s most powerful chess engine, is a computer program that has been designed to analyse chess moves. No human has a chance to beat it. Stockfish played AlphaZero, Google’s machine-learning program. The two programs played a hundred games.

AlphaZero won 28, drew 72 and lost none. The programmers of AlphaZero had not taught it chess; it learned on its own—in 4 hours.

Google’s claim of “4 hours” is actually a bit dramatic and opaque.

Also, AlphaZero has been training through such powerful devices that we should not try to comprehend “4 hours” in human terms. Harari, despite being a historian, is not concerned with the nuances of it all. He wants us to be scared. All things considered, it still is extraordinary that AlphaZero could teach itself chess and become the best chess player in the universe known to us. Harari uses such events to point to the future when machines will do almost all human tasks.

It is fitting (in many ways) to end this post with a link to the article by Nicolas Carr published in 2008 on whether Google was making us stupid. Now, we know the answer or do we?

Employment creation in India

Apparently, Surjit Bhalla and his co-author (Tirthatanmoy Das) have put up a paper on the website of the Economic Advisory Council of the Government of India on job creation in India in 2017. They estimate it to be 22 million jobs. That seems to be on the high side. Commentators have their knives out to attack the estimates. The protagonists and the antagonists are politically motivated. I am yet to read their paper. But, I have seen two critiques. One by Professor R. Nagaraj and the other in Hindustan Times which was supposedly second of a five-part serial on Indian labour market.

Professor Nagaraj analyses the claims of Bhalla and Das in four dimensions. The third dimension is that of generating formal employment estimates from the data provided by the Employee Provident Funds Organisation (EPFO). Prof. Nagaraj’ critique is stale and wrong because of the work of Pulak Ghosh and Soumya Kanti Ghosh had taken them into consideration in coming up with their conservative estimates of formal job creation from EPFO data. They have excluded EPFO enrolment through amnesty. They have excluded those who were above 25 years of age. They have dropped those where even one contribution was missed. I have written about their work here and here. That Prof. Nagaraj rehashes the same critique is a reflection of both sloppiness and bias.

Key sentences in this piece tell me that the authors are offering opinion and not analysis. Pulak Ghosh & Soumya Kanti Ghosh’ estimates based on EPFO were conservative and passed the test of rigour. These authors, when discussing their work, say that Ghosh & Ghosh were criticised. They leave it at that. Criticised by whom? For what? and how rigorously? Were the criticisms correct and reasonable?

That throwaway line dilutes the seriousness with which one should take the entire piece although one cannot and does not rule out political and, otherwise,upward bias in the work of Bhalla +1.

The first part is here (can be safely skipped) and the third part is by Manish Sabharwal. Those who have not read Manish’s articles on Indian labour market before can find them all neatly recapitulated in that piece.

A Chinese company perspective on the trade war with America

Business Review and Outlook

10 years ago, the U.S. printed money like crazy and exported U.S. dollars all over the world. Now, the U.S. has become a global enemy, trying to bring back the exported U.S. dollars (the U.S. dollar debt of the emerging market in the first quarter was close to 3.7 trillion) and supply chains, as well as to undermine the asset markets of other countries and the global supply chain order. No wonder the U.S. has made a lot of enemies. Fortunately, Trump does not have the same wisdom as Mao Zedong in making alliance with one while fighting another. He wants to fight the world. But to defeat the U.S. hegemony is not an easy task. The history told us that those who wanted to kick out the big brother would run the risk of being wiped out. Nevertheless, Chinese are savvy and resourceful. Deng Xiaoping said, “we should grope our way across the river, going one step at a time”. Jiang Zemin said, “keep a low profile to make a big fortune”. Han Xin demonstrated his immense ability to endure humility in order to preserve his existence for future accomplishments. Such wisdoms contributed to the creation of incredible historical achievements one after the other.

Today, the U.S. is pushing the trade war to the limit. Yet, it is not easy to cripple the China model, even with Trump’s wisdom. With a looming war, there are risks as well as opportunities. Therefore, the Group’s established policies will remain unchanged. While some projects are delayed pending for the government’s new plan, the Group will always ensure that Shareholders’ benefits are well taken care of.

Source: Half-yearly interim report of the China Properties Group Ltd. (1838 HK) [Link]

The moral requirements of Nirmal Mulye

This story boggles the mind. The Chief Executive Officer is either Indian or of Indian origin. His comments are politically incorrect, at the minimum and wrong, at worst.

“The point here is the only other choice is the brand at the higher price. It is still a saving regardless of whether it is a big one or not,” said Mr Mulye.

Mr Mulye compared his decision to increase the price to an art dealer that sells “a painting for half a million dollars” and said he was in “this business to make money”.

He also defended the actions of Martin Shkreli, who became infamous in 2015 for his decision to raise the price of an Aids and cancer drug from $13.50 to $750 per tablet. Shkreli was jailed earlier this year on unrelated fraud charges.

“I agree with Martin Shkreli that when he raised the price of his drug he was within his rights because he had to reward his shareholders,” said Mr Mulye.

Mr Mulye pointed out that Shkreli was able to increase the price of Daraprim so dramatically because his company was the only one making it.

“If he’s the only one selling it then he can make as much money as he can,” said Mr Mulye. “This is a capitalist economy and if you can’t make money you can’t stay in business.”

He added: “We have to make money when we can. The price of iPhones goes up, the  price of cars goes up, hotel rooms are very expensive.” [Link]

I do not know whether he has learnt that the goal of capitalism was not rewarding shareholders at all times; that it is a construct of the 1980s, etc. Further, I wonder if he also knows that capitalist enterprises could survive only if they are also seen by the market as being fair players and not amoral players. Then, there is Karma, of course.

I wonder what Adam Smith would have made of him, had he been around.

Students of economics can debate the following questions:

  • Is market economy compassionate?
  • Or, is there no place for compassion in a market economy? Why not? Shouldn’t it be there?
  • Without compassion, can there be a society? Without society, can there be an economy? – market economy or non-market economy?
  • Further, is he right to come across as so callous and insensitive? He may score marks for honesty but is the CEO being  insensitive?
  • There is another angle: Intellectual Property Rights/Patents of Pharma companies. Should there be IP protection at all, in the first place? If so, for how long?

These are all the questions one can explore.

Amusing and priceless

This is the amusing stuff:

“Juncker vows to turn euro into reserve currency to rival US dollar”

He must pay close attention at least the topline results of the PEW Survey I had blogged on earlier.

A quick recap:

Underneath Mr. Macron’s pro-European rhetoric, the French people are only closely behind Italy in their distaste for the European project. Politicians do not command much trust. The public is confused and worried on immigration. Distrust of media is rather high as it is the case with financial institutions.

(2) This is priceless stuff:

“Aung San Suu Kyi defends verdict against Reuters journalists”

This underscores the ‘free lunch’ of being a ‘Liberal’ outside the government and how difficult it is to govern as a ‘Liberal’. Indeed, there is an inherent contradiction being in government and being Liberal.