Socialism defined by rage to replace Capitalism defined by greed?

I think it has become important to re-interpret Adam Smith or interpret him correctly. About eleven days ago, this blog had posted about an article in Aeon on the visibly famous Adam Smith for his ‘invisible hand’. It turns out that he was not a big fan of ‘Invisible hand’ and certainly, not in isolation or independent of social norms and values. The blog post had also referred to a review by John Kay of a book by the British Conservative MP Jesse Norman.

It turns out that a good summary of his book is provided by Jesse Norman himself in an article he had penned for FT in June this year (ht: Gulzar Natarajan).

He wants to dispel five myths or point out five facts about Adam Smith and his famous work, ‘The Wealth of Nations’ (a short hand, no doubt):

(1) ‘Wealth of Nations’ is important because Smith is the first person to put markets at the centre of economics.

(2) “Markets are living institutions embedded in specific cultures and mediated by social norms and trust.” (verbatim quote from Jesse Norman’s article)

(3) What matters to a market economy is not empty rhetoric but the reality of effective competition and its most important feature is that companies internalise their costs. Something that banks are terribly adept at passing on, for example. Privatisation of gains and socialisation of losses is the anti-thesis of free markets.

(4) “Markets constitute a socially constructed and evolving order that exists and must exist not by divine right but because it serves the public good”. Again, a verbatim quote. This is important because once imperfections – that exist – are allowed, many of the supposed benefits of free markets (for public good) disappear.

(5) “Both individual markets and the free market order itself rely on the state.”

These five key aspects or elements of a market order are very important for its very survival and existence. Slowly,  the ‘capitalism defined by greed’ is being replaced by ‘socialism defined by rage’. It will be hard to choose between the two as to which is the bigger evil. Very hard.

Bagehot has a timely warning on the leftward lurch in British politics:

The compensation of the average boss of a FTSE 100 company increased by 11% in 2017, to £3.9m, while the pay of the average worker failed to keep up with inflation. Banking in Britain is a game played by insiders who enjoy a large implicit subsidy from taxpayers, who have to bail them out if they get into trouble. The same banks have little connection with the real economy: only about 10% of their lending is to businesses outside commercial property. Global companies such as Amazon and Google get away with paying little tax by the ruthless use of tax havens and transfer pricing.

No political party or leader in the world is able to convince or persuade businesses to understand that capitalism without conscience is a crime. By the time they realise it, it may well be too late. The world is responding or reacting, accordingly.

Reuters has a story out on the popularity of the incarcerated Brazilian leader Lula da Silva. It is unlikely he will become President. But, his party candidate might win, under his blessing or on ‘imported popularity’. But, PT, unlike in 2002-08 will be clearly Left-oriented.

In South Africa, there is fear about takeover of land from white farmers. Most of the media report might be slanted and that the South African government might be pursuing reasonable policies. Or, may be not. But, it may well be impossible to divine the truth for quite some time. Headlines mention the Zimbabwe parallel, of course. See here for the issues at stake.

Summary: Land can be taken over without compensation but such takeover can be challenged too in courts.

In America, Bernie Sanders and Elizabeth Warren are the most popular Democratic party leaders. Alexandria Ocasio-Cortez, the young democratic socialist firebrand ousted established Rep. Joe Crowley in the New York House Democratic primary in June.

These are enough warning signs. Capitalists must admit to their follies and reform themselves.

Higher taxes for higher incomes and for capital gains are in order. Higher wages are in order too. The march of artificial intelligence that takes away jobs and psychological security must be slowed and reversed, if possible. Eroding self-worth lowers life expectancy and the living begin to live unhealthily too.

If capitalists fail to read the tea leaves correctly and ignore warning signs, it may be too late. They may be swept away and the world will have replaced one form of lawlessness with another.

The hole in Jackson Hole

Read the speech delivered by Jerome Powell, the Fed chairman at the Kansas City Symposium – an annual jamboree of central bankers in Jackson Hole, Wyoming. He has said all the right things only to either discount them later or to ignore them.

For example, he recalls the Brainard principle:

Brainard principle, which recommends that when you are uncertain about the effects of your actions, you should move conservatively. In other words, when unsure of the potency of a medicine, start with a somewhat smaller dose.

This is perfectly valid in the case of QE. But, precisely that is what he goes on to defend, in the next sentences.

He correctly notes:

in the run-up to the past two recessions, destabilizing excesses appeared mainly in financial markets rather than in inflation. Thus, risk management suggests looking beyond inflation for signs of excesses.

But, he reserves the brave words ‘whatever it takes’ only to fight unanchored inflation expectations and financial crises of the type we encountered in 2008. If financial excesses precipitated the last two recessions, one would expect the Fed leadership to pledge to do whatever it takes to avoid building up financial excesses. But, he did not say that.

In the meantime, signs of financial excess abound. We documented one yesterday.  Here is another:

Before the financial crisis, about a quarter of the leveraged loan market was termed “covenant-lite”; today it stands at almost 80 per cent, according to Moody’s. Almost two-thirds of the entire market now has a lowly credit rating of B2 or worse, up from 47 per cent in 2006. In other words, an already junky market has deteriorated further…..

More than half of loan issuers have zero “unsecured” debt that could insulate lenders from the pain of a debt default, AllianceBernstein pointed out in a report this week. [Link]

Alliance Bernstein pointed out,

investment-grade credit quality got worse. Today, 48% of the bonds in the index are rated BBB, the lowest rung on the investment-grade ladder, up from 33% at the end of 2008. A-rated bonds declined from 50% to 41% over that time. [Link]

Channelling Greenspan for risk management makes one wonder if the Federal Reserve has learnt anything from the mistakes it made in the last twenty years because ‘the once in a lifetime improvement in productivity’ that Greenspan swore by, proved to be a chimera.

But, there are cheerleaders for a policy approach that avoids dealing with financial excesses. See this, for example.

John Authers of FT thinks that the overall message of Mr. Powell’s testimony at Jackson Hole was dovish in tone. May be, he is right.

The more things change, the more they remain the same.

Weekend Levity and Serious stuff

Volkswagen has a ‘Head of Integrity’ [Link]

Mr. Karan Thapar chides the Indian government for not accepting the offer of aid from the Government of the UAE. The newspaper that published his article has a good response.

Amrit Dhillon in ‘Business Standard’ on the ‘End of #metoo’ [Link]

Recycling India’s floral waste. It will be very good if it happens. [Link]

Rujuta Diwekar wonders why chocolates, potato chips and cola have not been called ‘pure poison’ while coconut oil has been? Valid point.

Pro-cyclical finance

Eric Cinnamond, a blogger, I discovered recently wrote:

As the current expansion marches on, I’ve been thinking more and more about business cycles and how I incorporate cyclicality into my valuation process. [Link]

He cautioned against extrapolation of current record earnings and the need to normalise earnings for cycles.

But, a recent Wall Street Journal article on how financial institutions are ramping up personal loans now is an eye-opener for those who are not convinced of the cyclicality of finance:

American Express Co. , Goldman Sachs Group Inc., LendingClub Corp. and Social Finance Inc. are among those behind an onslaught of unsolicited mailings offering unsecured loans, known as personal loans, as large as $100,000. In the first half of this year, lenders mailed a record 1.26 billion solicitations for these loans, according to market-research firm Competiscan. The second quarter marked the first period that lenders mailed out more offers for personal loans than credit cards, a much bigger market, according to research firm Mintel Comperemedia. [Link]

The increase in personal loans as the economic cycle has matured is amazing. Once again, lenders are taking on more risk at the peak of the cycle and are also persuading borrowers to take on more risk at this late stage in the economic cycle. The chart embedded in the article offers telling evidence of that.

personal loans

This should not be surprising at all:

Now, as the market gains momentum, borrowers who took out personal loans more recently are falling behind on payments at a faster rate, according to TransUnion, and several lenders are reporting higher losses.

This should be very worrying, of course:

Last year, more than 1.5 million personal loans were given to people with credit scores below 601, on a scale that tops out at 850, according to TransUnion. That is the highest number in more than a decade. Currently, borrowers with credit scores considered prime or better account for just over half of personal-loan balances, according to TransUnion.

But, newspapers that were responsible once upon a time are focusing on the wrong finance problem: campaign finance of the President of the United States of America!

Coconut oil

Came across this article in ‘The Guardian’ on Coconut oil. A professor at Harvard calls it ‘pure poison’.

A friend of mine who is a Cardiac specialist and surgeon wrote back:

“We have been using coconut oil for many centuries without any mishap. Whole of Kerala is using it and so many Pacific islanders do use coconut. Think the west is trying to undermine us! Our forefathers were clever indeed!”

Another friend sent me a link to this effective speech by Dr. B.M. Hegde on coconut oil. Dr. Hegde, in that six-minute speech, mentions an Institute that he has co-founded. You can find it through this link.

Another friend wrote in to say that he would trust B. M. Hedge over anyone else anyday.

One more friend – who always gives me a complex whenever I talk to him – shared the following information and insight with me:

I have read a lot of stuff on food and the only 2 things I have concluded are 1) a Mediterranean type diet is good, and 2) concurring with Michael Pollan’s pithy advice ‘Eat food. Not too much. Mostly plants’

I think Pollan is the Atul Gawande of food writing. I love his description of edible food like substances (high fructose corn syrup and other products of food science) which he contrasts with real food.

He added:

‘In defense of food: an eater’s manifesto’ is the one with the pithy advice; his preceding book ‘The Omnivore’s dilemma’ was good and his most prescriptive book is ‘Food rules’ which followed ‘In defense of food’.

I think coconut oil has already benefited me a lot, as you can see from the information I was able to gather from friends.

India’s GDP growth fracas

T. N. Ninan has a good op.ed today with many valid points.

But, I doubt that India has achieved rapid growth sustainably. UPA 1 growth was not sustainable and UPA II growth numbers in 2009-10 and in 2010-11 were even less so. Among other things, that is one of the reasons for this government ‘not being able to accelerate’ growth.

Mr. Ninan is very right to call for considerations of balance sheet. Indeed, the Kerala floods are a reminder that, for India, there is no real trade-off between economic growth and environmental considerations.

The current NDA government is right to question the costs of UPA I and II growth. Lest we forget, they are a big current account deficit, even bigger fiscal deficit, five years of double-digit inflation, a plunging currency and a huge NPA pile-up on cronyism.

Finally, the Congress also cannot cherry pick data that it likes. If CSO data on  growth are good for the Congress, then so must EPFO, NPS and ESIC data on formal job creation be.

Personal update

I was travelling from the 17th August to 22nd August. Came back to Singapore and it has not been this hectic in a while.

I am taking over as the Dean of the Business School of the Institute of Financial Management and Research (IFMR), located at Sri City in Andhra Pradesh. One takes NH 16 from Chennai to get there. It is little over 80 kms. from Alwarpet or Anna Salai – Gemini Circle. I start on October 4.

IFMR is the sponsoring body of the Krea University.

Not sure if I will find time to blog as avidly and regularly as I used to do all these years. Will find my way around it for it is an outlet and refuge for me.

Not that many missed my blog posts this past week 🙂

Why do I write

Came across this from Frank Partnoy (yes, I am not done with Partnoy, yet!)’s twitter handle.

This is by George Orwell on why he writes.

He lists four purposes for writing:

Putting aside the need to earn a living, I think there are four great motives for writing, at any rate for writing prose. They exist in different degrees in every writer, and in any one writer the proportions will vary from time to time, according to the atmosphere in which he is living. They are:

  1. Sheer egoism. Desire to seem clever, to be talked about, to be remembered after death, to get your own back on the grown-ups who snubbed you in childhood, etc., etc. It is humbug to pretend this is not a motive, and a strong one. Writers share this characteristic with scientists, artists, politicians, lawyers, soldiers, successful businessmen — in short, with the whole top crust of humanity. The great mass of human beings are not acutely selfish. After the age of about thirty they almost abandon the sense of being individuals at all — and live chiefly for others, or are simply smothered under drudgery. But there is also the minority of gifted, willful people who are determined to live their own lives to the end, and writers belong in this class. Serious writers, I should say, are on the whole more vain and self-centered than journalists, though less interested in money .

  2. Aesthetic enthusiasm. Perception of beauty in the external world, or, on the other hand, in words and their right arrangement. Pleasure in the impact of one sound on another, in the firmness of good prose or the rhythm of a good story. Desire to share an experience which one feels is valuable and ought not to be missed. The aesthetic motive is very feeble in a lot of writers, but even a pamphleteer or writer of textbooks will have pet words and phrases which appeal to him for non-utilitarian reasons; or he may feel strongly about typography, width of margins, etc. Above the level of a railway guide, no book is quite free from aesthetic considerations.

  3. Historical impulse. Desire to see things as they are, to find out true facts and store them up for the use of posterity.

  4. Political purpose — using the word “political” in the widest possible sense. Desire to push the world in a certain direction, to alter other peoples’ idea of the kind of society that they should strive after. Once again, no book is genuinely free from political bias. The opinion that art should have nothing to do with politics is itself a political attitude.

He goes on to conclude like this:

Writing a book is a horrible, exhausting struggle, like a long bout of some painful illness. One would never undertake such a thing if one were not driven on by some demon whom one can neither resist nor understand. For all one knows that demon is simply the same instinct that makes a baby squall for attention. And yet it is also true that one can write nothing readable unless one constantly struggles to efface one’s own personality. Good prose is like a windowpane. I cannot say with certainty which of my motives are the strongest, but I know which of them deserve to be followed. And looking back through my work, I see that it is invariably where I lacked a political purpose that I wrote lifeless books and was betrayed into purple passages, sentences without meaning, decorative adjectives and humbug generally.

Das Activist Manifesto

I cannot fathom why I did not blog on Frank Partnoy (with Rupert Younger)’s article on ‘The Activist Manifesto’ (‘What would Karl Marx write today’ was the title of their article in FT in March 2018). By chance, I stumbled upon it again, today.

I was writing to my friend Gulzar about some of the books written by Wall Street insiders. ‘F.I.A.S.C.O’ came to mind. Frank Partnoy was the author. He wrote it after he worked for Morgan Stanley. I had read the book long ago. I liked it. He practised law after that and joined University of San Diego in 1997. I understand that he is now shifting to University of Berkeley as tenured law professor. I had used his article in ‘The Atlantic’ on Wells Fargo (‘What’s inside American banks?’) in the courses that I teach.

I decided to check and see if he had a Twitter handle. Thankfully, he had one and even more thankfully, he was not an inveterate Tweeter! In the process, I chanced upon the FT article again on the rewriting of ‘Das Manifesto’. They had a website for the manifesto.

I spent time reading Professor Alan Morrison’s great introduction to the manifesto of Partnoy and Younger. Worth reading. I am yet to download their new manifesto and the original. Intend to do so.

In the process, from Partnoy’s Twitter handle, I read the wonderful review of Adam Winkler’s book, ‘We, the Corporations’ by Zephyr Teachout. Sample this comment:

Beginning in the 1970s, a group of activist lawyers associated with the University of Chicago persuaded courts to gut well-established principles designed to protect open markets and decentralized power, and to replace them with an ideology of efficiency that has contributed to our current crisis of monopoly capitalism and inequality. Winkler mentions the Chicago school in passing, but he doesn’t address the post-1980 antitrust cases, a striking oversight because they fit neatly into his theory: Corporate monopolies gained rights by asserting that they benefited the rights of others (in this case, consumers). [Link]

Teachout says that Winkler missed out on this but writes a nice tribute to his work.

Also, read the review of ‘The Chain of Title’ by David Dayen, reviewed by Frank Partnoy himself. It is the kind of stuff that one sees in developing economies. Nobody knew who had the titles to the properties that were foreclosed. Yet, they foreclosed! This happened in America. Heart-rending, actually:

Lisa Epstein, a nurse, learns that the bank foreclosing on her, the one at the end of
the securitization daisy chain, could not prove that it had legally obtained her loan. When she challenges the bank in court, its lawyers present a document dated three months after she was served with foreclosure papers — a “poorly drafted cover-up,” Dayen writes. She meets Michael Redman, a car salesman who had a similar experience, and persuades him to publish an online guide to uncovering mortgage fraud. The two of them connect with Lynn Szymoniak, a lawyer, who investigates the signatures in her own foreclosure action and finds one with a date when the signer was actually in state prison.

Exposing those lies becomes a moral crusade. The homeowners’ stories are emotional roller coasters, which Dayen meticulously reports. He and his characters find the banks’ behavior not just indefensible but criminal. Prepare to be surprised, and angry.

Partnoy also reviewed Anita Raghavan’s Billionaire’s Apprentice.

So, an evening in ‘partnership’ with Partnoy!

 

On Adam Smith

There is a nice article in ‘Aeon’ magazine on Adam Smith. The article is better than the review prof. John Kay wrote of a new book on Adam Smith which, I think, is similar to the article above.

But, the book itself might be richer in content than the review suggests. So, my comment on the review is not a comment on the book. Perhaps, the article in Aeon and the book might be convergent.

The important message from the article above is that Smith was not so much against state intervention as he was about ‘State capture’.

Further, there is the unnecessary obligatory reference to Donald Trump in Prof. John Kay’s article. Not needed at all, in the context of the article. John Kay too does not need to conform. If so, he would not have written ‘Other people’s money’ and authored the report on UK Equity Market Reforms. Just shows how powerful the tendency to conform to conventional wisdom is.