Adults in the room

That is part (or full) of the title of the book by Yanis Varoufakis, former Greek Finance Minister. I would like to get hold of it.  I have read his ‘Global Minotaur’. I liked it. The review of his book by Prof. J.W. Mason (a Marxist-economist, I am told) is quite well written. Makes one want to buy and read the book. J.W. Mason is Assistant Professor of Economics at John Jay College – CUNY.

The private memo sent by the European Central Bank to Italy, the advice that the Italian Prime Minister got from the German Finance Minister Wolfgang Schäuble to end collective bargaining and then the question that Christine Lagarde posed on Pharma sale de-regulation to Yanis Varoufakis are rather revealing. Notwithstanding all the tall talk of having learnt their lessons from the global crisis, of heightened sensitivity for the marginalised local population, the real agenda is laid bare in these situations.

I was also looking for a blog post that my friend Gulzar Natarajan had written on how many of these social enterprise investment funds incorporate in tax havens. Very simple. Consistency between practice and precepts or between words and deeds is missing. Credibility eroded. Backlash occurs and non-establishment candidates win. No point in blaming them. Elites bring this upon themselves and the public. Elites will survive. The public has it tough under both regimes.

At another level, this is also about the sovereign right to choose its economic agenda, the sequence and timing of implementation. Reminded of the paper, ‘Refocusing the IMF’ by Martin Feldstein published in ‘Foreign Affairs’ (March/April 1998). He said that IMF had no business dictating economic policy agenda to sovereigns.

(Postscript: I could not understand Professor J.W. Mason’s interview on the stock market. I do not quite fully understand why Marxist-economists believe that the Federal Reserve is helping the working class by not raising interest rates. To a degree, I can understand that. By raising rates just as wage growth gets going, the Federal Reserve snuffs at the nascent trend of higher income share going to workers. But, the failure lies not in that but in not raising rates early enough. The damage the Federal Reserve causes to the incomes of the working class with its monetary policy framework that underpins asset prices far exceeds the damage that it causes them with its belated tightening).


Jordan Peterson

Peggy Noonan has an interesting article (ht: Venugopal Ramakrishnan) on the interview of clinical psychologist and social philosopher Jordan Peterson by a British television journalist. From what she writes, I think Peterson’s work resonates with me. I listened to the interview he gave to Cathy Newman of Channel 4. He handled himself exceptionally well.

If you want to be ‘shocked’ at how someone could so deliberately distort the interviewee’s words and if you do not want to watch the interview, you can read an article in ‘The Atlantic’ on the conversation.

I got to know of Jordan Peterson as the person who had interviewed the Google employee James Damore. Sunder Pichai fired him for posing important questions on the culture at Google. Now, Mr. Pichai says he stands by his decision. Well, I suppose, it is too early for a mea culpa. Julian Baggini has a review of his book at FT.

The sub-title of the review is: ‘A YouTube intellectual’s advice on how to live emphasises order and tradition’. That is enough to put any objective reader off. The arrogance of some of these self-styled intellectuals is blinding them to the obvious reality that it is not helping but hurting the very causes that they claim to espouse – so-called liberal values. There is nothing very liberal or liberating about putting down another person. It is cheap and vulgar. It is intolerance. There are far better, more effective and more persuasive ways of critiquing a book’s content or the lack of it.

Cathy Newman of Channel 4 and Julian Baggini have done the greatest disservice to genuinely liberal values and principles.

Peggy Noonan has an answer for Julian Baggini:

When cultural arbiters try to silence a thinker, you have to assume he is saying something valuable.

So I bought and read the book. A small thing, but it improved my morale.

As many readers-commentators in FT have said, the article in ‘The Guardian’ on his book is far more insightful. I could also read what Professor Peterson had to say about the backlash his interviewer from UK’s Channel 4, Cathy Newman, faced.

The last line of that article tells me that he is a liberal:

If Cathy is interested, maybe we could model a conversation. That would be a good thing.

That is the way to foster a dialogue.

Books I read in 2017

During the year, I read several books:

1.       The Money Formula (Paul Wilmott + 1)

2.       Advice and Dissent (Dr. Y.V. Reddy)

3.       The Beautiful Country and the Middle Kingdom (John Pomfret)

4.       Journey Continues (Sri. M)

5.       Asia’s Reckoning (Richard McGregor) – in parts, because I was not persuaded to read the whole thing

6.       War by other means (Robert Blackwill + 1)

7.       Aadhaar (Shankkar Aiyar)

8.       Reflections on the Revolution in Europe (Christopher Caldwell)

9.       I do what I do (Raghuram Rajan)

10.   The Fix (Jonathan Tepperman)

11.   An Extraordinary Time (Marc Levinson)

12.   A Capitalism for the People (Luigi Zingales)

13.   Sapiens – a brief history of humankind (Yuval Harari) – brilliant in parts

Advice and Dissent, The Beautiful Country…, Reflections on the …., Sapiens and The Fix deserve special mention. My comment on John Pomfret’s book are here. For the spiritually inclined, Shri. M’s ‘Journey Continues’ is utterly fascinating.

A short review of Pomfret’s book, ‘The Beautiful Country and the Middle Kingdom’ appeared in MINT:

Among the many books I read this year, I would pick The Beautiful Country and the Middle Kingdom by John Pomfret as the best.

It was slow to start as the book traced the history of the Sino-American relations from several centuries ago. But, once the book entered the contemporary era, I perked up. What comes out rather clearly in the book is that China has played America like a fiddle over several decades–from President Nixon to President Obama. It appears that America won the Cold War not because of but in spite of the State Department. Nixon reflected later that he might have created a Frankenstein monster. Too late. When President Trump told Xi Jinping that China did what was right for it and that his predecessors had to be blamed for the unequal relationship, he was spot on.

It is interesting that Mao waived Japan’s apologies for its crimes against China but that did not stop his successors from making it a big issue. The amount of damage that Nixon and Kissinger have done to America’s (and India’s) interests thanks to their utter cynicism is considerable. We learn from the book about the origin of Siamese twin. The lesson that comes out rather clearly is that China views solicitude as a sign of vulnerability. Being nice is unrequited diplomacy with China. The book is a must read for India’s diplomatic community that includes both policymakers and starry-eyed commentators. [Link]

Lessons in economic ideology from office room allocation in U. Chicago

This is coming from Luigi Zingales who wanted to save capitalism from capitalists!

When I visited Stanford Business School many years ago , I was surprised to see that all of the offices in its new building were identical — a result that had cost money , thanks to the structure of the building . Why should socialism prevail with respect to offices ? I was told that the dean , who had to assign the offices , wanted to avoid the headache of having to decide who would get the best ones.

At the time , I thought these concerns were exaggerated , until Chicago Booth also constructed a new building for itself but decided to differentiate offices . To minimize lobbying , the dean announced that each faculty member would be randomly assigned a number within categories — presumably assistant , associate , full , and chair professor ( though this was not explicit ) , and would choose an office sequentially . But when the selection order was announced , the most famous faculty members were first , suggesting that the process had not in fact been random . The school erupted . Emotions took over . One faculty member shouted “ I hate you ! ” at another who had received a better office , ruining their relationship for quite some time .

We might underestimate the cost of all this commotion because it was not easily measurable . But if you do factor in the time wasted in office – allocation simulations , along with the cost of tense relationships for years to come , you see that Stanford’s choice was the more efficient one. This point has been recognized by a few economists.

Source: Zingales, Luigi. A Capitalism for the People: Recapturing the Lost Genius of American Prosperity (p. 205). Basic Books. Kindle Edition.

I shared this with my friend Gulzar Natarajan. We then had a couple of back and forth on it. He was wondering whether Communism and Socialism were ostracized because they were also tainted by association with totalitarian repression that some of the Communist leaders practiced.

At the same time, he noted that capitalism had adapted by embracing certain aspects of socialism:

“adaptability of capitalism to emergent threats – the welfare state, regulatory institutions, social democracy itself.”

This is what I wrote in response:

Several valid questions and interesting speculations in your email. Who knows the answers? In all these matters, all of us are like the blind men guessing the elephant. We are also influenced by the context and the times in the weights we assign to competing arguments.

I have always believed that a competitive market economy is about as egalitarian as one can get, in terms of opportunities. That is about the best one can hope to achieve in a society. Equality of outcomes, of course, takes away the incentives.

The best a government should aim for is a combination of competitive market economy with social safety and affirmative actions in the early phase of lives for the population – for health and education. Easier said than done.

In the concluding chapters, in ‘Faultlines’, Raghuram Rajan spends some time on these questions. They were practical and useful.

As for the current state of the world, humans are doomed to go through the cycles – swings between extremes with very brief (if lucky) interludes of stable equilibriums. Those of us who are lucky to find ourselves born and grow into adulthood in such stable equilibrium periods think that this steady state of affairs prevails permanently. We fail to grasp and remember our history lessons well.

In fact, that is the other lesson from this office room allocation episode. No matter how much of economics or anthropology or sociology these Professors have learnt, they had to fight for their office rooms with bitter name calling! We have too many flaws to create/achieve anything positive and stable on an enduring basis.

That enduring feature of humanity is what brings out and accentuates the drawbacks in these systems – capitalism or socialism or market economy.

We are capable of bringing out the worst in ourselves and in all things that we touch!

I am re-reading Yuval Harari’s Homo Sapiens. I read it too quickly the first time around. Sapiens are deadly!

Only one firm matters

An extraordinary proportion of people with training and experience in finance have worked at the highest levels of every recent presidential administration. Four of the last six secretaries of the Treasury fit this description. In fact , all four were directly or indirectly connected to one firm: Goldman Sachs. This is hardly the historical norm : of the previous six Treasury secretaries, only one had a finance background .

In 2001, following revelations of accounting irregularities, Enron verged on collapse, which meant that Citigroup, a major lender, would lose a significant amount of money. Fulfilling a request made by Michael Carpenter, head of Citigroup’s investment banking unit, Rubin called Peter R . Fisher, then undersecretary of the Treasury and asked him to consider advising the bond – rating agencies against an immediate downgrade of Enron’s debt. In other words , Rubin (a Democrat ) lobbied Fisher (a Republican ) to help bail out Enron. ( So much for Washington’s ideological divide.)

What Rubin did was technically legal, as The Economist explained, only because Bill Clinton , in his last days as president , had canceled an executive order that barred top officials from lobbying their old departments for five years after leaving office.

Source: Zingales, Luigi. A Capitalism for the People: Recapturing the Lost Genius of American Prosperity (p. 68). Basic Books. Kindle Edition.

Today, of course, there is far more money riding on the models than in the 1980s – and when it comes to positive feedback, size matters. Indeed, another example of positive feedback is the relationship between the financial sector and regulators. As the sector increases in size, it gains more influence over the government; this allows it to change regulations in its favor, which allows it to grow even larger, and so on, until it becomes Goldman Sachs.

  • Sometimes called Government Sachs, because of the remarkable ability of its alumni to go straight into senior levels of government, perhaps related to the fact that the firm is a leading corporate donor to political campaigns (Baram, 2009). It is even better represented at central banks. Four of the Federal Reserve’s 12 regional banks  are currently headed by former Goldman Sachs executives. Only five banks have voting power, in a rotating fashion, and in 2017 ex-Goldmanites will hold four of these votes. Together with Mark Carney at the Bank of England and Mario Draghi at the European Central Bank, this means that interest rate decisions for much of the world’s economy are made by people who came from a single firm. Nothing to see here, move along.

Source: Wilmott, Paul; Orrell, David. The Money Formula: Dodgy Finance, Pseudo Science, and How Mathematicians Took Over the Markets (Kindle Locations 4524-4527). Wiley. Kindle Edition.

The iron laws of public policy are…

… that the road to hell is paved with good intentions and that the law of unintended consequences always applies.

Read this:

April 20, 2005, President George W. Bush signed into law the Bankruptcy Abuse Prevention and Consumer Protection Act, which reformed the rules overseeing bankruptcy , especially personal bankruptcy.

At its inception , the nation had to borrow heavily from England , and thus the protection of debtors was in the national interest.

The debate over the 2005 reform was completely dominated by the credit lobby and organized by the National Consumer Bankruptcy Coalition . In the words of one legal scholar : “ Never before in our history has such a well – organized , well – orchestrated , and well – financed campaign been run to change the balance of power between creditors and debtors.”

In the pre-bankruptcy – reform world , distressed homeowners would have filed for personal bankruptcy , which would have allowed them to discharge their credit – card debt , making it easier to hold on to their houses. Under the new law , this option was no longer open . According to calculations based on a recent study, the 2005 reform increased the number of people defaulting on their mortgages by almost half a million; and when a mortgage holder defaults and the house is auctioned off , on average it loses 27 percent in value.  If we apply this loss to the average price of a house sold in 2005 ( $ 290,000 ), we can estimate that the financial industry lost $ 39 billion as a result of bankruptcy reform.

Source: Zingales, Luigi. A Capitalism for the People: Recapturing the Lost Genius of American Prosperity (p. 68). Basic Books. Kindle Edition.

Father of nepotism

Raised as I was in Italy , I know a few things about nepotism . In its origins , the term is a euphemism : historically , the “ nephews ” receiving favors were in fact natural children of a pope ( Alexander VI ) , who — being a Catholic pope — was not supposed to have children.

Source: Zingales, Luigi. A Capitalism for the People: Recapturing the Lost Genius of American Prosperity (p. 40). Basic Books. Kindle Edition.