The broken world of finance or Does Capitalism need enemies?

I was startled to read these two stories and contrast them with the picture below.

This image file came via courtesy of this website.

This article in Bloomberg gamely tries but fails to make sense of the craze for negative yielding bonds.

Wework floated a debt before filing for IPO! It has been losing money ever since it was founded and it is valued at USD47.0bn!

In contrast,

Regus owner IWG , founded in 1989, has a similar business. It booked revenue nearly twice as high as WeWork did last year yet it has an enterprise value a bit above $4 billion. [Link]

Wework co-founder has reportedly cashed out US$700 million from the company through stock sale and borrowings against shares of Wework. JP Morgan advised him on his sales and it is also advising the company on its debt offering. His shares hold 10 times the voting rights of standard shares. He has properties that are leased back to Wework and he collects millions in rent from Wework! Source: Link

Evidently, he could cash out so much because the company had the chutzpah to issue USD4.0 billion of debt

What a model of ethical capitalism!

It is into this loss-making company with co-founder cashing out such a large sum before IPO that Softbank decided to invest USD 16.0 billion including USD 6.0 billion of new money! The amount was eventually scaled back after partners opposed it.

Blame central banks and their policies for money losing its value and investors losing their heads and eventually, their shirts and trousers.

We rent digital books and don’t buy them

Katharina Pistor rightly raises the alarm on Facebook’s cryptocurrency. Central bankers’ silence is, one hopes, a sign that they are studying it deeply.

Yanis Varoufakis (May 2019) writes that the stellar returns achieved by Greece’ stocks and bonds since 2012 are part of the problem. He is right. There is a gap between economic reality and financial returns. Greece is not the only place it is happening. But, it could be one of the more extreme examples. He forgot to zero in on the principal source of the problem: reckless monetary policy pursued by the developed world.

Wall Street Journal comment on the appointment of Christine Lagarde is a very good read. It is politicisation of the European Central Bank. Not that Draghi was much different. The comment notes that markets are cheering her appointment but that markets would regret it. Well said. The cheer is because it means continuation of reckless monetary policies.

Adam Tooze’ review of the book, ‘1931’ by Tobias Straumann made for very interesting reading. My friend Ajit Ranade suggested that I read a blog post by his friend on the book. I did so. It is well written. The post makes a good point about how Jews were made the scapegoats by the Nazi party when they were actually in the forefront of defending Germany’s interests in the peace conference and that the German foreign minister was Jewish, etc.

As to the take-aways from the book, I am not sure that there are neat answers to avoid a certain march of history, except in hindsight. Colour me sceptical on humans’ ability to solve the problems they create. They are good at creating problems but not that good at solving them. Most of the time they solve themselves or plain luck and humans take credit.

It is hard to quarrel with the motherhood statement made by the blogger here:

Economic orthodoxy must always take second place to the need to make sure individuals, communities and businesses are able to work and earn a decent return on their investment (labour in the case of individuals, capital in the case of businesses).  [Link]

One important take-away from Adam Tooze’ review is that democratic politics (local politics) can come in the way of doing the right thing in terms of global obligations. This is but a variant of Dani Rodrik’s ‘Inescapable Trilemma’. The review also reminded me of what I had not read yet: John Kenneth Galbraith’s account of the Great Depression.

This FT Edit made for very disturbing reading, especially for someone like me who has gotten used to reading stuff on the Kindle App in my iPad. I did not know that I am renting books and not buying them outright. As the Edit says, this is duplicitous. The Edit says that, in this regard, the revival of paper-based books is a good thing. I have to agree.

Sucheta Dalal in Moneylife has a good article on the corporate cleanup underway in India. She thinks it has been overdue. I hope she is right that it is being pursued with earnestness.

It happens during the day

Chanced upon the review of three books by Quinn Slobodian in ‘Boston Review’. The three books are ‘dark’ in his view, especially the first one, he reviews: The Age of Surveillance Capitalism: The Fight for a Human Future at the New Frontier of Power by Shoshana Zuboff.

He takes exception to her comments on how media influences behaviour:

One could ask whether her description doesn’t flunk the Cultural Studies 101 test by failing to acknowledge that the media’s designers don’t dictate directly its use and consumption. We hear a great deal about what companies “aim” to do through baroque projects of “behavioral modification,” but, as with the Cold War brainwashing techniques she references, we have little evidence that these efforts work—except for generating ever greater contracts for those pronouncing their own effectiveness. [Link]

But, let us listen to the testimony of Jim Balsillie, former CEO of ‘Research in Motion’ (remember Blackberry?):

Second, social media’s toxicity is not a bug — it’s a feature. Technology works exactly as designed. Technology products, services and networks are not built in a vacuum. Usage patterns drive product development decisions. Behavioral scientists involved with today’s platforms helped design user experiences that capitalize on negative reactions because they produce far more engagement than positive reactions. [Emphasis mine]

Third, among the many valuable insights provided by whistleblowers inside the tech industry is this quote: “the dynamics of the attention economy are structurally set up to undermine the human will.” Democracy and markets work when people can make choices aligned with their interests. The online advertisement-driven business model subverts choice and represents a foundational threat to markets, election integrity and democracy itself. [Link]

Indeed, the comment about on-line reminds me of advertising itself. I just did a blog post on it yesterday.

More importantly, very powerful lines above. The point to note here is obvious: it is not the subversion of the tech. platforms by populists, demagogues, far-Right and other extremists that is the issue. The platform is the subversion.

That is why it was disappointing to read that Stanley Druckenmiller, otherwise an intelligent man, criticise the Trump Administration’s consideration of anti-trust investigations of the tech. companies in the USA.

So, Zuboff is not exactly wrong. It is ‘dark’ for the rest of us because we don’t know (or cannot be bothered to fathom) how the ‘rich’ and the ‘connected’ operate. Looks like that is the stuff of the second and, even more so, the third book reviewed.

The second book he reviews is Darkness by Design: The Hidden Power in Global Capital Markets by Walter Mattli. A key paragrph from the review:

Mattli shows how the shape of financial governance—and lack thereof—was pushed by a small elite of investment entities. The advantages gained by those able to make costly investments in computerization began to concentrate wealth at the upper end of exchange’s members, including the “national commercial and non-U.S. ‘universal’ banks” that deregulation had allowed to enter. By 2000, the twenty-five second-tier firms had less than 10 percent of the market capitalization of the top ten. Household name titans such as Barclays, Credit Suisse, Citigroup, Deutsche Bank, Goldman Sachs, Merrill Lynch, Morgan Stanley, and JP Morgan dominated. 

The third book he reviews is Katharina Pistor’s The Code of Capital.

In fact, he summarises it very well:

Katharina Pistor’s The Code of Capital is also an urgent tract. The difference, in her telling, is that the law doesn’t always ride a white horse. It comes as often to perpetuate injustice as redress it.

Further, the following statements are both profound and true. In other words, the State is the protector – or it ought to be – and the villain. The problem is, in other words, the State is captured and hence, aids the evasion of taxes by the rich whom it supposedly has to now bring back into its tax net!:

The concentration of wealth and its evasion of state attempts at its capture through taxation also do not happen by escaping law or the state, but through the law and the state—through projects of legal “encoding,” to use Pistor’s dominant metaphor.

Quinn Slobodian highlights a few things from Pistor’s book that ought to be of interest to those in Finance. Very few would even be aware of them:

Pistor introduces us to new sites and conventions created to offer protection for capital mobility and insulation from democratic states, places with their own acronyms, where PRIME Finance (Panel of Recognized International market Experts in finance) protects PRIMA (the Place of Relevant Intermediary Approach convention).

So, the point is that it is not about shining light on people operating covertly, in darkness, outside the pale of law. There is collusion. There is capture. State and the law have facilitated it.

Perhaps Pistor’s book is similar to the one by Brink Lindsey and Steven M. Teles: ‘The Captured Economy‘. I have begun reading it.

Advertising and the paradox of prosperity

It was a pleasant surprise finding these lines in the ‘Free Exchange’ blog in ‘The Economist’:

It is a funny sort of prosperity that depends on people never being satisfied with their lot. [Link]

The header does not accord with the article. The emphasis is mischievously inverted. This is the article header:

Advertising may make people miserable, but it still has its uses

Given the tone and the conclusion of the article, the header should have been this:

Advertising may have its uses but it leaves people feeling miserable.

But, that is a very different message. In my view, the header is a tell-tale encapsulation of the seduction of unhappy, unsatisfied prosperity of modern capitalism: “more is preferred to less”.

So, the statement featured at the top of this post is a paradox and it is ironical that it appeared in ‘The Economist’ but it is entirely unironical that ‘The Economist’ gave it the heading that it did!

Postscript: the article provides the reference to an important study which motivated the article in the first place. The study finds and inverse relationship between ad. spend and citizens’ welfare. The authors apparently do provide all the standard disclaimers but the conclusion is unsurprising.

What it costs the world for Alexa to answer your queries?

My friend and co-author Gulzar Natarajan pointed me to an article by Gillian Tett in FT on how private equity has grown over the years when public markets and public listing were the fashion since the Eighties. I then caught up with a few others of hers. One of them was on what it costs humans to be able to use their modern technological gadgets and devices that are founded on ‘artificial intelligence’.

That article had a link to this one: ‘Anatomy of an AI system’. It could be one of the most important articles you would read in 2019.

To me, the article underscores, for the umpteenth time, the fact that humans are incapable of grasping (let alone comprehending) what they unleash. They wade into waters that they can scarcely fathom and the splash and the spillovers are something that they cannot ever hope to get a grip on or control. Sample this:

it took Intel more than four years to understand its supply line well enough to ensure that no tantalum from the Congo was in its microprocessor products. As a semiconductor chip manufacturer, Intel supplies Apple with processors. In order to do so, Intel has its own multi-tiered supply chain of more than 19,000 suppliers in over 100 countries providing direct materials for their production processes, tools and machines for their factories, and logistics and packaging services. 20 That it took over four years for a leading technology company just to understand its own supply chain, reveals just how hard this process can be to grasp from the inside, let alone for external researchers, journalists and academics.

We are doomed not because we have damaged the environment, not becasue we are running out of water; not because we have run up too much debt; not because we have accumulated too much wealth in too few hands but because we know not and refuse to admit we know not.

The toxic strawman

Is a case for ‘social cohesion’ racism? If comments by some of the readers are anything to go by, then the answer seems to be ‘yes’. But, this blogger is not clear that it is. It should be possible to have constructive debates in families, in societies and in nations on limits to charity.

Nations created out of communities which, in turn, were created out of tribes or groups have their own character. It is natural to want to preserve that. Within that framework, one can be generous and accommodate strangers, the persecuted, the able, the skilled and the rest. But, when the latter threatens to overwhelm the former or when the former feels threatened, it is time to have a discussion on limits.

In short, there has been and there has to be a core for each society or nation. Otherwise, societies and countries will become the equivalent of ‘travellers’ bungalows’. That will be an existential crisis for societies.

The article in FT on the tough stance adopted by the Centre-Left Social Democrats in Denmark is an important read. Indeed, one can have a seminar for a day or two on that. The Centre-Left immigration spokesperson is the son of an immigrant himself – Ethiopian father and Danish mother.

These remarks of his are central to the entire article:

The areas where the migrants are moving to are classically Social Democrat areas. So typically it will be Social Democrat voters who will have kids in schools that will have problems, typically skilled and unskilled workers who will have new colleagues. This is challenging the social cohesion in the welfare state,” he said [Link]

The conflicts and the challenges faced by open-ended immigration are borne by the poor and the marginalised in those nations that have had a history of being open to immigration and asylum seekers.

That these nations too have their poor and marginalised- even if only in relative terms – is, in turn, a problem of the model of economic organisations that countries have adopted or have been forced to adopt – capitalism without social characteristics.

One can discuss the multiple strands of implications that the article throws up. It is not just about Denmark. That is the ‘beauty’ of the article/story.

Finally, one commentator captured the problem in public debates on these issues:

So, unless you’re an open-borders fanatic, you’re a Nazi? No wonder the votes are migrating to so-called populists.

This is the mistake that the so-called ‘do-gooders’ are making. Their readiness to paint all those who do not agree with their positions as dangerous demagogues or right-wing populists shuts out adult-like discussion on important matters. That is the toxic strawman that the so-called Liberals set up to shut all necessary discussions on the topic.

In doing so, they give rise to the ‘populism-nationalism’ that they claim to abhor or detest. That seems rather daft to me.

It is important to recognise that these are not just issues of budgets or economic viability alone. These are legitimate existential questions for ordinary people.

Postscript: Over the weekend, my friend Srinivas Thiruvadanthai had shared an article by Reihan Salam of the Manhattan Institute on India, written for ‘The Atlantic’. Mr. Salam has an interesting book, ‘Melting pot or Civil War’. Sounds interesting. I have just ordered it.

Ideas thrive on competition

I enjoyed writing this piece for Mint last Tuesday:

Why capitalism must allow competition for its own good

Capitalist America did a great disservice to itself when it ‘defeated’ the communist Soviet Union

Raghuram Rajan recently had an opinion piece titled, Why Capitalism Needs Populism. He is on to something with that title.

It becomes clearer when you see these lines from Samuel Huntington’s book, ‘The Clash Of Civilizations And The Remaking Of World Order‘: “It is human to hate. For self-definition and motivation people need enemies: Competitors in business, rivals in achievement, opponents in politics.” And, “there can be no true friends without true enemies. Unless we hate what we are not, we cannot love what we are.”

Samuel Huntington cites the second quote above from Michael Dibdin’s novel, ‘Dead Lagoon‘.

By that token, one can say that capitalist America did a great disservice to itself when it “defeated” the communist Soviet Union in 1990. The latter was needed to cushion, smoothen or even hide the rough edges of capitalism; to lend it a human face; to suffuse it with humane tendencies via welfare policies, via policies that seek to provide (if not succeed) a level playing field in terms of opportunities.

Without the “check and balance” that communism provided, the excesses of capitalism manifested themselves first in 2001 and then in a much bigger way in 2008. As a result, within a little over a quarter century of capitalism having triumphed over communism, America has a politician who has called for a 70% top marginal tax rate. So much for the end of history.

With victory over enemies and rivals, one loses a force that actually keeps one “battle fit”, intellectually or otherwise. So, we all need the “other” to remain fit ourselves. No point in becoming totalitarian. That is the short but definite first step towards decay, sloth and eventual extinction.

So, capitalism needs populism to redefine and reinvent itself for the better. But, that is only a necessary condition and not a sufficient condition. One may still read the wrong lessons from competition and make the wrong course corrections. I think that is what is happening to the so-called “liberals”.

They now face competition from those who espouse “populism-nationalism” as they pejoratively describe those who do not think like them. Going by Rajan’s thesis, the so-called “liberals” should welcome this competition as a tool or an opportunity to “up their game” intellectually. But quite the opposite is happening with the Democratic Party in the US and with several so-called “liberal intellectuals”.

One example of a counterproductive and delusional reaction is their characterization of the ongoing trade and intellectual disputes between the US and China. They characterise it as “Trump’s trade war”. One moment, they blame him for compromising with China, and the next moment, they blame him for triggering a trade war. All along, it has been about China not living by its own commitments when it signed up to join the World Trade Organization in 2001.

The second example is, as Robert Barro points out in another Project Syndicate piece (My Best Growth Forecast Ever), liberals wishing ill on the economy in America because it is doing well under a president they hate.

What happens if competition fails to hone and sharpen or if competition is removed? Crises emerge in short order. Having seen off competition from communism (or so they thought), capitalists have been behaving (enriching themselves) in a manner that has resulted in a crisis that threatens their very existence. The crisis of 2008 was a warning sign ignored.

Indeed, that is what has been happening to so-called Western liberal and democratic societies lately. They are blaming demagogues and politicians for the rise of protectionist sentiments with respect to trade and immigration. Perhaps, ageing societies are prone to such sentiments naturally and all the more so when an economic crisis has shrunk their savings pie and placed their social security, pensions and healthcare in jeopardy. Ageing individuals no longer welcome new ideas and strangers in their midst. Why should ageing societies be exceptions? If seen that way, the answer certainly does not lie in forcing further immigration upon them.

For societies and ideas, a failure to harness competition could mean a revolutionary overthrow and the emergence of a new order. This new order may not be for the good. Further, there could be a prolonged period of chaos and disorder before that new order emerges.

In recent times, 1914-45 and 1967-82 are examples of such “disorderly” and “chaotic” interregnums, although the latter far less so than the former. That is why the chaos, disorder and violence of 1914-45 produced two decades of order and prosperity all around.

The chaos and disorder of 1967-82 produced a new order that appeared to usher in an era of prosperity—globalization and all that. But, it has landed the world in a crisis of capitalism, for capitalism got rid of the “check and balance” of competition along the way.

Therefore, what awaits us is another prolonged (or, short, if we are lucky) period of uncertainty and turbulence, followed by a new social order that will not look like 1945-65, nor like 1982-2000, but a lot worse. Brace yourself.

V. Anantha Nageswaran is the dean of IFMR Graduate School of Business (KREA University). These are the author’s personal views

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