I have been thinking about this from a long time. I first thought about this some 5 years ago when Rajat Gupta, an Indian educated at IIT Delhi and Harvard University, while being on board for Mckinsey&Co. was convicted for insider trading. It seems that Capitalism for all its worth has ultimately led to wider destruction and chaos than the good it set out to do in the first place. I know we live in the 21st century. With our Apple i-phones, BMW cars, Chinese electronics, Microsoft Windows, efficient ACs, subsidized oil and cheap credit we do owe Capitalism a lot. But lets not entertain these thoughts for a while. Lets spin the wheel the other way round.
One of the first major indications of the not so good consequences was the crashing of U.S. stock markets leading to the economic depression of 1930. The U.S. GDP contracted by 15% during this depression. To lend a perspective, the U.S. GDP contracted by roughly 1% during the 2008 economic recession in the U.S. Although the size of U.S. GDP in 2008 was significantly larger than that in 1930 yet a contraction of 15% is important at least for speculative purposes. Several theories exist till date regarding the causes of the depression. However one clearly outstanding conclusion from the depression was that the market, supposedly, did not have the power to self correct itself completely. There seemed to be bottlenecks in the mechanism since much of the investment in the economy came from profit speculation. The principles of a free market took a beating for the first time ever since the industrial revolution served the "Free Market Agenda" of the influential capitalists to the world in general.
I profess that I am not someone who hates capitalism or socialism for that matter. I am no one. But yes despite the benefits which Capitalism did bestow on the global economy there are some horrific consequences which emerged with time.
The U.S. recovered and continued to soar through the decades. The market was regulated through new laws. Regulation acted as an effective check on banks and financial institutions and investors as to the limits of their transactions. Most regular banks were local businesses and were tightly regulated. They were not allowed to speculate with depositors' money. Investment banks which dealt with bonds and stock were small establishments. The Managers of such banks paid close attention to all the money they managed. All was well.
The 80s saw the emergence of a new kind of greed for money. It started with large Investment Banks going public. This gave them huge amounts of stockholder money at their disposal. Suddenly the banks didn't take a liking to regulation. A new wave of deregulation started emerging slowly and got a support of a large number of economists and financial lobbyists. In 1982, the Ronald Reagan administration started a 30 year long deregulation phase by first deregulating loan and savings companies. By the end of the decade many major loan companies had got bankrupt. Several executives went to jail for looting their own companies.
Computerised trading had just set its foot in. Traders started selling bonds, securities and derivatives by computer speculation based on an 'arbitrary economic boom' which never existed. Rampant selling of such instruments created a whirlwind of speculations which was one of the major reported cause of the crash of stock markets of U.S., U.K. and Australia in 1987.
A growing trend of fraud on wall street emerged which could be observed in the selling of fake derivatives which stood upon on dubious underlying assets. The conviction of Jordan Belfort in the penny stock scam is a brilliant example of that.
Corporate Raiding was one such concept which took rapid ground in this phase where investors who had acquired major stakes in corporations turned them upside down by mostly liquidating them. A great movie Wall Street (1987) was made on the concept where Michael Douglas played Gorden Gekko, a corporate raider.
Insider Trading was another such evil that emerged out of the greed for money that avenues such as wall street had to offer. It is a practice of sharing vital information of an organisation, detrimental for its interests, by an insider employee putting his interests in conflict with his organisation. Several people have been found guilty of insider trading world over by the regulatory agencies.
One of the most horrible forms of capitalism, Crony Capitalism, showed its face in the East Asian Crisis of 1997 leading to a whole new set of problems for the economies like Thailand, Indonesia and Malaysia. Thailand's economy developed into an economic bubble fueled by hot money. More and more was required as the size of the bubble grew. The same type of situation happened in Malaysia, and Indonesia, which had the added complication of what was called "crony capitalism". The short-term capital flow was expensive and often highly conditioned for quick profit. Development money went in a largely uncontrolled manner to certain people only, not particularly the best suited or most efficient, but those closest to the centres of power.
At the time of the mid-1990s, Thailand, Indonesia and South Korea had large private current account deficits and the maintenance of fixed exchange rates encouraged external borrowing and led to excessive exposure to foreign exchange risks in both the financial and corporate sectors.
A facet of Capitalism that worries me is its propensity to increase Consumerism to ridiculous levels. A trend that sets apart the last two centuries from the whole previous lot is the dramatic increase in the consumer base during the aforementioned period. Industries especially like cosmetics, electronics, food, liquor and tobacco, real estate and financial products have seen rampant growth amidst all major booms. What is worrisome is the incapability of the regulatory sector to regulate them before they harm the consumers they target. For example, the global GM crop major Monsanto has been selling Bt Cotton, a genetic variant of cotton, despite proven research that it might be carcinogenic. The U.S. Food and Drug Administration (FDA) has been at its wits end in dealing with the issue. Meanwhile Bt Cotton has found its place globally as a beneficial alternative to the regular cotton despite no proven research in regards to its yield as against the natural variety.
A wonderful movie The Insider (1999) by Michael Mann was released based on a fictionalized account of a true story about the struggles that a tobacco industry insider and a TV show producer go through to come up with a show to expose the malpractices in the industry. It cited the handicapped U.S. Judicial and Regulatory mechanism unable to deal with the billion dollar tobacco industry where inappropriate and unauthorised usage of ammonia to increase the addictive quality of tobacco was taking place.
Following deregulation the first major crisis that erupted was in the late 90s in the form of the Dot Com Bubble. Investment banks started investing heavily in the internet stocks that were basically those of startups. By 2001, however, the market had crashed with an estimated 5 trillion dollars investment loss. The Securities and Exchange Commission, the federal agency to look into such matters did nothing.
Analysts were paid according to the amount of business they brought in. Extensive investigation found out that the banks had invested in stocks they knew would crash. There was a stark anomaly between what the analysts talked about inside and what they invested in publicly.
The most debated and perhaps the most fresh example of the greed is the Sub-Prime Mortgage Crisis which took place in the U.S. in 2008. It lead to a global financial meltdown. The crisis posed some very serious questions. As a background, the crisis was an aftermath to a real estate bubble that had emerged due to the slack monetary policies of the U.S. Fedreral Reserve and the Treasury Department. Throughout the whole episode none of these agencies did anything within their easy ambit or power to avert the crisis. Supposedly this was because these agencies had their top executives as people who had interests at stake in the ongoing gamble.
Availability of easy credit along with no collateral and inquiry led to a rampant increase in the loans due to the banks. The banks decided to write these loans off their books by restructuring these loans into derivatives like Collateralized Debt Obligation (CDO). Although these derivatives had sub-prime assets underneath them they were still rated highly by the top rating agencies who were paid to do so indicating a complete fraud with the buyers by the banks-rating agencies syndicate. I have never heard of a Corporate Fraud more horrendous than this one.
The fraud is horrendous in the sense that its criminal intent is so blatant and obvious since the entire system was involved in it. From Late 90s till date the appointees to the Fed Reserve and the Treasury department have been people with an extreme conflict of interest. People with earlier positions in major private financial institutions were being appointed. They did a wonderful job at stressing heavily on the deregulation of derivatives. Derivatives were a 90s innovation that were perhaps the most dangerous financial weapons ever thought of. Using a derivative, which was basically something that derived its value from an underlying asset, one could bet on oil futures and hell, could even predict the weather.
Around the same time as this was happening two important developments came in. The first was the deregulation of Credit Default Swaps. Now Credit Default Swap (CDS) is a kind of insurance with only one major difference. While in case of a regular insurance only the owner of a property can insure against that asset, in case of a CDS anyone can insure against any asset. So it could be a possibility that 50 people have purchased CDS against an asset which none of them owns. A horrible development that came about was that banks selling CDOs to investors were purchasing CDS against those very CDOs. This leads us to a conclusion that the banks did know that the derivatives they were selling were going to default sooner or later. The second development was regarding the insurance major AIG. It was selling CDS at a massive scale without putting aside any collateral or capital reserves in case of defaults where it would have to pay the CDS owners. It was finally bailed out by the government for 180 billion dollars.
When the crisis did hit it hit the common man the worst. The top most executives came out unscathed with most of them having earned hundreds of million dollars. None of them were criminally sentenced and all of them along with the organisations they ruined got away with nothing. Unemployment rose, however, at a dramatic rate. This led to spending cuts by the public which had reverberations all over the world. For example, the cheap labour industry in China took a hit since there was a slump in manufacturing due to low demands. It would be foolish to think that any economy got away without getting affected. We live in a global world where economies are interconnected. The degree of losses varied depending on the integration as well as the level of regulations in the economy. Even Iceland suffered losses due to heavy investments of its public money by privatised banks in Mortgage Backed Securities (MBS). However, countries like India were less affected due to the active work of its regulator SEBI (Securities and Exchange Board of India). Moreover there was a considerable constraint on the banks freedom to invest depositors' money into securities.
An interesting impact of the crisis was that its influence was so huge that it even trickled down to the academic institutions that taught economics. The professors at top schools were found to have worked as lobbyists for the wall street greed. Some of them were found to be on the boards of major banks which had defaulted later. Most of them were found to be drawing fat pay cheques by acting as consultants to investment banks. Also instances were found where they had praised imprudent policies of the wall street such as deregulation of profits in their reports and academic writings.
An interesting movie The Big short (2015) was released based on this crisis and I thoroughly enjoyed watching it. A documentary titled Inside Job (2010), also on the same issue, was released to critical acclaim. I have watched it thrice. It seems cool every time.
The world has slowly emerged out of this whole crisis and new laws have come up. But I guess I see a whole old pattern here. A crisis occurs and the authorities come into action: catch the perpetrators and enact laws. The top criminals of the act get away easily without remorse or regret. Common man takes the burden of the crimes mostly. Then things go back to normal and the chaos settles. A boom comes and things start drifting slowly to the old order. People with larger stakes (read insatiable greed) find a way around the weak rules. The crisis arrives at the climax of this ape show. It is a whole vicious loop.
India has not been unscathed from the vices of capitalism. Only stakes have been slightly lower due to its status as a developing economy.
Actually, I personally feel that the economic liberalization that the country has had over the years since 1991 has made really positive impacts on the economy in general. But at the same time it has led to huge corruption and corporate fraud as a collateral damage. The Harshad Mehta scam of the 90s was just an example. Over the years the scams and their net value have increased dramatically. For example the 2G spectrum allocation scam was to the tune of ₹1.76 trillion (US$27 billion), based on 2010 3G and BWA spectrum auction prices.
The disturbing trends are not only visible in the scam led corruption but also in the hugely stressed banking sector. The loan sheets of banks are ridden with billions of dollars of corporate debt. And all of it is taxpayer's valuable money fed to the perpetrators of crony capitalism. Huge boom in credit due to speculative growth led to massive borrowings by indian companies in the period after 2000s. Much of it didn't work out due to structural inefficiencies and the global crisis of 2008. This led to loan defaults on a massive scale. It has been continuing since then due to many reasons like political patronage to the industrialists.
It will be a whole new challenge for India to combat corruption which is rampant, clean up her own debt as well as her banks' clogged sheets. Also India needs a stringent check on its regulatory efficiency to avert any crisis. Greed is universal. What happened on Wall Street could well happen on Dalal Street. NSEL scam where 5600 Cr worth of debt was accumulated by trading futures with no underlying commodities is a big example.
I wonder where this capitalism will finally lead us to. I agree that perhaps it is the best solution as against all other models of production and political administration. But the side effects of this practice have been wreaking horrors on the common citizen.
Capitalism is not just limited to money. It extends to everything. From climate change to resource depletion, everywhere we find the invisible yet all pervasive hand of capitalism. All decisions whether they are political or strategic have its imprint.
I know I am naive. I am not trained in economics. It could be equally true that all these issues have been presented in the wrong perspective. Maybe the countries had it coming. Maybe the economies had to take the fall, capitalism or not. I dont know. All I know that these are my thoughts and I do have my questions and doubts. I am an ordinary citizen. I am at least entitled to doubts and questions if not welfare and clean water.
One of the first major indications of the not so good consequences was the crashing of U.S. stock markets leading to the economic depression of 1930. The U.S. GDP contracted by 15% during this depression. To lend a perspective, the U.S. GDP contracted by roughly 1% during the 2008 economic recession in the U.S. Although the size of U.S. GDP in 2008 was significantly larger than that in 1930 yet a contraction of 15% is important at least for speculative purposes. Several theories exist till date regarding the causes of the depression. However one clearly outstanding conclusion from the depression was that the market, supposedly, did not have the power to self correct itself completely. There seemed to be bottlenecks in the mechanism since much of the investment in the economy came from profit speculation. The principles of a free market took a beating for the first time ever since the industrial revolution served the "Free Market Agenda" of the influential capitalists to the world in general.
I profess that I am not someone who hates capitalism or socialism for that matter. I am no one. But yes despite the benefits which Capitalism did bestow on the global economy there are some horrific consequences which emerged with time.
The U.S. recovered and continued to soar through the decades. The market was regulated through new laws. Regulation acted as an effective check on banks and financial institutions and investors as to the limits of their transactions. Most regular banks were local businesses and were tightly regulated. They were not allowed to speculate with depositors' money. Investment banks which dealt with bonds and stock were small establishments. The Managers of such banks paid close attention to all the money they managed. All was well.
The 80s saw the emergence of a new kind of greed for money. It started with large Investment Banks going public. This gave them huge amounts of stockholder money at their disposal. Suddenly the banks didn't take a liking to regulation. A new wave of deregulation started emerging slowly and got a support of a large number of economists and financial lobbyists. In 1982, the Ronald Reagan administration started a 30 year long deregulation phase by first deregulating loan and savings companies. By the end of the decade many major loan companies had got bankrupt. Several executives went to jail for looting their own companies.
Computerised trading had just set its foot in. Traders started selling bonds, securities and derivatives by computer speculation based on an 'arbitrary economic boom' which never existed. Rampant selling of such instruments created a whirlwind of speculations which was one of the major reported cause of the crash of stock markets of U.S., U.K. and Australia in 1987.
A growing trend of fraud on wall street emerged which could be observed in the selling of fake derivatives which stood upon on dubious underlying assets. The conviction of Jordan Belfort in the penny stock scam is a brilliant example of that.
Corporate Raiding was one such concept which took rapid ground in this phase where investors who had acquired major stakes in corporations turned them upside down by mostly liquidating them. A great movie Wall Street (1987) was made on the concept where Michael Douglas played Gorden Gekko, a corporate raider.
Insider Trading was another such evil that emerged out of the greed for money that avenues such as wall street had to offer. It is a practice of sharing vital information of an organisation, detrimental for its interests, by an insider employee putting his interests in conflict with his organisation. Several people have been found guilty of insider trading world over by the regulatory agencies.
One of the most horrible forms of capitalism, Crony Capitalism, showed its face in the East Asian Crisis of 1997 leading to a whole new set of problems for the economies like Thailand, Indonesia and Malaysia. Thailand's economy developed into an economic bubble fueled by hot money. More and more was required as the size of the bubble grew. The same type of situation happened in Malaysia, and Indonesia, which had the added complication of what was called "crony capitalism". The short-term capital flow was expensive and often highly conditioned for quick profit. Development money went in a largely uncontrolled manner to certain people only, not particularly the best suited or most efficient, but those closest to the centres of power.
At the time of the mid-1990s, Thailand, Indonesia and South Korea had large private current account deficits and the maintenance of fixed exchange rates encouraged external borrowing and led to excessive exposure to foreign exchange risks in both the financial and corporate sectors.
A facet of Capitalism that worries me is its propensity to increase Consumerism to ridiculous levels. A trend that sets apart the last two centuries from the whole previous lot is the dramatic increase in the consumer base during the aforementioned period. Industries especially like cosmetics, electronics, food, liquor and tobacco, real estate and financial products have seen rampant growth amidst all major booms. What is worrisome is the incapability of the regulatory sector to regulate them before they harm the consumers they target. For example, the global GM crop major Monsanto has been selling Bt Cotton, a genetic variant of cotton, despite proven research that it might be carcinogenic. The U.S. Food and Drug Administration (FDA) has been at its wits end in dealing with the issue. Meanwhile Bt Cotton has found its place globally as a beneficial alternative to the regular cotton despite no proven research in regards to its yield as against the natural variety.
A wonderful movie The Insider (1999) by Michael Mann was released based on a fictionalized account of a true story about the struggles that a tobacco industry insider and a TV show producer go through to come up with a show to expose the malpractices in the industry. It cited the handicapped U.S. Judicial and Regulatory mechanism unable to deal with the billion dollar tobacco industry where inappropriate and unauthorised usage of ammonia to increase the addictive quality of tobacco was taking place.
Following deregulation the first major crisis that erupted was in the late 90s in the form of the Dot Com Bubble. Investment banks started investing heavily in the internet stocks that were basically those of startups. By 2001, however, the market had crashed with an estimated 5 trillion dollars investment loss. The Securities and Exchange Commission, the federal agency to look into such matters did nothing.
Analysts were paid according to the amount of business they brought in. Extensive investigation found out that the banks had invested in stocks they knew would crash. There was a stark anomaly between what the analysts talked about inside and what they invested in publicly.
The most debated and perhaps the most fresh example of the greed is the Sub-Prime Mortgage Crisis which took place in the U.S. in 2008. It lead to a global financial meltdown. The crisis posed some very serious questions. As a background, the crisis was an aftermath to a real estate bubble that had emerged due to the slack monetary policies of the U.S. Fedreral Reserve and the Treasury Department. Throughout the whole episode none of these agencies did anything within their easy ambit or power to avert the crisis. Supposedly this was because these agencies had their top executives as people who had interests at stake in the ongoing gamble.
Availability of easy credit along with no collateral and inquiry led to a rampant increase in the loans due to the banks. The banks decided to write these loans off their books by restructuring these loans into derivatives like Collateralized Debt Obligation (CDO). Although these derivatives had sub-prime assets underneath them they were still rated highly by the top rating agencies who were paid to do so indicating a complete fraud with the buyers by the banks-rating agencies syndicate. I have never heard of a Corporate Fraud more horrendous than this one.
The fraud is horrendous in the sense that its criminal intent is so blatant and obvious since the entire system was involved in it. From Late 90s till date the appointees to the Fed Reserve and the Treasury department have been people with an extreme conflict of interest. People with earlier positions in major private financial institutions were being appointed. They did a wonderful job at stressing heavily on the deregulation of derivatives. Derivatives were a 90s innovation that were perhaps the most dangerous financial weapons ever thought of. Using a derivative, which was basically something that derived its value from an underlying asset, one could bet on oil futures and hell, could even predict the weather.
Around the same time as this was happening two important developments came in. The first was the deregulation of Credit Default Swaps. Now Credit Default Swap (CDS) is a kind of insurance with only one major difference. While in case of a regular insurance only the owner of a property can insure against that asset, in case of a CDS anyone can insure against any asset. So it could be a possibility that 50 people have purchased CDS against an asset which none of them owns. A horrible development that came about was that banks selling CDOs to investors were purchasing CDS against those very CDOs. This leads us to a conclusion that the banks did know that the derivatives they were selling were going to default sooner or later. The second development was regarding the insurance major AIG. It was selling CDS at a massive scale without putting aside any collateral or capital reserves in case of defaults where it would have to pay the CDS owners. It was finally bailed out by the government for 180 billion dollars.
When the crisis did hit it hit the common man the worst. The top most executives came out unscathed with most of them having earned hundreds of million dollars. None of them were criminally sentenced and all of them along with the organisations they ruined got away with nothing. Unemployment rose, however, at a dramatic rate. This led to spending cuts by the public which had reverberations all over the world. For example, the cheap labour industry in China took a hit since there was a slump in manufacturing due to low demands. It would be foolish to think that any economy got away without getting affected. We live in a global world where economies are interconnected. The degree of losses varied depending on the integration as well as the level of regulations in the economy. Even Iceland suffered losses due to heavy investments of its public money by privatised banks in Mortgage Backed Securities (MBS). However, countries like India were less affected due to the active work of its regulator SEBI (Securities and Exchange Board of India). Moreover there was a considerable constraint on the banks freedom to invest depositors' money into securities.
An interesting impact of the crisis was that its influence was so huge that it even trickled down to the academic institutions that taught economics. The professors at top schools were found to have worked as lobbyists for the wall street greed. Some of them were found to be on the boards of major banks which had defaulted later. Most of them were found to be drawing fat pay cheques by acting as consultants to investment banks. Also instances were found where they had praised imprudent policies of the wall street such as deregulation of profits in their reports and academic writings.
An interesting movie The Big short (2015) was released based on this crisis and I thoroughly enjoyed watching it. A documentary titled Inside Job (2010), also on the same issue, was released to critical acclaim. I have watched it thrice. It seems cool every time.
The world has slowly emerged out of this whole crisis and new laws have come up. But I guess I see a whole old pattern here. A crisis occurs and the authorities come into action: catch the perpetrators and enact laws. The top criminals of the act get away easily without remorse or regret. Common man takes the burden of the crimes mostly. Then things go back to normal and the chaos settles. A boom comes and things start drifting slowly to the old order. People with larger stakes (read insatiable greed) find a way around the weak rules. The crisis arrives at the climax of this ape show. It is a whole vicious loop.
India has not been unscathed from the vices of capitalism. Only stakes have been slightly lower due to its status as a developing economy.
Actually, I personally feel that the economic liberalization that the country has had over the years since 1991 has made really positive impacts on the economy in general. But at the same time it has led to huge corruption and corporate fraud as a collateral damage. The Harshad Mehta scam of the 90s was just an example. Over the years the scams and their net value have increased dramatically. For example the 2G spectrum allocation scam was to the tune of ₹1.76 trillion (US$27 billion), based on 2010 3G and BWA spectrum auction prices.
The disturbing trends are not only visible in the scam led corruption but also in the hugely stressed banking sector. The loan sheets of banks are ridden with billions of dollars of corporate debt. And all of it is taxpayer's valuable money fed to the perpetrators of crony capitalism. Huge boom in credit due to speculative growth led to massive borrowings by indian companies in the period after 2000s. Much of it didn't work out due to structural inefficiencies and the global crisis of 2008. This led to loan defaults on a massive scale. It has been continuing since then due to many reasons like political patronage to the industrialists.
It will be a whole new challenge for India to combat corruption which is rampant, clean up her own debt as well as her banks' clogged sheets. Also India needs a stringent check on its regulatory efficiency to avert any crisis. Greed is universal. What happened on Wall Street could well happen on Dalal Street. NSEL scam where 5600 Cr worth of debt was accumulated by trading futures with no underlying commodities is a big example.
I wonder where this capitalism will finally lead us to. I agree that perhaps it is the best solution as against all other models of production and political administration. But the side effects of this practice have been wreaking horrors on the common citizen.
Capitalism is not just limited to money. It extends to everything. From climate change to resource depletion, everywhere we find the invisible yet all pervasive hand of capitalism. All decisions whether they are political or strategic have its imprint.
I know I am naive. I am not trained in economics. It could be equally true that all these issues have been presented in the wrong perspective. Maybe the countries had it coming. Maybe the economies had to take the fall, capitalism or not. I dont know. All I know that these are my thoughts and I do have my questions and doubts. I am an ordinary citizen. I am at least entitled to doubts and questions if not welfare and clean water.
