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“On the Top of the world” was the feeling amongst the investors in different markets viz equity, real estate, commodities. The propaganda carried out by the Capitalist-friendly media with the tagline “India Story is still strong” has cost a lot of first-time-investors their life’s savings. A matter of Economics has become a matter of life and death for so many small investors. The author is urging us not to blindly follow the economic reports filed by these pink dailies and has term them as “manufacturers of millionaires”.

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January 11, 2009 Organiser : By R. Balashankar

The eclipse of the investment banks which for over a decade epitomised the modern financial system was the most cataclysmic outcome of the economic meltdown of 2008. Not only that the fall of investment banks deprived millions of investors of their savings. It also dented the reputations of many economic wizards who blindly propagated and promoted the economic system founded on financial capitalism.

The Economist, which had been enthusiastically supporting the spread of financial capitalism, wrote in its issue dated December 6, 2008, “For America and European savers it has been a lost decade. After two booms and two busts, stock markets have earned them nothing or less, in the past ten years. …Nor has been the bad news confined to equities. This year the value of all manner of risky investments, from corporate bonds to commodities to hedge funds, has been clobbered. The belief that diversification into “alternative assets” could prevent investors losing money in bear markets has proved false… As a result, saving seems like pouring money into a black hole.”

This confession took long to come. Even after the collapse of the financial market in September, many commentators in India and the West pretended as if it were a temporary aberration and the system they promoted was essentially sound. See what The Economist wrote in its issue dated September 20, 2008. It said, “This is a black week. Those of us who have supported financial capitalism are open to the charge that the system we championed has merely enabled a few SPIVS to get rich. But it helped produce healthy economic growth and low inflation for a generation. It would take a very big recession indeed to wipe out these gains. Do not forget that in the debate ahead.” Well, the very big recession followed and the gains were indeed wiped out. Only that it is yet to evaluate the fullest impact. It took almost three months for the champions of the system to confront the reality.

I am quoting from The Economist to drive home the point how the systematic propaganda worked overtime to sell the superiority of money market instruments as a substitute for real economic activity for wealth creation. It is widely regarded as one of the most authentic voices of modern capitalism. And the point I want to emphasise is that system is unsuited for India.

It is now one year since I started this column. One of the reasons for me to write this column was the one-sided manner of economic debate in the country as if America and the IMF had the monopoly on economic thinking. We easily got used to outsourcing our economic strategy. In the last one decade there had been no original work in India on our economy. It was tragic that no alternative model was envisaged.

This debate would have been impossible but for the collapse of western financial capitalism in September last. Ten short days changed the entire scenario. The governments in the west are intervening to bailout and nationalise banks and manufacturing industry as if they are in the high noon of socialist takeover. Private and public sector banking institutions now stand side-by-side. After the bailout even the Detroit car-makers who once earned a turnover larger than US GDP are now practically in the public sector. Are all these developments teaching India any lesson?

Western hold on the Indian economic planning was total. As if it had mesmerised the entire generation of Indians. Making easy money was catapulted to the status of social virtue. The motto was whatever it takes—as if there was no tomorrow and India had no vision of its own to settle its problems of growth and creation of an egalitarian society.

We have a media, which will support anything that will enhance crony capitalism. Today everybody is talking about fear and return to sanity. That only proves they were so far leading us insane. The recession has forced the US to confront the bad habits, it developed over the past few decades. The US made up its unsustainable consumption by borrowing. For the last one year, the world’s largest economy, America had been in recession. The economies of Japan and Europe have been shrinking. The west could borrow and finance their spending spree because their house prices were rising faster for long and they had the collateral to work the so-called sophisticated financial instruments.

Let’s see how they promoted the myth. The investment bankers doubled up as investment advisers too and made enormous profit. They thrived also on sale and acquisitions of well-to-do corporate entities. They were the rating agencies for emerging economies. The fate of FDI flow to developing economies and the stability of their stock markets largely depended on these rating agency’s certificates. We are relieved that they and their rating analysis are no more hitting headlines in the pink dailies in India. But it is interesting to have a peep into their world before it is forgotten.

“On the top of the world” declared a cover story on Goldman Sachs in The Economist dated April 29, 2006, and concluded, “Love Goldman or hate it, you ought to admire it and the system it epitomizes. And hang on tight.” The weekly had a comprehensive reportage on the stunningly profitable business of investment banking. Marvelling at their phenomenal success, it recommended the world because they according to the weekly were “manufacturer of millionaires”.

In praise of their innovative ingenuity, it said, “Outsiders—and perhaps even insiders—find it hard to judge whether Goldman’s business is sustainably good or has thrived thanks to a dose of unsustainable goodluck and skill. In addition, the very improvements in risk management that have spread risk far and wide make it harder to know where risk is concentrated or how risks might combine to threaten the system’s overall health.”

This is what Thomas Friedman explained thus: Investment banks and hedge funds were leveraging themselves to crazy levels, paying themselves crazy salaries and investing financial instruments that completely disconnected the ultimate lenders from original borrower. And left no one accountable.

It produced big money, huge profits for sometime. The sharp-suited investment bankers acted as a sales force for the less well-dressed colleagues who work out how to make money from swaps, options and direct investments. As The Economist noted, from small beginnings in 1987, the face value of contracts in interest rates and currency derivatives Goldman grew to more than $200 trillion (2006)—16 times America’s GDP. Led by Goldman, investment bankers innovated at a furious pace and changed the mix of their own businesses. They took more risks as they moved from more transparent markets to more profitable portfolios of derivatives and direct private-equity investments. They were called simply the best. They have been claiming that they kept plenty of liquid reserves against the dread day.

It all turned out to be a pack of hoax. The investment banks thus featured included, other than Goldman, Morgan Stanley, Merrill Lynch, Bear Stearns and Lehman Brothers. All these have now gone down the drain or converted themselves into routine banks. These were the ones projected as the signature brands of American capitalism expanded by financial whiz-kids. And they turned out to be sharp-suited crooks and swindlers. Should we admire them? Or shed a few drops of tears for the unsuspecting investors whose entire savings have gone for ever?

There was sufficient reason for a merciless postmortem. But the common refrain was again to “hedge” and go about as if nothing had gone wrong. The policymakers in India are still opaque compared to their counterparts in the west. Thankfully, the most brilliant criticisms of the racket in the investment market have come from western economists.

(The views expressed in this column are personal. The writer can be contacted at editor@organiserweekly.com)