The title above describes the idee fixe of this Government. One would think that we have got a fairly good banking system, good Corporations for Life Insurance, General Insurance, etc., and a good and sound Pension Fund governed by the Employees’ Provident Funds Act, etc. But the incessant mumbo jumbo from the Government circles for the need for `re-eeforms’ (the way it is pronounced by Government spokespersons — though we should regard them as `de-forms’ –deformation of our entire system in the above sectors, built up of over a period of decades) makes one feel that we are in the Paleolithic age, totally ignorant of such sophisticated institutions as banks, insurance companies, pension funds, etc.. We should resist the attempts of Government to subvert our established institutions, tooth and nail, or else we shall be left with nothing but these after the foreign players, whom the Government are letting loose have had their fill, packed up and gone.
I cannot do better than set the ball rolling with the remarkable article in The Hindu of September 14, 2013 by David Pais (who worked for those miracle institutions Morgan Stanley and Citigroup in London and now based in Delhi. The title of his article, “Clinging to a discredited dogma” (which, the readers will have realized, is what the Government is doing), and his caveat that the country should be wary of replicating the Anglophone model which has spread so much devastation across the world, should serve as a wake-up call to the people of the country, the Government, of course, being impervious to any such calls for abjuring such action.
Pais states that it looks as though the new Governor of the Reserve Bank of India intends to replicate the U. S. financial system in India — with all its bells and whistles. Given the recent global economic and financial history, this is a shockingly disastrous set of objective to be setting. Raghuram Rajan would be doing so even as the Indian economy is being buffeted by the vagaries of the global financial system. As Governor, he will be setting out dogma rather than policy. By clinging to the thoroughly discredited dogma, viz, that “arm’s length” financial markets always know best, Rajan risks putting the RBI on the wrong side of economic history, says Pais.
We need finance to provide credit to every productive nook and cranny of the Indian economy in much the same way as banks in America finance massive increase in output after World War II, and as the German banking system continues to fund its mittelstand of small and medium enterprises. Our economists in the Universities and Research Institutes should do a thorough study of whether, and if so, or what scale this is happening here. Pais says that what we do not need is the `casino banking’, which was developed first in the Anglophone countries in the early 1990’s and has spread around the world, causing somuch devastation in its wake — and which Mr. Rajan seems hell-bent on replicating in India.
The Government and the media are following an ostrich-like policy regarding the last 15 years of global financial and economic history. Among the events which happened are Latin America’s assorted tortilla crises; the East Asian crisis in 1997-98 which soon pulled in Russia, Brazil and Turkey, and the crisis in Argentina in 2001. These financial crises were labelled as crises of `crony capitalism’, as the `natives in their grass skirts’ did not know how to run a financial system. “Our” Government, driven by the I. M. F. and the World Bank believe — and wants the people to believe — that this country is also in the same stage as those `native in grass skirts’ in so far as the financial system and the financial institutions in the country are concerned: that is why they are “fast tracking” the re-eforms, mentioned above.
Says Pais that we cannot get away from the fact that the Anglophone model of running a financial system, such as the Government is hell-bent on ushering in, is broken. The former US Federal Reserve Board Governor, Alan Greenspan admitted –in a rare moment of unguarded honesty, “the entire intellectual edifice has collapsed.” How does the Anglophone model, which “our” Government wants to embrace (with a bear hug?) work? That model is based on increased debt creation and financial `intensification’ which are both facilitated by `light touch’ regulation. Before long the financial industry starts to run amok. It soon runs out of productive outlets for its debt and ends up creating a real estate bubble instead inevitably, the bubbles bursts, the banking system becomes insolvent, and the tax payer is left to pick up the pieces in a shattered economy. This happened again and again from Japan in 1989 (from which it has not managed to extricate itself) to all the crises mentioned above.
Citing the Indonesian examples, Pais says that it should serve to caution India because of its similar size, ethnic diversity, etc., Indonesia has a budget surplus, a trade surplus, relatively low inflation and was in the pink of economic health before the financial crisis (induced by the Western financial vultures descending on the country) hit the country in the mid-1990s. The year after that, Indonesia’s GDP became -18% (yes, it is a minus!) — it led to riots in Jakarta, and ultimately the overthrow of the Government and a political revolution. There was a huge upsurge in secessionist violence in Aceh (where thousands died) and ultimately independence for East Timor.
Pais has perspicaciously drawn our attention to the current scenario of the Indian economy — it has all the hallmarks of one afflicted with the Anglophone disease — a current account deficit caused by too much domestic debt issuance — the media focus on exports and imports and the exchange rate is superficial and misleading — an inability to fund the current account, as foreign inflows prove to be fickle and unreliable, an economy which is overly dependent on real estate and construction, rising inequality amidst a growth slow-down and, most importantly an economic governing class which has run out of ideas, and is, therefore, constantly looking outside for guidance and inspiration.
In America, thereis a degree of awareness that the system is in large part broken, which is why the new central bank governor nominee, Larry Summers is publicly hauled over the coals for his role in maintaining `light touch’ regulation in the run up to the US financial crisis. "Our" Government is trying to `ease’ the regulations just when regulators in the US and around the world are scratching their heads, trying to figure out how to get to the position where India is able to keep its head somewhat above water right now!
We need to stop believing in two myths, said Pais. (Actually, our Government is trying to `run’ the Government on several myths — but these are for a different day!). The first one is that the Central Bank Governors can `fine tune’ the economy by waving their interest rate magic wand. In reality, our true economic prospects are determined on the supply side by cartels operating at sabjimandis, by infrastructure bottlenecks and our education system. But, understanding the supply side requires our
“policy makers” to roll up their sleeves and get their hands dirty, something which those safely ensconced in Delhi have been unwilling to do. Instead, they trot out the same tired old airy prognostications about aggregate demand and macro imbalances.
The second myth is that a more developed economy requires an intensification of financial industry products and gimmicks. All we need from banking perspective is just an efficient payment system and credit delivery system. All other supposed productivity or innovation is nothing but smoke and
mirrors, which just redistribute gains and losses within finance (with no benefit to the rest of us), or is parasitic on the rest of the economy. Finance is just a distributive agent and deserves none of the outsized rewards it has been awarding to itself.
Prior to the collapse of Lehman, crises in “emerging markets” were blamed on `crony capitalism’ or other such supposed cultural defects. Now that the rogue elephant, that is the global financial system, has devastated the `advanced economies’ as well, it is time to rethink fundamentally our approach to finance. But, are the copycats who are running the Government set up capable of any original or innovative thinking which is more germane to our country and our ethos?
It is time to enter the jungle of High Finance and consider some of the carniovara of this jungle who have caused so much devastation in so many countries — Latin America, East Asia, Russia, Brazil, Turkey, Argentina, Indonesia, as referred to in the article of Pais, mentioned above. I have the permission of the kind reader to refer to what I had mentioned in the article "FDI — Beware of those who cover other people’s money!", based on the book "Other People’s Money" by Nomi Prins who had left the banking industry after a 15 year climb up the Corporate ladder in Goldman-Sachs. After leaving the firm, she examined how the collaboration among firms like Goldman-Sachs, Corporate America, and Capitol Hill pumped up the economy and then brought it down, along with other people’s futures with it. She joined the march against the World Bank and the I. M. F. control of Third World countries’ economic agenda, while Goldman was on his rhetoric on how globalization was good for the bottom line of Goldman-Sachs and the general future of the Universe! The fact of thematter is that many investment bankers exist in a cocoon of their own worth and entitlement: the belief that what the bankers are doing is extremely valuable pervades the investment banking community. The real danger to society comes from white collar criminals.
Quoting Ralph Nader, Prins says: "The US needs to crack down on corporate crimes, fraud and abuse that have in the last four years looted and drained millions of dollars from workers, investors, pension holders and consumers." (Workers, labour leaders et al. may kindly note!) These are the very players whom what is loosely called “Our” Government is inviting to come to the country and have a free hand. This is the objective of the re-eforms, which the Government wants to rush through.
Prins has pointed out that Corporations use pension funds evaluations in order to manipulate profit. Lack of transparency in financial reporting has contributed to inflated earnings in `bull market’, and severe shortfall and diminished benefits to retirees when there are market downturns (which are quite frequent). According to a survey, estimated assets of pension funds declined by 23% in 2000, and public pensions went down by 18%. The companies with the largest plan, including General Motors, IBM and Verizon lost an estimated US $ 15 billion or more during that period. This is what will happened to the `re-eform’ relating to the pension fund, as the Government’s intentions as indicated by the Finance Minister, is that the pension fund will be subject to “market forces”, a euphemism for speculative deals with these balance. So, the Labour Unions should take note and ponder over the fallout of the Government re-eforms.
We have seen above what havoc and depredation the Anglophone model has wrought to the economy of several countries across the world. One may wonder whether, e.g., the US has escaped the consequences of the activities of the main players in this drama of destruction and ruin. In fact, the US Government had to go all out to face the economic crisis — five years ago — in order to avoid a catastrophic breakdown of the financial system, which the concerned citizens may kindly note. In a report on the anniversary of the bankruptcy of the investment bank Lehman Brothers — which snowballed into the worst crisis since the 1980s — the US Treasury defended deploying hundreds of
billions of taxpayer dollars to save the other banks, major financial institutions and auto companies. While this “rescue effort” pulled up the Government debt, it was necessary, said the US Treasury, in order to prevent a collapse of the financial system. If these are not grounds enough to prevent our Government from pushing the (bogus) re-eforms down the throat of the people of this country, even a divine intervention will not save the country from the catastrophe such as the one mentioned above. Of the US $ 230 billion (US $ 1 billion is more than approximately Rs. 6,000 crores) pumped into more than 700 vulnerable banks, US $ 3 billion remained to be paid back (after 5 years). From $ 182 billion allocated to the rescue the giant insurer, American International Group, the Government said they received $ 205 billion in return — though this included $ 17 billion in paper gains not yet realized! In the huge operations to save General Motors and Chrysler from bankruptcy, the Government put up $ 180 billion. The Government has since sold Chrysler to Italy’s Fiat (!) and General Motors is said to be back to health.
Let us note the credentials of same of those who will be key players, who will be let loose inthis country as a sequel to our Government’s re-eform frenzy.
1. J. P. Morgan Chase — This biggest US bank posted $ 4.4 billion of credit trading losses — though it said it had cleaned up the group responsible for the bad debts — due to betting on `credit derivatives’.
A settlement arrived at by the Bank with State and Federal authorities over its role in selling mortgage-backed securities in the year 2008 has wide-ranging implications, noted The Hindu in an Editorial. Leading financial institutions on Wall Street and elsewhere in the “developed world” were complicit in selling securities based on home loans, many of which were of dubious quality. Rating agencies (in which “our” Government has touching faith) were also complicit in giving investment grade ratings to these securities which were at the heart of the financial crisis in 2008. The crisis soon snowballed into a global economic crisis of unprecedented dimensions, the consequences of which are still reverberating. The J. P. Morgan case was the first to reach] conclusions after a special task office was set up in 2012 by an administration which had been repeatedly harangued for not holding Wall Street to account for financial crisis. The settlement of J. P. Morgan envisaged a fine of $ 13 billion, in return for their getting a reprieve from all civil proceedings, but not for criminal charges.
Among the important messages, says The Hindu, which the settlement conveys is that even an institution of the size and stature of J. P. Morgan can be proceeded against. For India, where the Government is going the whole hog to throw wide open the financial sector to foreign banks, there are lessons to be learnt, but the Government is turning a blind eye to them and to the dangers posed to the country. The Hindu states further that, despite their size and legacy, many of these “iconic institutions” have not acquitted themselves with any degree of honesty and credibility in their own countries. Many of their practices — such as those which precipitated the 2008 crisis — must be strongly discouraged in their Indian operations. But, we can be sure that “our” Government has neither the inclination not the courage to do so.
We may also note that The New York Times reported that J. P. Morgan Chase hired the daughter of former Chinese Premier Wen Jiabao, paying her consulting firm $ 1.8 million (Rs. 11.38 crores) over two years, as the bank looked to expand its interests in China. The bank had agreed to a lucrative $ 75, 000 a month contract with a little known Beijing consulting firm, which comprised of just two employees — Wen Ruchun, the Premier’s daughter and a friend! The NYT report said that authorities in the US were looking into J. P. Morgan’s relations with Ms. Wen `as part of a wider bribery investigation into whether the bank swapped contracts and jobs for business deals with State-owned Chinese companies.’
Then you have another banking giant HSBC. According to reports, HSBC had promised an assured return of 24% from mutual funds as well as insurance. A study by the Mumbai-based Indira Gandhi Institute of Development Research, showed that investors have lost about Rs. 1,50,000crores or $ 24 billion, owing to mis-selling by the financial services major HSBC, over the period 2004-05 to 2011-12. These will be the Institutions which will be the key players vis-a-vis the Pension Fund which is proposed to be set up by this Government.
I crave the permission of the long-suffering readers (if any?) of this enormously lengthy `article’ to add a few pages on the `tortilla crisis’ in Latin America, referred to by Pais, as what happened there is very relevant to what is already happening in our country, with disastrous consequences to all of us.
Mexico’s poor suffer as food speculation fuels tortilla crisis
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A surge in financial speculation on maize is causing vastl inflated prices for corn tortillas — a sacred staple in Mexico.
In the isolated mountains of Oaxica, South Mexico, people rely on stable prices for their national staple — corn. The price has tripled over prices prevalent 3 years ago: corn tortillas which cost 2or 3 pesos
two years ago, now cost 12 pesos per kilo. For an estimated 40 million Mexicans on less than $ 5 a day, tortillas account for almost half of their average daily calorie intake.
A growing number of Mexicans are being priced out of their daily staple — corn tortillas, tacos and tostadas, despite it being a nutritionally essential part of the nation’s diet. A major factor behind the
recent scale of price hikes in maize and Mexico’s corn tortilla is a newly emerging capitalist phenomenon — food speculation and rise in food speculation.
In London, Chicago, and other “financial centres”, traders and investors are tracking the prices of maize and other staple food commodities. Commodities markets were primarily meant to help producers
and buyers to find the true market price (“price discovery” in trader-speak) for the product through futures contracts. The system worked well for almost a century, by guaranteeing a future market for
the producer and a stable price for the buyer.
However, over the last decade, there has been a surge in the interest in buying and selling these futures contracts from people with no interest or connection to agriculture of the food sector. These investors
are just speculators, who have no commercial interest on the commodity in which they are trading; they are not looking to tracking delivery of maize at any time. Their only aim is to make profit from the changing prices over the lifetime of these food futures contracts.
Most large institutional investors, including pension funds, have little knowledge of commodities markets. Investment Banks act as the middlemen by taking investments and speculating on the investors’ behalf, buying and selling futures in food commodities. The food market has been swamped by financial speculators. The banks have turned stable food market into one drive by the short-term profit motives of speculators.
In 2000, $ 6 billion were invested in commodities; by 2011 it was $ 340 billion, of which $ 126 billion, according to data from Barclay’s Capital, is reported to be invested in food; the vast majority of this new investment has been speculators with on interest in the agricultural sector or in taking delivery of the commodity.
The price of food futures sets the benchmark for current food prices. And the sudden surges of investment and the rising prices of futures contracts for food are, of course, being passed on to the consumers.
While the poor suffer, investment banks are making massive profits: it is reported that Goldman Sachs made more than $ 1 billion from commodities trding in 2009; and in the UK, Barclays is believed to
be making up to $ 340 million a year.
All these are well known to “our” Government managers who have deliberately permitted Commodities Exchange. The Government knows, or should know fully well who are all the key speculators, the sources of their funds, the way they have pushed up their prices; these are the underlying reasons
for the soaring prices of essential commodities and the ever increasing inflation. Not being burdened with even a speck of honesty on their conscience, the Government brushes aside the sufferings of the people and the people’s demand to know what action the Government has taken to bring down the prices and the inflation. Our “intellectuals” too have a light conscience about these issues which cause so much misery to the aam admi. My doubts about these factors contributing to the high prices of essential commodities and the ever soaring inflation, were set at rest in reading Dr. Subramanian Swamy’s attributing, in a speech at a seminar organized by the YMCA, Ernakulam, price rise to
the Government’s "policy" of permitting forward trading in agricultural commodities.
Before winding up, I wish to place before the readers some of the obnoxious practices, adopted by, among others, a couple of multi-national giants, Global Corporations and their affiliates, say J. B. Foster and R. W. McChesney in their book, “The Endless Crisis” (2012 edn.), rely on sweatshops run by sub-contractors for obtaining lower unit labour costs. A well-known examples is Nike, which, as a “hollow corporation” outsources all of its production to sub-contractors in Asia, in countries such as Korea, Chines, Indonesia, Thailand and Vietnam.
In Indonesia, in the 1990s, where Nikes manufactured 70 million pairs of shoes in the year 1996 alone, young girls were being paid 15 c/hr for a 11 hour day. Indonesian workers made an average of around $2 a day, well below the living wage. The entire labour cost for production of a pair of $149.50 basketball shoes (if produced entirely in Vietnam) would be $ 1.50 — 1% of the final retail price in the US! By using sub-contractors Nike took advantage of extreme forms of labour coercion, while deflecting the criticism associated with such gross exploitation.
In 1997, for example, a labour investigator visiting a factory in Ho Chi Minh City operated by a Nike sub-contractor firm from Taiwan, saw a manager ordering 56 workers to run around the factory until 15
collapsed from the heat.
A report by the National Labour Committee indicated that in 2010, women workers employed in El Salvador by the Singapore-based sub-contractor Ocean Sky to make National Football League (NFL) T-shirts, commissioned by Reebok, were pais just 8 c for every $ 25 NFL T-shirt they produced.
It is now the privilege of the reader to ask what I propose in order to deal with this state of affairs. My suggestion is as below:
The maxim goes "Protect The Tree: It will Protect You": Following this, my exhortation to all of us is "Protect Dharma and Dharma will Protect You". Why this exhortation? Because, dharma has been thrown overboard. The Government driven by the "IMF – World Bank Agenda" has substituted the dharma and rajadharma (Principles of the State Policy) by the “neo-liberal” regime. This is aimed at promoting more extreme forms of exploitation — directly as well as through the restructuring of insurance and pension systems (which readers may kindly note!). Neo-liberal strategies functioning with the aid of a “predator” State (like ours) are directed at enhancing corporate profits, while providing needed cash infusions into the financial sector. Everywhere, the advent of neo-liberalism has meant intensification of the class struggle, emanating from corporations and the State. Neo-liberalism is a product of big capital, big government and big finance. Neo-liberalism has forced stringent restructuring on poorer countries, including removal of restrictions on the movement of capital, privatization, deregulation, elimination of state supports to the poor, de-unionization, etc.. The goal has been to prop up the leading financial institutions and to socialize their losses, while retaining a policy of non-intervention during period when the financial bubble is expanding — thereby allowing corporations to benefit fully from the bubble while it lasts.
So, the inescapable conclusion is:
1) Debar persons who have worked for the IMF, World Bank, etc., from holding any positions of power or importance in the Government of India — lest neo-liberalism should invade the country and overwhelm it.
2) Say an emphatic NO to the `re-eforms” which the Government if smuggling in. It is NOT "Reforms or Perish" but it is "Reform AND Perish".
3) Resuscitate dharma, bring it to the Centre Stage and make it even more explicit that the executive actions and “policy decision” should strictly conform to dharma and rajadharma.
by C. A. Balasubramanian,
Additional Controller General of Accounts, Government of India (Retd.)
