Huff and puff brought the economic house down

 
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By Christian Nielsen

How the Mr Bigs and their biglettes unwittingly (or not) brought down the world’s economies – and the hotly contested prize for ‘America’s worst investor’.

5 October 2009

Two stories in The Economist have more in common than perhaps the magazine intended. One, accusing the MBA factories of doing little to mend their habit of churning out ever-smarter greedy buggers. The other, announcing a Golden Raspberry-inspired prize for the worst small investor in the United States.

I’ll deal with the MBAs first. But before starting, I must confess to having a Belgian derivative of this certificate. It never did me any good, bar an excuse to stay in the country. But the Mr Bigs of MBAs – I’m talking about the likes of London Business School, Harvard Business School (HBS) and others on the yearly ‘best MBA’ courses list – deliver a cohort of big achievers year on year, at a not inconsiderable cost to the students or their organisations.

These Mr Bigs and their biglettes have done sweet f-all to mend their Gekko-esque educational model moulded round the mantra that “greed is good for everyone, especially me”.

The bankers have, at least in principle, been stripped of their pinstripes and, if France gets its way, their future fiduciary roar as well. But until I read this trumpeting repost by Schumpeter (‘The pedagogy of the privileged’), I hadn’t considered the degree of culpability that the elite education machine should perhaps also bear. He says these institutions of learning have been “churning out jargon-spewing economic vandals”, the likes that lined the executive tables of such feted organisations as Enron, Lehman Brothers and half of the Wall Street walkers now offering good CV and an ego-massage to anyone who‘ll now listen.

Yes, blueprints for betterment have been drawn up by some of these fine establishments, The Economist says, but little has emerged of note. No, wait, HBS has introduced a voluntary pledge “to serve the greater good” and a group of Harvard students have set up an oath of “responsible value creation”, according to BusinessWeek’s website.

(Makes you wonder  if that ‘greater good’ is of the kind you would hear espoused at a GOP rally: ‘make shit loads of profit and let the rest take care of itself’. Sound familiar?)

So, if the bankers are going to be made to pay – just a little, and even that isn’t a given because, like a mugging, as the economy starts to show signs of improving, it’s easier to forget the trauma – why not the manufacturers of the greed-is-good method of wealth creation?

Perhaps business schools could start teaching history as well, it was suggested, to remind graduates that the laws of gravity work for money markets too. Taking a knife to the climate of “boosterism” – puffing up the models and methods of certain businesses, people or consultancies – prevailing at some business schools was also put forward as an antidote to acolyte-building academia.

“Business schools need to make more room for people who are willing to bite the hands that feed them: to prick business bubbles, expose management fads and generally rough up the most feted managers,” Schumpeter concluded.

Perhaps we need a matrix to help explain this. Any bright MBA grads want to help us out with that?

Spurious connection

I’m going to make another confession; I didn’t really have a strong ’connector’ for this second story. It just sounded like a really fun idea to highlight: the folly of investment-envy and the slavish adherence to the sort of MBA-inspired confidence that drove people to think they were on to a winning investment strategy for ever.

With some careful analysis, you could probably make a fair case for one relating to the other, but I don’t have the smarts for that – my MBA was a bottom-shelf affair.

The deadline to apply for the ignominious title of ‘America’s worst investor’, the contest organised by Hedgeable.com, is 12 October. Don’t miss this train too! With no shortage of contenders, this is an admirable effort to poke the wounds of this year’s economic fiasco, and perhaps in doing so, remind us that even smart people can make some dumb decisions.

Read Reuters Blogs for some commentaries on how some small and medium-sized American hedge funds and asset managers got their clients (a lot of them retirees) in the hock with exotic derivatives.

Watch this space for expert commentary and sharp(ish) analysis on the winning losers.

Side note: Chronikler would be happy to publicise any effort to set up a ‘Europe’s worst investor’ prize. The Americans are offering the winners – I mean losers – trips to Rome, Las Vegas and Iceland, all home to decent collapse some time in the last 2000 years. Perhaps the European winners could win a trip to Wall Street or the City. Just a thought.

©Christian Nielsen. All rights reserved

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Introducing equanomics

 
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By Khaled Diab

Governments need to rethink their economy policies to make them more equitable and responsive to citizens’ needs.

January 2009

Reading the business pages is like wading through a nuclear wasteland littered with ‘toxic assets’. Gordon Brown is now working to limit the damage from this radioactive debt with a multi-billion pound safety net for the financial system. This, along with the hundreds of billions the government has already pledged, not to mention the tens of billion it has already spent, has sparked warnings of possible bankruptcy for the UK.

Since it rippled out from the subprime scandal in the United States, the global financial crisis has seen taxpayers exposed to mind-boggling liabilities, potentially counting in the trillions. While the financial sector sends the wider economy into a recessionary tailspin, what have the architects of the disaster been up to?

Rather than face paying the price for the ruin they have visited on others, top executives have been giving each other golden handshakes before donning their diamond-encrusted parachutes and leaping out of the blazing wrecks they have left for governments to keep airborne with both engines burning.

But even in the United States, it seems that people have lost patients with the executive caviar train. Last week, the Senate said it would not approve any more bailout money without strict limits being imposed on executive pay.

The brewing outrage is hardly surprising when you consider that, as millions face the prospect of the dole and losing their homes, top managers are sitting pretty and laughing. Take the Merril Lynch executive who got $25 million for three months work or, on this side of the Atlantic, the €4 million payoff received by the former chief financial officer of Belgian-Dutch Fortis Bank, which benefited from a government bailout to the tune of €11.2 billion.

Even George W Bush, a leading cheerleader of neo-liberal economics who has probably done more than any other president to fatten the bottom line of corporate America, has been making ominous threats. “Anyone engaging in illegal financial transactions will be caught and persecuted,” he recently said. Appalled as I am by the exuberant excesses at the top, as a strong believer in human rights, I cannot tolerate talk of persecution.

What needs to be done is not only to limit executive pay in banks receiving government bailouts but across the board. We need a general cap on earnings, which would be high enough to provide an incentive for people to perform and strive but low enough to prevent major economic injustice.

But that, in itself, is not enough. We need to rethink our approach to the economy and herald in a new age of what I call equanomics, where the success of an economy is judged by how well it improves citizens’ well-being, narrows the gap between them, and truly provides them with equal opportunities.

At present, there is too much of a tendency to regard the economy as somehow existing outside of society. But this false separation has led policy-makers in many countries to put the interests of the market ahead of the interests of the people. Equanomics would remove the false barriers between the economy, markets and society, and social indicators – such as quality of life, education and health – would count as much as macro- and microeconomic indicators.

In addition to maximum and minimum limits on income, under equanomics, salaries would be determined not only according to a job’s market value but also its social worth through, say, an impartial index which draws on the views of experts and the general public to assess the social value of different jobs. Of course, this might mean that top executives will be taxed extra to raise the pay of nurses.

Some will argue that only free markets can create the wealth needed to improve people’s lives and that communism only succeeded in impoverishing societies in its quest for equality. I am not advocating the imposition of a communist dystopia, but the sort of enlightened blend of socialism and capitalism that served Europe well in the post-war years and has helped Scandinavia to have its cake and allow the majority of citizens to eat it.

Besides, free market capitalism has failed dismally to create the utopia it promised. Despite the laudable talk of equal opportunities, economic disparity robs millions of the opportunity to shine and succeed. For example, an upper-class boy in the UK is 30 times more likely to land a top job than a boy from the unskilled working class. Contrast this with the countries with the highest social mobility, such as the Nordic countries and Canada, which also happen to be the countries with the lowest inequality. This means that there can be no equal opportunity without greater economic equality.

The free market, as we currently know it, is actually not an ‘invisible hand’ that dispenses impartial economic justice. The big players, from oligarchs to dominant or pseudo-monopolistic corporations, have a massive distortionary effect on the efficient functioning of the market.

This is reflected in the rapidly rising levels of global income and wealth inequality, which has led the UN to sound the alarm on the possibility of widespread social unrest, not only in developing countries, but also in the United States, Britain, Spain and Greece (which was recently plagued by riots).

In the UK, since income disparity rose at unprecedented rates in the 1980s, those Thatcherite levels of economic inequality have been perpetuated, with the super rich racing even further ahead, the middle classes getting a modest piece of the action, and the lowest income groups being left behind to eat everyone else’s dust.

Of course, given the fact that multinationals are of a size to rival small, prosperous nation states and the financial markets can punish governments for stepping out of line, the need for coordinated intergovernmental action has become all the more urgent. In this regard, governments can harness the power of the EU and other regional blocs, and even reinvent the World Trade Organisation, to make globalisation fairer and more equitable.

The current crisis risks deepening the wealth gap, as millions in the middle and lower income brackets face the prospect of imminent unemployment and pay cuts, while government funds are exhausted underwriting the welfare of the wealthy. We need governments to put equanomic principles at the heart of their policy if we are to avoid widespread social conflict and enhance socio-economic justice.

This column appeared in The Guardian Unlimited’s Comment is Free section on 19 January 2009. Read the related discussion.

This is an archive piece that was migrated to this website from Diabolic Digest

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Trouble in the Baltic

 
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By Khaled Diab

The turmoil submerging Latvia is an example of ‘drizzle-down’ economics in action and has implications for the rest of Europe.

February 2009With a population of just over 2 million and a GDP about the size of the Bank of America bailout, the tiny Baltic state of Latvia does not make the headlines very often.

While attention is distracted by the deafening popping of bubbles in larger economies, Latvia has been imploding dramatically in one of the world’s most extreme versions of ‘bubblenomics’. The latest chapter in Latvia’s unnoticed turmoil occurred this weekend with the collapse of the Latvian government.

Prime Minister Ivars Godmanis, who led the march to independence but has been embroiled in corruption allegations, was forced to resign. This makes Latvia the second European country, and first EU member state, to lose its government as a result of the global economic crisis. Although Latvia has been through about a dozen governments since independence in the early 1990s, this time the public mood is very different.

The day before the collapse, disgruntled citizens of Latvia’s second city Daugavpils, borrowed the (by now) world famous Arab insult, immortalised by Iraqi journalist Muntadar al-Zaidi, and hurled shoes at images of the country’s parliament, the Saeima.

This was the culmination of weeks of turmoil and civil unrest, which peaked with mass peaceful demonstrations – which descended into rioting – in January.

“I’m surprised it’s taken so long to get to this point,” said one protester at the January demonstrations, accusing politicians of “robbing” the people for years. This scepticism and pessimism is a far cry from the hopeful psychological crescendo of the Singing Revolution.

“Latvians are not given to protests or public displays of any sorts, [so] their recent actions indicate the gravity of the crisis,” observes Jeffrey Sommers, a professor of economic history at the Stockholm School of Economics in Riga, the Latvian capital.

And their frustration is easy to understand. The economic crisis has hit Latvia harder than other EU states. In the final quarter of 2008, the country’s economy contracted by a staggering 10.5% and, the ‘Alice in Wonderland’ shrinkage is expected to chop 12% off GDP in 2009, while unemployment, already high, is expected to rise by another 50%.

Until last year, Latvia, with the fastest growth rate in Europe since 2000 (reaching nearly 12% in 2006), was trumpeted as the plucky little ‘tiger’ among the older EU turtles. However, the figures were illusionary in that some of the growth was really a case of climbing back from the 1990s crash. Moreover, its economic boom was based largely on a property bubble and reckless financial speculation, while macro-economic reforms imposed by the World Bank and IMF pushed resource-poor Latvia to dismantle most of its industrial and productive capacity.

Like its neighbours and other former Soviet bloc states, ‘free market’ reforms have largely benefited politicians, a select oligarchy of entrepreneurs with massive political clout and foreign corporations. Rather than ‘trickle down’, Latvia has experienced what could be called ‘drizzle down’ economics in which the few enjoy the sunshine years while the many endure the economic storms before and after.

The immense financial crisis in Latvia prompted the IMF and the EU to offer Latvia a €7.5-billion rescue package in late December. However, the strings attached make clear that this is exclusively a bailout for banks and offers no relief for ordinary Latvians.

In fact, at a time when western economies are raising public expenditure to Keynesian levels, the most hard-pressed Latvians will be expected to pick up the tab through painful austerity measures.

But it’s not just foreign pressure that’s unlikely to bring change. “A new government will likely keep similar economic policies in place,” expects Sommers. “Many privileged Latvians, especially politicians, benefited from the asset inflation in real estate. Many speculators took out loans in euros and they would be hurt by a devaluation of Latvia’s grossly overvalued currency.”

With other central and eastern European countries tottering on the brink of an economic abyss, capitals in western Europe are seeing a different kind of ‘red threat’ coming from the east.

New battle lines are emerging between ‘old’ and ‘new’ EU member states. As the EU’s big four – Germany, the UK, France and Italy – gathered in Berlin, the Union’s eastern member states revealed plans to hold their own mini summit.

“We want to send a clear message that we support the European Union’s position in favour of defending the common market and that we are against protectionism,” said Poland’s Europe minister, Mikolaj Dowgielewicz, in response to aid packages unveiled in France, Spain and Italy to help their domestic automakers.

For its part, Brussels insists that the EU can weather the storm. “Europe is equipped to help the weakest economies,” said Economic and Financial Affairs Commissioner Joaquín Almunia.

The trouble is that, while funds seem to be quite readily available to bail out the financial sector, little of this has trickled into the real economy. EU governments need to find mechanisms for directly stimulating the economy and boosting employment perhaps by channelling funds directly to SMEs.

Excessive protectionism could well hurt Europe, but the single market needs to be complemented with robust common labour standards, as well as an increase in or more effective use of solidarity instruments, such as the structural funds.

This column appeared in The Guardian Unlimited’s Comment is Free section on 25 February 2009. Read the related discussion.

This is an archive piece that was migrated to this website from Diabolic Digest

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