Friday, September 26, 2008

Karat's Sophistry

Prakash Karat argues in an op-ed today the gist of which is that financial deregulation caused the ongoing financial crisis in the US and the $700 billion contemplated to fix this problem is aimed at helping the 'fatcats and speculators recoup their losses'. Both claims are false. Read this to understand the issue, these articles (here, here and here) which explain why absence of regulation was not the cause of this crisis (not paucity but potentially bad regulation - see this and this)and this piece which summarizes briefly what the US treasury department has done and how it does not benefit the rich but the hoi polloi who otherwise stand to lose the most from the failure of these firms. The episode may potentially have lessons for India but it is premature to say what they are. The imperative to prevent liberalization is however definitely not one of them as Karat posits.

8 comments:

reason said...

karat may not know sh*t about derivatives, i would not worry about what he says.

But your short post is about liberally linking numerous sources without a specific point to make or refute.

the bailout package of a 700 billion dollars is about the government printing money to buy 'toxic' assets. Because wall street wants to dump those bad debts and take them off their books. How did those toxic assets build up? who gets benefited by this bail out? The bail out is merely because 'the markets are now too big to fail'.

The american hoi polloi in fact became fat cats and speculators. Though now they will get screwed with rising inflation and falling real wages. But the hoi polloi will deserve every bit of it for buying things they did not need using money they did not have and paying too much for it.

Let us ignore Karat. but there is nothing to follow from the US. what they have now is degenerate capitalism.

reason said...

after the death of Bear and Lehmann, and sell out of Merril, Morgan and Goldman Sachs now want more regulation - becoming banks. watch out now for the hedge funds.

Anonymous said...

It is a common approach (but information is restricted) that China has selectively backed up many on the brink companies. Insider information on how they mend the rules to suit their big and quasi state companies (example opening of credit cards to mnc's) is well known.

Coming back to this issue, the following are the layman's questions:

a) Every big company are run by army of , so called , brightest talents, yet could not even understand the inherent quality of CDOs. A low profile analyst has to pitch in to question this fundamental issue which triggered this catastrophe.

b) Its the sheer greed, that so called chief executives and financial talkers taken an hefty packet (example bonus in LEH runs like 40months multiple) kept the true issues covered up without taking any containment actions

c) Think, an individual like Warren Buffet by investing 5bn is commanding a guaranteed dividend of 10% and warrants of another 5bn and if redeemed another 10% premium. While by parting with (investing) 700bn what treasury stand to gain?

d) In spite of current turmoil, still industry sources does not want Govt to cap executives salary/ over control on the management etc.

e) In summary it is like pocket the profit but socialize the losses?

Having said that, Fed just cannot afford not to support. The damage will be far more worse if not done. But it should use this opportunity to demand considerable premium and management and regulatory control in the coming years.

Shankar said...

Some random thoughts:
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Lesson for India: Capitalism is good as long as you don't equate speculation and glorified betting with real wealth generation.
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What were the credit rating agencies doing? How come no one is questioning their failure to forewarn?
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Right now on the Hill, both Republicans and Democrats are working overtime to rescue the nation from this mess.

Had this happened in India, coalition members would have withdrawn support by now and, instead of solving problems, rampant horse trading and noisy elections would have ensued.

Problems are unavoidable. How we address them is more important. Our Parliamentary system is our major weakness.
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Read 'The Indian Bail Out Story'
http://www.livemint.com/2008/09/14215236/The-Indian-bailout-story.html
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Pilid said...

Reason,

The point of linking all those sources was to show that the companies that failed were more heavily regulated than others that have not.

Pilid said...

Anon,

You have got much of it right. The question being asked is what sort of regulation. As I pointed out above, heavy regulation is no guarantee of success. Which is what this episode appears to have demonstrated.

reason said...

"As I pointed out above, heavy regulation is no guarantee of success. Which is what this episode appears to have demonstrated."

on the contrary,the remaining two of the big five investment banking firms voluntarily signed up for more regulation by converting into commercial banks.

Warren Buffett got out of a business he ran offering insurance more than FDIC guarantee. You may know more that lets you keep your faith on the mighty empire.

Pilid said...

Signing up to be bank holding companies has less to do with regulation and more to do with the fact that following this crisis, for obvious reasons, raising capital the old fashioned way by accepting deposits has become a necessity. The question the commentators have been asking when they talk of regulation is whether SEC regulation of short selling and other speculative measures would have solved this problem. The answer is still no - that is not what caused this problem in the first place.