Receeding Capitalism

The series of unfortunate events in banking, spreading to manufacturing, to job losses had to reach governments too. Governments, like the brave kings of yore have ridden in to the rescue. They have bought up banks, guaranteed deposits, secured pensions. Do not worry, your money is safe with us. (To discuss whether these governments are safe would border on political, which I declare out of the scope of this space).

For years it is these very governments that have prided themselves on being the vanguard of capitalism. Through the IMF they have declared large public sectors evil. They have made privatisation a condition of more funding in many emerging markets. Conditions there were similar – high debt, high public sector deficit, high trade gaps and high levels of unemployment.  Then, these conditions were chronic, and the solution was to shrink the size of the government. Now, it is ironic, that the same issues result in expanding the government. Did I hear that right?

 

So what happens to capitalism in this brave new world? Does it get redefined? Are free markets an unsustainable myth? Is equilibrium a mirage? Will there always be power and politics that controls the balance between safe and sorry, between creative and chaos, indeed between rich and poor?

 

They declared the death of communism a few decades ago and now capitalism is on the wane, for it has proved once again to be a false god. Will we forgive this once again and go back to being ruled by fear and greed, or shall we choose new gods to rule over us.

Or maybe, is it just possible that we emerge into this world, where there is funding for every good idea, rewards for every honest saver and investor and security for every home while keeping freedom for every individual? If this sounds like a fairy tale, maybe it is, for it does not mention the dark underbelly of risk – where things go wrong.

I wonder, and this is just a thought, that if we did not deal with chunks of money, and dealt only with slivers, would things be different? We aggregated money traditionally only because of intermediaries who knew how to deal with them. Truly, in this day of web 2.0 (and growing), do we need these intermediaries at all? We need information, analysis, processes and transactions. But do we need these to be consolidated in financial intermediaries? Or can we throw this yoke off now?

Fear and Greed

Fear and Greed

 

There was a time, I admit, when I was an investment banker. And the one lesson I took away from there is that the world of money is controlled by two emotions – Fear and Greed. Economic models are all very well, as are the sophisticated financial models that predict markets that only rocket scientists could understand. (By the way, it is true, the myth that rocket scientists have contributed to financial market models). But every trader at our desk knew, that whatever the models said, the only way to predict which way the market would go was to be an astute judge of emotions.

 

So, how did they get it right all the time? They did not. Nobody can be a perfect judge of emotions, even their own, let alone an entire markets’. Ever been in a relationship? Yup, see what I mean? As long as you win more than you lose, you are doing well. If you win more than 80% of  the time, you are one of the greats. If you win all the time, you are a star for now, but every star falls sometime.

 

Is that what was happening in the markets? Were our billions being traded, nay gambled, on somebody’s opinion of whether fear would rule the day or greed?

 

I believe so. And I do not disapprove at all. For years, when things were going our way, neither did we. Now, now, gotta be fair.

 

What is really important here and now is to realize this and build it into our future. We cannot let this happen to us again. If we do not know what went right and what went wrong, we will never be able to make things go right for us. Economic rationality is not all, which is why economists came up with bounded rationality. (more on that later, if anybody is interested). 

 

We need to be able to build emotions into financial decision making models – like impulse, inertia, temptation, greed, peer pressure. All of these have played a role in our financial decision making at some time or the other. The big question is how.

Watch this space, I’ll think of something(!)

 

(c) meetasengupta