Today’s English-language newspapers report a front-page story that suggests the extent of intellectual fraud emanating from our capital-city’s English-speaking elite may be unending and limitless and uncontrollable (and this Delhi-based elite has spread itself to other places in the country too).
Such may be a source of our ridiculous politics, paralleled by the corruption in organized business in both public and private sectors. Delhi was perhaps the wrong place to which to move India’s capital one hundred years ago; the geography was such that it made ordinary survival hard or at least highly stressful, and when you have a capital-city in which the elite have to work so hard all the time merely to remain within the city-limits, it was inevitable perhaps that truthfulness and honesty would become major casualties.
The wonders of the Internet continue to surprise (and yes Virginia, there was a world before SMS and before the Internet too). In early January, in context of India’s Satyam fraud (of a size of perhaps 1 or perhaps 2 billion dollars), I referred here to what seemed to me the likelihood of Satyam becoming a zombie company and I said “we in India have many such zombies walking around in the organised business sector”. I drew attention to Andrew Beattie’s astute definition of zombies and other such ghoulish phenomena in the financial world, and also referred to John Stepek’s excellent if brief November 2008 analysis “How zombie companies suck the life from an economy”. Today I find Ms Arianna Huffington has made reference to Mr Martin Wolf’s reference a couple of days ago to zombie companies and to his statement that President Obama needs to “Admit reality, restructure banks and, above all, slay zombie institutions at once.” Ms Huffington has agreed, though of course all this slaying may be easier said than done. (It is better that zombies not be created in the first place.)
Mr Wolf has pointedly asked a question that many around the world may have half-thought about but not articulated: “Has Barack Obama’s presidency already failed?” It would be a grave and appalling state of affairs if it has, within less than a month of entering office. I am grateful to find in Ms Huffington’s article a reference to an October 2008 Wall Stret Journal interview of Dr Anna Jacobson Schwartz, perhaps the most respected voice in monetary economics today. There have been numerous people claiming to have predicted America’s financial crisis but none may have as much credibility as Dr Schwartz. Six years ago, in a National Bureau of Economic Research study dated November 2002, “Asset Price Inflation and Monetary Policy”,Working Paper 9321 she had said with utmost clarity: “It is crucial that central banks and regulatory authorities be aware of effects of asset price inflation on the stability of the financial system. Lending activity based on asset collateral during the boom is hazardous to the health of lenders when the boom collapses. One way that authorities can curb the distortion of lenders’ portfolios during asset price booms is to have in place capital requirements that increase with the growth of credit extensions collateralized by assets whose prices have escalated. If financial institutions avoid this pitfall, their soundness will not be impaired when assets backing loans fall in value. Rather than trying to gauge the effects of asset prices on core inflation, central banks may be better advised to be alert to the weakening of financial balance sheets in the aftermath of a fall in value of asset collateral backing loans….”
Most poignantly too, Dr Schwartz was present when Ben Bernanke said in a 2002 speech honouring the late Milton Friedman “I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.” Dr Schwartz told the Wall Street Journal ‘”This was [his] claim to be worthy of running the Fed”. “He was ‘familiar with history. He knew what had been done.’ But perhaps this is actually Mr. Bernanke’s biggest problem. Today’s crisis isn’t a replay of the problem in the 1930s, but our central bankers have responded by using the tools they should have used then. They are fighting the last war. The result, she argues, has been failure. ‘I don’t see that they’ve achieved what they should have been trying to achieve. So my verdict on this present Fed leadership is that they have not really done their job.'”
President Obama’s economists need to urgently consult Anna J Schwartz.
Subroto Roy, Kolkata
Postscript: My own brief views on the subject are at “October 1929? Not!” dated September 18 2008, and “America’s divided economists” dated October 26 2008. The latter article suggested that playing the demographic card and inducing a wave of immigration into the United States may be the surest way to move the housing demand-curve firmly upwards.
Satyam may be able to summarily solve the problems caused by its high-level corporate fraud by transforming itself into a “Labour-Managed Firm”.
One of the new Government-appointed board members has stated publicly today that the company has little or no debt. If this is true it would be interesting because not only were the vast cash-assets non-existent, the liabilities-side of the balance-sheet also may be small, which could mean the company was simply far smaller in terms of value than it had made itself out to be. In a bankrupt firm, the remaining assets normally come to belong to the creditors but what if the main creditors happen to be the work-force? If that is in fact the situation in this case, Satyam may be a prime candidate to be transformed into a “Labour-Managed Firm” of the sort discussed by Jaroslav Vanek (The General Theory of Labour Managed Firms and Market Economies, 1970) and James Meade (The theory of the labour-managed firm and profit-sharing, Economic Journal 1972), and surveyed by e.g. Louis Putterman in the New Palgrave Dictionary and by Martin Ricketts in The Economics of Business Enterprise 2003.
As I had briefly mentioned earlier here, the transition could be made by Satyam’s existing technical and other staff being allowed to participate (with their personal savings and claims to future income) in any auction of the “works-in-progress” that constitute the client contracts the company presently has around the world and which constitute its major intangible asset. This may be the single best way to preserve the firm’s value as well as the income-streams of its staff.
The staff would have to make a transition from being employees to becoming self-managers which may not be easy in practice, although in theory the information-technology industry may be well-suited to labour-managed firms given the peculiarly intangible nature of their products. The marginal cost of production of (true) information is typically very high but the marginal cost of dissemination of information is near- zero.
If this happened and a corrupt bankrupt Satyam-I transformed itself into a viable Labour-Managed Satyam-II, the newly appointed board would become redundant even more quickly than it would have done otherwise — though this board may be even less likely to know of Vanek and Meade than to be familiar with modern corporate finance. Time perhaps to hit the textbooks, gentlemen, and burn that midnight candle! Is that something we can expect from some of the key lobbyists of India’s organized business sector?
Postscript 1 : Of course if the asset-side has been fraudulently exaggerated while the liabilities-side has been small, the fraud has been directly perpetrated on equity-holders who held stock that was overvalued by the market as a direct result of the fraud.
Postscript 2: I find (grotesquely) amusing the new found emphasis on “Independent Directors” in view of the obvious fraud in the advertised biographies of some rather notorious Independent Directors in the IT-business and other sectors of corporate India and the higher bureaucracy! There seems in fact to have been a wild hyperinflation of reputations generally, especially in Delhi, Mumbai, Bangalore, Pune and other such hip with-it places — people claiming to have earned PhDs when they have none, people calling themselves “Dr” on the basis of some defunct Soviet management institute having once paid them off, people claiming to be Harvard postgraduates on the basis of some outsourced executive development programme of a few weeks’ duration, people claiming academic publications and academic affiliations which are non-existent, etc etc. All that for another day! (But any former students of mine who may find the above pertinent to themselves may please know their old prof is cross with them! Tsk tsk!) (And then there was the one of the senior government economic planner who told his astrologer on the telephone his correct date of birth but had lied to the Government of India by a couple of years…. clearly he did not want to get his own Ptolomaic horoscope wrong even if his plans for India in the Copernican world went awry!)
Fable of the Fox, the Farmer, and the Would-Be Tailors
In the Land of Milk and Honey, there was once a great shortage of Tailors. So the King called for Tailors from all other Lands to come, and they would be each paid the princely sum of forty gold ducats for their work…
A Fox who lived in the Land of Stones and Dust heard of this. In the Land of Stones and Dust, people were hardworking but were mostly poor and destitute. If they worked hard all year, they could manage to keep only a half or maybe one ducat of gold. The Fox had an idea. Maybe he could start sending people to be Tailors in the Land of Milk and Honey. So he called a big gathering of the people and said: “People of the Land of Stones and Dust! I want to make you wealthy. All year long you toil and make only a few ducats under the blazing sun! I will make you into Tailors and send you within a few short weeks to the cool and lovely Land of Milk and Honey! Do you know how much a Tailor makes there? Forty gold ducats in a year! Think of that! You and your family will live in the lap of luxury!“ There was a sigh of disbelief mixed with happiness in the crowd at the mention of such an unearthly large sum of money. Nobody, not even the richest, could earn such amounts here, which mere Tailors could make over there! None of the people had been to the Land of Milk and Honey but they had heard many stories of its riches before.
“Come right up, sign right here, sign right here!” said the Fox, and many people crowded to sign on. “It will cost you a couple of ducats, just a couple, that’s all, and we will soon have you off to the Land of Milk and Honey where forty gold ducats are yours for the taking! Isn’t that something?!” When he mentioned the two ducats they had to pay, a lot of people stopped. “But how can we pay so much, you know that in our country we only earn a pittance every year; two ducats are beyond our reach, it means our life’s savings!” “Come now my friends,” said the Fox, “what kind of spirit is that? Can’t you see that soon within a few short weeks you will be in the Land of Milk and Honey, and as a Tailor you will be making forty ducats, now isn’t that truly a princely sum the likes of which you’ve never seen? Think about that! You are being asked to contribute a little something to that goal, what’s one or two ducats here and there, think of your future! If you don’t have the two ducats in your pocket, sell a few things you don’t need, even your house for soon you will be on your way to the Land of Milk and Honey!”
The Fox spoke so persuasively and with such a kind voice and generosity in his eyes that as many as one hundred and sixty people sold their belongings, and each confidently put two ducats into the Fox’s hands. The three hundred and twenty gold ducats brought tears of joy to the Fox as he counted them; this could become such a pleasant activity he thought to himself!
But now, he thought, I have a problem; the King of the Land of Milk and Honey has asked for Tailors, and these people I have are all woodcutters, weavers and candlestick-makers. Somehow, I have to make them all Tailors. Let me go to my friend the Farmer, maybe he can teach them some tailoring for a few ducats!
The Old Farmer listened to the Fox’s offer with increasing anticipation. He had always liked a good sum of money in hand though he was careful not to show it by any ostentation. He had many mouths to feed, and besides if something was left over he would like to visit the Land of Milk and Honey just once himself with all his family. “Certainly, my good friend,” he told the Fox, “give me the money and soon I’ll make tailors out of these people. Oh what fun we shall have together!” The fact he was a farmer and not a tailor himself or that he had never been to the Land of Milk and Honey and knew nothing about it did not seem to bother him. He was a man who felt he knew the substance of almost all the subjects under the sun beneath which he had toiled. Why, even on the subject of tailoring in the Land of Milk and Honey, he had an opinion or two which he felt to be surely among the very best. Besides, he said to himself, what he knew not himself he would rely on his many friends and relatives to provide. So he brought together his wife, who did some sewing, and a cousin who had once cut cloth for a coat, and three nephews who were apprenticed to a weaver, and two of his nieces who were supposed to knit wool so fast that it was said they could make a whole blanket in half a day, as well as a few trusted friends here and there, including one who had once been a tailor’s apprentice many years ago but had not succeeded because of his poor eyesight.
And the Fox brought all the Would-be Tailors to the Old Farmer, who put them all in a room with his kith and kin so they could be taught their skills every day and night for some weeks. A Traveller happened to pass through and find this in progress. “But will this help these woodcutters, weavers and candlestick-makers to become Tailors?” he innocently asked the Old Farmer. The Old Farmer made no reply. Instead, in the deep of night when the Traveller slept, the Farmer and the Fox arranged to have the hapless fool’s throat cut and then threw his body into the sea.
When the Would-Be Tailors came out of the room into the sunlight, the Fox had ships ready for them at the harbour to take them to the Land of Milk and Honey. He bundled them on board, and almost before they could say their farewells to their loved ones, the ships were quickly on their way. “But are we Tailors now?” shouted one from the decks. “What?”, the Fox said over all the noise, “are you Tailors now? Yes, yes, of course you are Tailors, what else do you think you are, don’t worry about anything, you are Tailors all right, you are just what they want in the Land of Milk and Honey, work hard now, and all the best to you, good luck!”
Alas, it was not to be. Some of the Would-Be Tailors never reached as their ships sank en route. Others reached but could not find work or were killed by the locals in the Land of Milk and Honey or were sent in slave ships back to the Land of Stones and Dust. A few Would-Be Tailors did manage to stay on somehow and per chance learned to become tailors and earn a modest living, but they too yearned for their homes and families and even the hot sun of their own Land of Stones and Dust. As for the Fox and the Old Farmer, life went on nicely enough, as they went from town to town speaking to people about the glories and riches that awaited them in the cool and lovely Land of Milk and Honey, and many crowds gathered to hear them everywhere they went.
Moral: Do not interfere with people when they are making money (or, for that matter, when they are eating, or making love).