Is casino capitalism to blame for the financial crisis?
Wednesday, 15 October 2008
Imtiyaz Husain
WE can never forget the great achievement of Prof. Yunus in microfinance. Not only he has implemented this great idea in our country but has many successful replication of the scheme the world over. The concept is working and giving great boon to the poor. It is to this success that we shall always acclaim his farsightedness and dedication. We should also not forget his role in exposing the kakistocracy which was leading the nation towards disastrous trails.
This tsunami on the Wall Street has affected the world and may perhaps soon reach our shores in the form of disturbing and falling exports and job prospects in the Middle East and elsewhere. Our portfolio investors may become nervous and repeat their pull out of 1996-7. Our real estate business may face another bust. The banking system may face reduced income and earnings assuming none have played cowboy capitalism. In the end we shall surely come out of all this with resilience but a lot poorer.
The remedy suggested by Prof. Yunus is to depend on the market mechanism and not government intervention. Former Prime Minster Mahatier of Malaysia refused the IMF bailout solution during the Asian Crisis of 1997 and had his own intervention plan which was eventually successful. A few days back Prof. Joseph Stieglitz, an economic Nobel laureate said, "People around the world once admired us for our economy, and we told them if you want to be like us, here's what you have to do -- hand over power to the market." He further adds, "the point is that no one has respect for that kind of model anymore given the crisis. And of course it raises questions about our credibility. Everyone feels they are suffering now because of us." Indeed people and countries feel the same otherwise why would Iceland seek a bailout from Russia!
My humble suggestion to Prof. Yunus is that we should look inwards to our needs and ensure that our stock market does not gallop away to irrational heights driven only by a sense of passionate greed. In the developed world the share prices have fallen because of the urgent need to recoup cash, to settle debts and match payrolls. Prices have gone down because hedge funds and institutions have bills to pay and since credit is not available, shares are off-loaded. There is no trust in the banking system. In many countries expectations of the future is driving down the market. In Japan and South Korea the indices have plummeted because the sale of cars and electronics goods which the US buys is expected to fall. India which has a strong internal growth, yet the market has suffered because international credit is short; buying power of the US is expected to go down. In the UK and Europe, the banking system is impacted and thus bearing the consequences of the Wall Street meltdown. Take for instance the case of Iceland a small socialist country whose banking system borrowed eight times of its deposit and invested it in hedge funds and credit swaps which can no longer payback. Thus I am convinced that the private sector does not have the resources to help out.
The only answer is oversight and continued regulations which would stop firms from taking undesirable risks.
Surely what Prof. Yunus may do is to look at his own mutual funds being traded in our stock exchange. The Grameen Mutual Fund 1 & 2 are today trading at many times their net asset value. Mutual Funds are after all financial products which derive their value from the values of all equity, bonds or commodities stock they hold. The value of a mutual fund cannot be more than the sum of the value of its components. How these values have gone astray is another question but it would only be right if he looks into the matter and stops the casino capitalism in his own back yard.
WE can never forget the great achievement of Prof. Yunus in microfinance. Not only he has implemented this great idea in our country but has many successful replication of the scheme the world over. The concept is working and giving great boon to the poor. It is to this success that we shall always acclaim his farsightedness and dedication. We should also not forget his role in exposing the kakistocracy which was leading the nation towards disastrous trails.
This tsunami on the Wall Street has affected the world and may perhaps soon reach our shores in the form of disturbing and falling exports and job prospects in the Middle East and elsewhere. Our portfolio investors may become nervous and repeat their pull out of 1996-7. Our real estate business may face another bust. The banking system may face reduced income and earnings assuming none have played cowboy capitalism. In the end we shall surely come out of all this with resilience but a lot poorer.
The remedy suggested by Prof. Yunus is to depend on the market mechanism and not government intervention. Former Prime Minster Mahatier of Malaysia refused the IMF bailout solution during the Asian Crisis of 1997 and had his own intervention plan which was eventually successful. A few days back Prof. Joseph Stieglitz, an economic Nobel laureate said, "People around the world once admired us for our economy, and we told them if you want to be like us, here's what you have to do -- hand over power to the market." He further adds, "the point is that no one has respect for that kind of model anymore given the crisis. And of course it raises questions about our credibility. Everyone feels they are suffering now because of us." Indeed people and countries feel the same otherwise why would Iceland seek a bailout from Russia!
My humble suggestion to Prof. Yunus is that we should look inwards to our needs and ensure that our stock market does not gallop away to irrational heights driven only by a sense of passionate greed. In the developed world the share prices have fallen because of the urgent need to recoup cash, to settle debts and match payrolls. Prices have gone down because hedge funds and institutions have bills to pay and since credit is not available, shares are off-loaded. There is no trust in the banking system. In many countries expectations of the future is driving down the market. In Japan and South Korea the indices have plummeted because the sale of cars and electronics goods which the US buys is expected to fall. India which has a strong internal growth, yet the market has suffered because international credit is short; buying power of the US is expected to go down. In the UK and Europe, the banking system is impacted and thus bearing the consequences of the Wall Street meltdown. Take for instance the case of Iceland a small socialist country whose banking system borrowed eight times of its deposit and invested it in hedge funds and credit swaps which can no longer payback. Thus I am convinced that the private sector does not have the resources to help out.
The only answer is oversight and continued regulations which would stop firms from taking undesirable risks.
Surely what Prof. Yunus may do is to look at his own mutual funds being traded in our stock exchange. The Grameen Mutual Fund 1 & 2 are today trading at many times their net asset value. Mutual Funds are after all financial products which derive their value from the values of all equity, bonds or commodities stock they hold. The value of a mutual fund cannot be more than the sum of the value of its components. How these values have gone astray is another question but it would only be right if he looks into the matter and stops the casino capitalism in his own back yard.