Wednesday, January 21, 2009

Day 4: Into The Deep

Barack Obama got sworn in, and after his inauguration speech, where he talked about the resolve to take on the financial crisis, but warned that there are challenges ahead, the Wall Street sank. How much of it is Barack Obama, and how much of it is due to the continuing bad news coming from banks, it is difficult to tell. But it seems it is mostly banks, as they continue to pour bad news, despite clear evidence that they are now hoarding cash, clawing back on loans and obviously passing on their troubles to the broader economy. The British government, over last couple of days, took some extraordinary steps to give the banks confidence about lending money, basically by insuring their loans. Despite this, question marks are being raised about the financial health of Britain's largest banks, Barclay's for one. Across the pond, it is Citi, yes the world's largest financial institution supposedly, which is in trouble. It is interesting to learn that in Citi, it is only its brokerage arm, Smith Barney, that makes the money; all other consumer businesses of Citi group do not make any money at all. And, Citi is planning to sell Smith Barney. So, it is Deja Vu once again, to quote CNBC commentators. It feels like that week in September when Lehman Brothers went into bankruptcy and AIG came out with its troubles. Just that, this time, it is going to be bigger, and the policy options are mostly exhausted.

Let's talk about it - policy options. It is extraordinary to see what the governments are doing across the world. If we wind back 12 months, the first set of responses were based on interest rates, where the monetary authorities were trying to make money cheaply available to keep the economy going. This was getting sticky, with rising inflation and a negative real interest rate, but everyone kept going. However, around mid year, Banks started failing and the phenomena of reckless lending came to light. By then, interest cuts were no longer the option - it was already cut too low - and the word 'Bail Out' came to the fore. So, governments bailed out the financial institutions and thought everything will be back to normal. It did not, as banks started repairing their balance sheets first - what else do you expect of a profit making entity - and we moved from bail out to 'stimulus', injecting money to the wider economy through loan guarantees to banks and even the extraordinary steps like allowing the central bank to lend to businesses. It looked like we are going on reverse gear on economic theory - we reached from Milton Friedman to Keynes in a few short months.

If one has to read anything in the current situation, the crisis is not going to get over any time soon. I, like many others, expected this to be a short recession, almost an unfinished one, blown away by combined policy actions by the middle of 2010. But, it does seem now, the interventions so far has done nothing - and this is the extra-ordinary thing about collective psychology - and as the banks act rationally in line with their economic interests, we have no way out of this crisis any time soon.

Without the real life pain, I obviously worry about the business I run, it would be an interesting game of strategy. The governments are running out of ideas fast. They are facing a crisis of an extraordinary proportion, and increasingly it is looking like that the whole capitalist system is in a sort of crisis. I say this because, as it stands, if everyone, bankers, entrepreneurs and government officials keep behaving the correct rational way, this crisis will deepen; so, we are possibly standing at a point of inflection in our history.

What could be done now? Everyone knows that we are seeking a Direct-to-Consumer strategy. How to reach money to the consumers so that demands can revive, businesses can start producing and banks see the rationale in lending money yet again. However, in our cascaded society, we have few options for such a stimulus. In fact, the deeper issue is about equality, sub-prime is not the problem but the solution rather. We have been hoarding money in the hands of a few for far too long: such a crisis was expected.

God has this habit of acting Robin Hood. It seems that whenever the balance of the economy is lost, he flattens it out yet again. It happens through disruptive technologies and innovations, but this time it is going to be a cruel correction of economic forces.

There is pain ahead, as Barack Obama also said. The question is: Whether we shall keep our faith and emerge, as good men and women, on the other side of the tunnel. Or, shall we lose ourselves in the process. Suddenly, failure does not look that bad at all. At times like this, I guess the trick is to focus on what we have, rather than what we don't; keep ourselves flexible, and feel the great freedom such crisis provides, one to do anything and be anyone, yet again.

I am, however, stuck to my old life, though I am trying best to escape. I am working on agreements and numbers, knowing fully well that this is about building a hut on the sea-shore amidst a tsunami. But then, habits die hard - our business culture is used to certain things, without which it does not look like work. So, I shall play the game as long as I have to, though I am desperate to send an IM to Noah to keep a seat.

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