Part 1 of Series of Opinions and Reflections on Responsible Capitalism.
The truth is that our central bankers are rather conservative with a small ‘c’, but they also appear to have multiple personality problems. Before the financial crisis of 2008, they were taking a huge risks by ignoring the credit supply market and the enormous risks which the retail banks were taking. And yet at the same time they were also voicing concerns over inflationary pressures. The bottom line is that they were too out of touch with the real economy. Their automatic response to inflation was based on the assumption that all causes of inflation are the same, and that the response and cure is therefore the same. Remember the 1970s?
The rationale was simple. Inflation is caused by hyper demand (be it real or illusionary), leading to wage increases and other unsavoury malaise of an overheated economy – so we must give it the good old medicine of Interest Rate Hike. Inflation as a result of oil prices did not compute with the Central Bankers, perhaps because they do not drive themselves to the petrol station, or shop at the supermarket regularly enough to see what was really happening. As a result only three months after the last interest rate rise in July 2008, they could be heard murmuring ‘oops’, ‘oh dear’ and other phrases to that effect.
This unholy alliance of credit-driven demand, coupled with ill-judged interest rate increases, pushed risky lending over the edge. Defaults by high-risk, or to be politically correct, ‘sub-prime’ borrowers started to increase – pushing the banks’ exposure beyond sustainable levels, and so the entire house of cards came crashing down.
What is even more stupefying, is the response from governments around the world, championed by Gordon Brown. They started to cut VAT and taxes (read – income), they rescued banks by purchasing toxic assets with taxpayers’ money (read – exposure), and they pacified taxpayers by shareholdings in worthless banks (read – please re-elect me!).
These governments also rescued bankrupt auto manufacturers, which should have gone out of business years ago, according to the ‘free market’ doctrine. Suddenly everyone was a socialist and free market advocates were less vocal. Prime Ministers and Presidents (old and new) told the electorate “Don’t worry, we will fix this as soon as we can find some more money for you to borrow, then you can all go back to your buying sprees”. And the British Government started to print more money to solve the liquidity problem! At last Britain had something that it could agree on with Robert Mogabe of Zimbabwe and the then genius President of Iran !
The fact is, driving demand by the easy supply of credit is only mortgaging the future. Consumers have borrowed up to their capacity, based on their future ability to earn and to service debt. Notwithstanding the fact that some are losing their jobs and their capacity to earn or consume, we have probably consumed our lot for the next decade or so! Bringing forward future demand by releasing credit into the economy is irresponsible and immoral, as well as being a recipe for economic and social disaster.
In reality, the electorate and the political elite need to make some hard decisions. The ‘free-for-all’ market doctrine has failed, so let’s hope it is buried for good and Rests In Peace! Our society needs to take stock of the new realities. We either want to live in a fool’s paradise, or we want to be truly prosperous and civilised. Perhaps we need to stop defining ‘civilisation’ and ‘civilised society’ by the measure of how many expensive cars, large houses, and widescreen TVs we have, and by all that is material. Instead, we need to reassess our definitions and make a new contract with humanity.
Economic success in a truly civilised and enlightened society is not dependant on an ‘every man for himself’ and ‘the end justifies the means’ mentality. The price for one man’s prosperity does not have to be another man’s poverty. We can be prosperous and look after the old, the infirm, and those who are unable to cope. But to achieve this we have to introduce morality and responsibility into our economic activity and into our belief systems. It is right to ban ‘short selling’ permanently. It is right to put away fraudsters like Madoff. And it is morally correct and responsible to cap lending.
Morality, honour, and justice are not the enemies of Capitalism, but are instead the virtues of civilised societies, which respect the rights of their citizens to achieve their dreams and their potential. Responsible Capitalism is about having the freedom to fully realise personal potential, to achieve the best that one can, and do so in peace and security. Responsible Capitalism recognises that the freedom of an individual is not boundless, but that its boundary is where the freedom of another person starts.
We cannot insist that we have a right to property, wealth, and wellbeing – yet deny others the same choices, because we see our way of life as superior, hence by definition the only one that has a right to exist. We can no longer stay disengaged from our politicians and not hold them accountable, as we are now waking up to the interdependencies of politics and the economy. However, we can with certainty claim that economic success is more likely when populations have the opportunity to exercise their free will – but free will, or democracy if that is what you wish to call it, comes with responsibility, accountability and social justice. We cannot separate our politics from our economics, so to be engaged in one means we have to get involved with the other. If we wish to live in a democracy, we need to accept the responsibilities that this freedom carries.
We cannot allow the economy to run at the hyper credit levels of the last two decades, creating illusionary and false demand, even if it costs the ruling party the next General Election! The future of the country is more important than the party. This does mean hard times for a number of years and there is a social cost that is inevitable and regrettable. We need to create the safety nets which are necessary to ensure we minimise hardship and suffering, but this cold is not going to go away without becoming a fever first. We have had the fun and it is time for the hangover, so may be next time we should drink a little less and not stay so long at the party!
So what is the practical answer to this? In economic terms, we need to recognise and come into terms with our national capacity to consume – which should be equal to the availability of funds (note not cash Mr Brown) at a reasonable risk. We need to stabilise falling demand by supporting companies with meaningful government loan guarantees, so that more people do not lose their jobs and so reduce the capacity in the economy even further.
These ‘gesture politics’, such as providing a laughable £20 billion in loan guarantees, need to stop. Take note Mr Mandelson. £20 billion sounds like a great deal of money, but in the context of the fourth-largest economy in the world, with a GDP of £1.47 trillion, it doesn’t even qualify as small change. Reducing VAT sounds great the next day when your aids are reviewing the papers, but as we have seen it achieves precisely zero – even though ministers have the audacity to claim that things would have been worse without it. Just do the maths on a £150 weekly food shop and see how much this policy has saved for every household?
In these uncertain times one thing at least is certain. Until governments stop playing games, and using smokescreens to fool the electorate so that they can be re-elected, we will never find the solution. And that is a long time to be in recession.
About the Author:
Ali Zartash-Lloyd is Managing Partner at Cognisant Associates a business consulting partnership. He is a management graduate from the University of Leicester. He held Senior Management positions at a number of Multinationals for over a decade including Director of Global SME Products at Avaya Inc. and European Sales & Marketing Director at Samsung Telecom.
Copyright- “Webmasters are free to reprint or reproduce this article provided that it is not edited, the author’s information is included, and the links are included as live links”.
