Looks like it is going to be a 'dead-decade' for the West after the bankers triggered the financial crisis resulting in not just mass unemployments for the youth but also financial crisis across countries.
So, what is 'broken' with Capitalism in it's present form? This is the question we all are asking in the present crisis.
I would like to point out a few quirks which needs to be amended asap if the system is to bring long term prosperity to masses and hence the peace across the world.
1. Role of Government - An example of better management presented via this 'Utilities Example' by Martin Wolf & Prof. Helm on 13-Jun-2008 in FT.
A regulated utility consists of a set of assets, an operating function and a co-ordinating function. The second, in turn, consists of two activities: running the business day to day and planning and implementing investment projects. Professor Helm argues , persuasively, that lumping all these together has led to inefficiency and a rip-off of consumers*.
Utilities have high capital costs and low operating costs. The purpose of the regulatory regime is to assure owners of the assets that they will not be expropriated. Thus the regulatory regime needs to offer a return sufficient to persuade investors to finance existing assets, known in the UK as the regulatory asset base. The regulatory regime also needs to offer private contractors sufficient returns to operate the business and develop and implement new capital projects.
Under the assumption that all these functions are to be carried out by a single entity, the solution has been to offer a so-called "weighted average cost of capital", whose components are debt and equity. Prof Helm's argument is that this is a mistake: the weighted average cost of capital is too high for finance of the regulatory asset base and too low for finance of the other activities. Worse, the private sector has understood this, with two dire consequences: excess profits on ownership of the assets and tendencies to under-investment.
The obvious way to finance the asset base is via debt. There is no reason to force customers to pay higher charges than are needed to service debt raised against the assets. Why, after all, should customers compensate investors for the risk of expropriation, which the regulatory regime exists to eliminate? Because the weighted average cost of capital is well above the cost of debt, investors have been able to buy the companies (BAA and the water companies, for example), replace the equity with debt and enjoy a licence to print money. Prof Helm estimates that this financial arbitrage has been worth up to £1,000bn a year, at the expense of the customers, predominantly in water. This is, quite simply, a scandal.
Yet this is not all. While the weighted average cost of capital is too high for finance of existing assets it is too low for the risky operating and, above all, investment activities. Not surprisingly, the companies have little interest in undertaking these.
The solution is to disaggregate the regulatory regime and the functions of these companies. Interestingly, the market itself is carrying out much of this, via its financial engineering. Finance of existing assets should be by debt, with the cost of capital set accordingly. Operating the assets and adding new ones could (and should) be franchised out, as is done for water in France. Instead of setting returns, as the regulators now do, the franchiser would discover the returns the market seeks via competitive auctions. Should franchisees fail to act in accordance with the contract, they would lose their franchise. What a simple solution that would have been to the problem of BAA!
When one looks at it this way, it seems obvious that the finance of assets is a suitable function for the public sector, which has one huge advantage - the ability to borrow cheaply. The difference between public finance of the assets and debt finance of a privately owned regulatory asset base, whose service is guaranteed by charges on customers set by a publicly appointed regulator, is, to put it mildly, not obvious.
The most sensible solution would have been for the public sector to own & finance the assets, with the operating and investment activities contracted out.
So simple. But what do the Government's do. They go from one extreme to another at a high cost to the people - all in the name of CAPITALISM.
2. Financing of Political Parties in the so called West & Democracies.
Different countries have different political systems all within the 'Democracy'. In one form or other all the major politicians are financed by the big business people and companies.
3. CRR Ratio to be set by Independent Central Bank and not the Commercial Bankers.
While CRR Ratio should not be more than 1:4, Debt should be punished and Equity rewarded not other way round
What the government's should understand is just keeping today's youth on dole will not make the problem go away. What about their minds? As the mind is restless and it needs productive work to be stable, only a stable economy with sensible policies can help achieve that. Otherwise, today's unemployed will become tomorrow's terrorists.
Kind regards,
Pradeep
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