How does the Democracy or shall we say 'Sham'ocracy works in most of the West (USA & UK primarily)
Well, this is how it works:
1. 40-60% of eligible voters vote to elect politicians
2. The politicians are financed by big corporates, businessmen and bankers on wall street
3. Whoever gets the biggest backing has the highest cash to splash
4. Whoever splashes more has the best chance of getting elected
5. Once elected, the politicians have to return the favours of their cash-sponsers
6. They do that in a very transparant and democratic way by killing the regulation and loosening the rules
So, what is the problem?
1. Well, the rich gets richer while the poor stays poorer
2. The poor are taxed to subsidise the rich
3. Equitable distribution of wealth is thrown out of window in the mirage of for example 'the great american dream'
4. Life's value is measured just in money's worth. Quality of Life can be thrown in the bin
5. Natural resources are exploited in the name of quarterly growth
So, what is the solution?
1. Banning all political donations in cash/kind
2. Having a democracy tax which funds the elections
3. Voting to be made 'compulsory' for all eligible people
4. Putting the best resources behind regulation
5. Equitable or near-equitable society should be the the central aim of the state
6. All the utilities should be state-owned but privatised only to run and manage efficiently
7. State should have permanent and thriving presence in Media (ex. BBC in UK)
Unless this happens, it is safe to say, we live in 'Sham'ocracy where the government is nothing but the mouth-piece of their paymasters (corporates, big businessmen and bankers)
That is why, it is no surprise when David Cameron visits US, top on his agenda is protecting BP. When Kraft was cutting jobs after taking over Cadbury in UK, the government said, we don't interfere in the private sector business!!!
That is why, it is no surprise when David Cameron visits India, he take a huge delegation of 400 people (almost all of them are big corporate guys, rich businessmen and banks).
That is why, it is no surprise when in India, the UK chancellor George Osborne spends most of his time in Mumbai, selling the financial services to the Indians. Forget the 'big-talk' on banking regulation at home.
So, you see, what we in West call Democracy is actually 'Sham'ocracy.
Regards,
Pradeep Kabra
Friday, 30 July 2010
Wednesday, 28 July 2010
RE: BBC does business a dramatic disservice
Dear Luke,
In your article, you mention that BBC does business a dramatic disservice. The fact is, if BBC stops broadcasting a program like Dragon's Den or The Apprentice, then will private channels not JUMP at the same 'trash'? Your argument is muddled up. It is not clear if you are against BBC or you are criticizing BBC, if yes, then on who's behalf? I'm perfectly happy with the ad-free high-quality television and educational content which BBC provides. Your assertion that BBC 'acting as a spending empire that extorts money from taxpayers' is utter non-sense. Just look at the state of television in USA. All trash. 30% of ads and hardly any educational.
Coming to the specific criticisms of Dragon's Den, I agree. But instead of suggesting constructive improvements to the format of Dragon's Den, you are blindly criticizing BBC.
Regards,
Pradeep Kabra
--------------------------------------------
BBC does business a dramatic disservice
Luke Johnson The entrepreneur
The BBC has always regarded business with suspicion. As an institution funded by a regressive poll tax, it struggles mightily with the whole concept of the profit motive, or indeed the very concept of organisations having to actually generate revenues to pay the bills – rather than just acting as a spending empire that extorts money from taxpayers. For the BBC, the assumption is that business is ruthless, domineering and egotistical. And so the grotesque programme
Dragon’s Den fits their in-house prejudices perfectly.
Dragon’s Den is a cartoon masquerading as factual television. It has more in common with broadcast wrestling than the real world of investing. The very idea that genuine venture capital takes place in such a ludicrous way is a farce. It is obvious that many misguided projects are encouraged to present because they provide a few cheap laughs. Does it serve the cause of enterprise to have multimillionaires humiliate inventors, and cackle like schoolboys while treading on people’s dreams? But the BBC – despite being a public service broadcaster – doesn’t care. It all feeds the ratings monster, even if it does a disservice to innovation and the private sector.
Having chaired a rival broadcaster for six years, I understand well that television is a mass medium that is obliged to use broad brushstrokes. But in the case of Dragon’s Den, entrepreneurship has been dumbed down to the status of staged entertainment. This is a tragedy. Britain needs entrepreneurs who are positive role models, who inspire others, and who help create jobs and accelerate our recovery from the recession. The BBC gives us the bullying of The Apprentice (another idea formatted from elsewhere) and the superficiality of Dragon’s Den.
Perhaps in 2005, when Dragon’s Den was first shown in Britain, there was a degree of novelty and even a modest element of authenticity about it, even if it was a derivative format copied from Japan. But now in its eighth series, the concept has been milked dry and has descended to the level of caricature. The “Dragons” participate for the publicity, the producers want tears and jokes. The amount the investors risk is small change to them, but in return the show buys them plenty of exposure. As Simon Woodroffe, one of the original Dragons, said: “The thing to remember is that when you walk up the stairs [to pitch an idea] it’s not five people thinking ‘How am I going to be able to make an investment here?’ They’re actually thinking ‘Am I going to be the star of this next little piece?’”
Real angel investing is not a game. It is a vital source of funding for early stage companies that may represent the next wave of industry. It succeeds when it involves rigorous due diligence, conscientious research and professionalism. It involves long-term backing and collaboration, not macho bidding contests based on a two-minute pitch. It is a shame such a serious matter is debased by this sort of fake drama, much of it cooked up for the cameras for prime-time consumption.
It takes little imagination to produce shows like The Apprentice and Dragon’s Den, which pander to popular misconceptions about business and entrepreneurs. I suppose the patronising behaviour and casual cruelty are meant to toughen up candidates for the rigours of the market and the workplace. In reality they display a distorted picture closer to slapstick comedy than a genuine 21st century corporation.
As long as the audience and participants realise the programme is an exploitative sham, then I suppose it is merely a missed opportunity. But I do wonder why they bother. The entire purpose of the BBC is to deliver public goods in the form of high quality transmissions that are edifying and uplifting. After all, the BBC does not come cheap. Prosecutions of licence fee evaders undertaken by the British courts on the BBC’s behalf represent at least 10 per cent of all prosecutions of any kind. Meanwhile, law abiding citizens contribute £3.6bn ($5.6bn, €4.3bn) a year – all to deliver misleading confections like Dragon’s Den. When will the BBC adopt a more constructive and grown-up approach to business and free enterprise? lukej@riskcapitalpartners.co.uk The writer runs Risk Capital Partners, a private equity firm, and is chairman of the Royal Society of Arts
In your article, you mention that BBC does business a dramatic disservice. The fact is, if BBC stops broadcasting a program like Dragon's Den or The Apprentice, then will private channels not JUMP at the same 'trash'? Your argument is muddled up. It is not clear if you are against BBC or you are criticizing BBC, if yes, then on who's behalf? I'm perfectly happy with the ad-free high-quality television and educational content which BBC provides. Your assertion that BBC 'acting as a spending empire that extorts money from taxpayers' is utter non-sense. Just look at the state of television in USA. All trash. 30% of ads and hardly any educational.
Coming to the specific criticisms of Dragon's Den, I agree. But instead of suggesting constructive improvements to the format of Dragon's Den, you are blindly criticizing BBC.
Regards,
Pradeep Kabra
--------------------------------------------
BBC does business a dramatic disservice
Luke Johnson The entrepreneur
The BBC has always regarded business with suspicion. As an institution funded by a regressive poll tax, it struggles mightily with the whole concept of the profit motive, or indeed the very concept of organisations having to actually generate revenues to pay the bills – rather than just acting as a spending empire that extorts money from taxpayers. For the BBC, the assumption is that business is ruthless, domineering and egotistical. And so the grotesque programme
Dragon’s Den fits their in-house prejudices perfectly.
Dragon’s Den is a cartoon masquerading as factual television. It has more in common with broadcast wrestling than the real world of investing. The very idea that genuine venture capital takes place in such a ludicrous way is a farce. It is obvious that many misguided projects are encouraged to present because they provide a few cheap laughs. Does it serve the cause of enterprise to have multimillionaires humiliate inventors, and cackle like schoolboys while treading on people’s dreams? But the BBC – despite being a public service broadcaster – doesn’t care. It all feeds the ratings monster, even if it does a disservice to innovation and the private sector.
Having chaired a rival broadcaster for six years, I understand well that television is a mass medium that is obliged to use broad brushstrokes. But in the case of Dragon’s Den, entrepreneurship has been dumbed down to the status of staged entertainment. This is a tragedy. Britain needs entrepreneurs who are positive role models, who inspire others, and who help create jobs and accelerate our recovery from the recession. The BBC gives us the bullying of The Apprentice (another idea formatted from elsewhere) and the superficiality of Dragon’s Den.
Perhaps in 2005, when Dragon’s Den was first shown in Britain, there was a degree of novelty and even a modest element of authenticity about it, even if it was a derivative format copied from Japan. But now in its eighth series, the concept has been milked dry and has descended to the level of caricature. The “Dragons” participate for the publicity, the producers want tears and jokes. The amount the investors risk is small change to them, but in return the show buys them plenty of exposure. As Simon Woodroffe, one of the original Dragons, said: “The thing to remember is that when you walk up the stairs [to pitch an idea] it’s not five people thinking ‘How am I going to be able to make an investment here?’ They’re actually thinking ‘Am I going to be the star of this next little piece?’”
Real angel investing is not a game. It is a vital source of funding for early stage companies that may represent the next wave of industry. It succeeds when it involves rigorous due diligence, conscientious research and professionalism. It involves long-term backing and collaboration, not macho bidding contests based on a two-minute pitch. It is a shame such a serious matter is debased by this sort of fake drama, much of it cooked up for the cameras for prime-time consumption.
It takes little imagination to produce shows like The Apprentice and Dragon’s Den, which pander to popular misconceptions about business and entrepreneurs. I suppose the patronising behaviour and casual cruelty are meant to toughen up candidates for the rigours of the market and the workplace. In reality they display a distorted picture closer to slapstick comedy than a genuine 21st century corporation.
As long as the audience and participants realise the programme is an exploitative sham, then I suppose it is merely a missed opportunity. But I do wonder why they bother. The entire purpose of the BBC is to deliver public goods in the form of high quality transmissions that are edifying and uplifting. After all, the BBC does not come cheap. Prosecutions of licence fee evaders undertaken by the British courts on the BBC’s behalf represent at least 10 per cent of all prosecutions of any kind. Meanwhile, law abiding citizens contribute £3.6bn ($5.6bn, €4.3bn) a year – all to deliver misleading confections like Dragon’s Den. When will the BBC adopt a more constructive and grown-up approach to business and free enterprise? lukej@riskcapitalpartners.co.uk The writer runs Risk Capital Partners, a private equity firm, and is chairman of the Royal Society of Arts
Re: Banking needs more robust stress tests than these
Dear Mr. Kay,
Thanks for the article in today's FT.
In the last paragraph, you mention lucidly that "Shamefully, the purpose of the stress tests is not to ensure that depositors’ money is safe or that taxpayers will not be called on again. The purpose is to reassure banks and their shareholders that they will not be required to provide significant additional capital."
You end it by saying, "The lesson – perhaps the only lesson – of the stress tests is that Europe’s politicians and regulators have not begun to address, far less resolve, the issues posed by the crisis of 2008"
The true lesson is that Democracy in West is a sham where the election funding is controlled by the corporates and rich few. The only way to resolve it is by a) banning all political donations in cash/kind b) having a democracy tax which funds the elections c) voting to be made 'compulsory' for all eligible people.
Till these things are not resolved, we will see the same shameful situations in different guises across the spectrum.
Regards,
Pradeep Kabra
-----------------------------------
Banking needs more robust stress tests than these
by John Kay in Financial Times, 28-Jul-2010
Stress tests should be subject to stress tests. Would the banks that passed the version of the test imposed by Europe’s financial regulators be able to fund themselves adequately if implicit or explicit state guarantees of their non-deposit liabilities were withdrawn? This further test should be applied to each bank individually, and for the group of systemically important banks as a whole. The outcome would indicate how far Europe’s banks have progressed in being able to survive without public subsidy. Not far, I suspect.
The concept of stress tests is derived from the procedures used to ensure the robustness of complex engineering structures. There are three stages. You begin by testing each component in conditions considerably more demanding than it is likely to encounter. Then, you review system design to ensure that, even if several elements break down simultaneously, this does not jeopardise the integrity of the whole structure. Third, and most importantly, you test the total system for outcomes far outside the range of experience. You do not ask, “Will the bridge survive a strong gust of wind?” You ask, “Will it survive a gale worse than any at this site in the last century?”
There is much that the finance sector could learn from this, but no indication it has done so. The adverse scenario of the bank stress tests, far from being outside the range of experience or expectation, is not far from the mean. Sovereign default is not considered, since politicians have decreed it will not happen, although allowance is made for the possibility that pesky markets might not believe that assertion. Any risk manager in a bank who has not considered far more extreme developments than those in the stress tests should be fired.
And that illustrates a problem. One of many adverse consequences of the Basel capital requirements was that banks that held more than the regulatory minimum came under pressure to justify their “surplus” capital. It is easy to imagine the board of a bank feeling reassured when told that their institution is secure against the most adverse scenario postulated by their external regulator – the stress tests are designed to provide precisely that reassurance to capital markets. So the risk manager whose job is in jeopardy today is not the one who fails to insist on more pessimistic assessments than the stress tests: it is the one who does.
Worse, the stress tests are self-referential. Their purpose is to show, not that the bank is sound, but that it meets the requirements for regulatory capital. But one lesson of 2008 was that capital adequacy was almost irrelevant in a crisis. Most institutions met their regulatory capital obligations on the day they failed. Queues formed outside the branches of Northern Rock only weeks after the bank had announced (but before it had implemented) plans to return its “surplus” capital to shareholders.
Depositors were not satisfied by the assurance that the bank was compliant, and they were right. When the Tacoma Narrows Bridge collapsed in 1940, experts said the bridge had satisfied the highest engineering standards even though it had unfortunately fallen down.
Engineers have learned the lesson, but financial regulators have not. Capital adequacy was designed for a world in which a lender of last resort would turn the good but illiquid assets of a solvent bank into cash. But when uncertainty about the value of complex assets and liabilities becomes so great that the bank itself, far less any central bank or external lender, cannot reliably ascertain the true position, capital and cash are very different things.
Shamefully, the purpose of the stress tests is not to ensure that depositors’ money is safe or that taxpayers will not be called on again. The purpose is to reassure banks and their shareholders that they will not be required to provide significant additional capital. The lesson – perhaps the only lesson – of the stress tests is that Europe’s politicians and regulators have not begun to address, far less resolve, the issues posed by the crisis of 2008. johnkay@johnkay.com
Thanks for the article in today's FT.
In the last paragraph, you mention lucidly that "Shamefully, the purpose of the stress tests is not to ensure that depositors’ money is safe or that taxpayers will not be called on again. The purpose is to reassure banks and their shareholders that they will not be required to provide significant additional capital."
You end it by saying, "The lesson – perhaps the only lesson – of the stress tests is that Europe’s politicians and regulators have not begun to address, far less resolve, the issues posed by the crisis of 2008"
The true lesson is that Democracy in West is a sham where the election funding is controlled by the corporates and rich few. The only way to resolve it is by a) banning all political donations in cash/kind b) having a democracy tax which funds the elections c) voting to be made 'compulsory' for all eligible people.
Till these things are not resolved, we will see the same shameful situations in different guises across the spectrum.
Regards,
Pradeep Kabra
-----------------------------------
Banking needs more robust stress tests than these
by John Kay in Financial Times, 28-Jul-2010
Stress tests should be subject to stress tests. Would the banks that passed the version of the test imposed by Europe’s financial regulators be able to fund themselves adequately if implicit or explicit state guarantees of their non-deposit liabilities were withdrawn? This further test should be applied to each bank individually, and for the group of systemically important banks as a whole. The outcome would indicate how far Europe’s banks have progressed in being able to survive without public subsidy. Not far, I suspect.
The concept of stress tests is derived from the procedures used to ensure the robustness of complex engineering structures. There are three stages. You begin by testing each component in conditions considerably more demanding than it is likely to encounter. Then, you review system design to ensure that, even if several elements break down simultaneously, this does not jeopardise the integrity of the whole structure. Third, and most importantly, you test the total system for outcomes far outside the range of experience. You do not ask, “Will the bridge survive a strong gust of wind?” You ask, “Will it survive a gale worse than any at this site in the last century?”
There is much that the finance sector could learn from this, but no indication it has done so. The adverse scenario of the bank stress tests, far from being outside the range of experience or expectation, is not far from the mean. Sovereign default is not considered, since politicians have decreed it will not happen, although allowance is made for the possibility that pesky markets might not believe that assertion. Any risk manager in a bank who has not considered far more extreme developments than those in the stress tests should be fired.
And that illustrates a problem. One of many adverse consequences of the Basel capital requirements was that banks that held more than the regulatory minimum came under pressure to justify their “surplus” capital. It is easy to imagine the board of a bank feeling reassured when told that their institution is secure against the most adverse scenario postulated by their external regulator – the stress tests are designed to provide precisely that reassurance to capital markets. So the risk manager whose job is in jeopardy today is not the one who fails to insist on more pessimistic assessments than the stress tests: it is the one who does.
Worse, the stress tests are self-referential. Their purpose is to show, not that the bank is sound, but that it meets the requirements for regulatory capital. But one lesson of 2008 was that capital adequacy was almost irrelevant in a crisis. Most institutions met their regulatory capital obligations on the day they failed. Queues formed outside the branches of Northern Rock only weeks after the bank had announced (but before it had implemented) plans to return its “surplus” capital to shareholders.
Depositors were not satisfied by the assurance that the bank was compliant, and they were right. When the Tacoma Narrows Bridge collapsed in 1940, experts said the bridge had satisfied the highest engineering standards even though it had unfortunately fallen down.
Engineers have learned the lesson, but financial regulators have not. Capital adequacy was designed for a world in which a lender of last resort would turn the good but illiquid assets of a solvent bank into cash. But when uncertainty about the value of complex assets and liabilities becomes so great that the bank itself, far less any central bank or external lender, cannot reliably ascertain the true position, capital and cash are very different things.
Shamefully, the purpose of the stress tests is not to ensure that depositors’ money is safe or that taxpayers will not be called on again. The purpose is to reassure banks and their shareholders that they will not be required to provide significant additional capital. The lesson – perhaps the only lesson – of the stress tests is that Europe’s politicians and regulators have not begun to address, far less resolve, the issues posed by the crisis of 2008. johnkay@johnkay.com
Thursday, 22 July 2010
Spain's Football Dominance - What Next?
They say, it is easier to reach the top than to maintain it. What can be the possible reasons for that? Well, there can be numerous starting from lack of ambition to tiredness to lack of zeal or enthusiasm to self-contentment to hubris. So what can be done about it? More specifically, what should Spanish football team do to maintain their football dominance after holding aloft European Cup and now World Cup?
Without going into the philosophical solutions, I would say that they should do the following:
a) Make Cecs Fabregas regular in the starting line-up.
b) Encourage their forwards to play like mid-fielders. With players like Xavi, Iniesta and Fabregas who needs forwards anyway?
c) Get rid of Ramos.
d) Send Cruyff or somebody from his line of school to Real Madrid's academy to coach youngsters
Bingo. It wouldn't be far-fetched to see Spain repeating the feat of European Cup & World Cup in the coming four years. Wouldn't that be a fitting end to the careers of gems like Xavi & Iniesta?
Pradeep Kabra
Without going into the philosophical solutions, I would say that they should do the following:
a) Make Cecs Fabregas regular in the starting line-up.
b) Encourage their forwards to play like mid-fielders. With players like Xavi, Iniesta and Fabregas who needs forwards anyway?
c) Get rid of Ramos.
d) Send Cruyff or somebody from his line of school to Real Madrid's academy to coach youngsters
Bingo. It wouldn't be far-fetched to see Spain repeating the feat of European Cup & World Cup in the coming four years. Wouldn't that be a fitting end to the careers of gems like Xavi & Iniesta?
Pradeep Kabra
Monday, 19 July 2010
Re: Financial Reform
Dear Sir,
You correctly mention that the real work starts now on the financial reform in-spite of the incompleteness of the same.
But the main point is, issue like 'minimum capital requirements' though pending have been left of for Basel standards to decide, what about the other three-fourths of the reform which has not even been considered viz., Housing Loans/Market Reform (read Fannie & Freddie), Insurance Reform & Rating Agency Reform.
It is a pity that while the biggest financial and economic meltdown since 1930s produce so little reforms from a democratic government in US, it also shows the clout of the bankers on CAPITOL HILL!!!
Regards,
Pradeep Kabra
------------------------------------------
Financial reform - Editorial in Financial Times, 19-Ju-2010
Dodd-Frank bill is historic, but the work is unfinished
The US financial regulation bill passed by Congress last week is comprehensive and far-reaching. The White House, whose first design proved influential, and the bill’s sponsors are right to call it historic. But few delude themselves that the new law settles much. The real work starts now.
The Dodd-Frank law expands the powers and responsibilities of multiple agencies, but says little about what the new rules will require of financial institutions: so many pages, so little content. In many instances, Congress has told the regulators to balance conflicting objectives but given little guidance about how trade-offs – for instance, between financial safety and availability of credit – should be struck.
Wider discretion was in many cases desirable or inevitable. Rules must fit the circumstances. Nonetheless, it is a hazard and a cause of uncertainty. The regulators must waste no time in staffing up, clarifying their rules and methods, and learning how to co-operate.
Better interaction among regulators will be vital. The complexity of the old organisation chart helped cause the crisis – emerging concerns cut across jurisdictions – but the new one is no simpler. According to most counts (there is room for dispute, which tells you something), the number of agencies has increased. New co-ordination mechanisms are in place, and much depends on them.
The new Financial Stability Oversight Council, the principal co-ordinating body, will be responsible for systemic safety. The Fed will be its main operating arm. These are good innovations, but how the system functions will be for its constituent parts to decide.
Maintaining a sense of urgency as the politicians, for the moment, step aside will be a challenge. The same is true of the reform’s other main innovations: early resolution authority, which will not be tested until a big, complex, troubled firm has to be wound up; the diluted Volcker rule, which curbs banks’ proprietary trading without defining proprietary trading; and derivatives regulation, which is to be tightened through standardisation and exchange trading, but with exemptions of uncertain scope.
Most important, the bill is almost silent on capital requirements. Eyes must turn now to the Basel process, in which national regulators are negotiating that crucial issue. Progress has been slow, and there are indications that the new rules may be too lax. If Basel fails, the innovations of the US law will be undermined, and the whole project rendered somewhat beside the point.
You correctly mention that the real work starts now on the financial reform in-spite of the incompleteness of the same.
But the main point is, issue like 'minimum capital requirements' though pending have been left of for Basel standards to decide, what about the other three-fourths of the reform which has not even been considered viz., Housing Loans/Market Reform (read Fannie & Freddie), Insurance Reform & Rating Agency Reform.
It is a pity that while the biggest financial and economic meltdown since 1930s produce so little reforms from a democratic government in US, it also shows the clout of the bankers on CAPITOL HILL!!!
Regards,
Pradeep Kabra
------------------------------------------
Financial reform - Editorial in Financial Times, 19-Ju-2010
Dodd-Frank bill is historic, but the work is unfinished
The US financial regulation bill passed by Congress last week is comprehensive and far-reaching. The White House, whose first design proved influential, and the bill’s sponsors are right to call it historic. But few delude themselves that the new law settles much. The real work starts now.
The Dodd-Frank law expands the powers and responsibilities of multiple agencies, but says little about what the new rules will require of financial institutions: so many pages, so little content. In many instances, Congress has told the regulators to balance conflicting objectives but given little guidance about how trade-offs – for instance, between financial safety and availability of credit – should be struck.
Wider discretion was in many cases desirable or inevitable. Rules must fit the circumstances. Nonetheless, it is a hazard and a cause of uncertainty. The regulators must waste no time in staffing up, clarifying their rules and methods, and learning how to co-operate.
Better interaction among regulators will be vital. The complexity of the old organisation chart helped cause the crisis – emerging concerns cut across jurisdictions – but the new one is no simpler. According to most counts (there is room for dispute, which tells you something), the number of agencies has increased. New co-ordination mechanisms are in place, and much depends on them.
The new Financial Stability Oversight Council, the principal co-ordinating body, will be responsible for systemic safety. The Fed will be its main operating arm. These are good innovations, but how the system functions will be for its constituent parts to decide.
Maintaining a sense of urgency as the politicians, for the moment, step aside will be a challenge. The same is true of the reform’s other main innovations: early resolution authority, which will not be tested until a big, complex, troubled firm has to be wound up; the diluted Volcker rule, which curbs banks’ proprietary trading without defining proprietary trading; and derivatives regulation, which is to be tightened through standardisation and exchange trading, but with exemptions of uncertain scope.
Most important, the bill is almost silent on capital requirements. Eyes must turn now to the Basel process, in which national regulators are negotiating that crucial issue. Progress has been slow, and there are indications that the new rules may be too lax. If Basel fails, the innovations of the US law will be undermined, and the whole project rendered somewhat beside the point.
Friday, 16 July 2010
Re: Watching Google
As published in Financial Times on 20-Jul-2010
Dear Sir,
In your editorial you mention that "Google is not obviously being evil but it is such a powerful technology company that it has the potential to go astray".
Well, but as Google argues - if they mis-use their trust of their customers, the competition is just a click away unlike how majority of people are all locked in Microsoft's inept operating systems.
Unfortunately, the job of most of the arm-chair observers is just to make these kind of comments. What Google has provided is the vision for so many services which were just unimaginable or available only to elite few.
Firstly, they have come up with Search which was ignored by all the big tech companies. (inspite of their so call huge R&D budgets!!!) Which itself has changed the way we live our lives. Which has taken away the stress from our lives by connecting us to what we seek.
The markets where they have entered late (like email), they have redefined the scope of the status-quo by making the product better. (The concept of Conversation in an email to minimum 1 GB storage!!!)
Finally, where they have purchased the companies to get an entry point (like Google Maps or Youtube), they have left the start-ups intact after providing all the resources to pursue their passion rather than killing them in the big beauracratic machine.
So, before worrying about whether Google is evil, you should be encouraging other companies to behave like Google. Think how our lives were before the Google Search, Google Maps, Gmail, Google Earth, Google Apps, Youtube, Google Books etc.,
Regards,
Pradeep Kabra
-----------------------------------
Watching Google - Editorial in Financial Times, 16Jul2010
Regulators need to keep an eye on a powerful company
Google is an innovative company that has produced many benefits for consumers with its free search technology. In turn, it has become a highly profitable enterprise with a strong market share.
It is thus very important to many companies – particularly small businesses – where they appear in Google’s search rankings. They have no way of knowing how Google’s technology works since the company wants to protect its competitive edge.
As a result, Google is coming under increased scrutiny from regulators, with the European Commission already making informal inquiries into the search market. As yet, there is no evidence of Google abusing its market power, but it could do so.
As reported in the Financial Times this week, Google is facing controversy in two areas. The first is “search neutrality”, the suggestion that regulators should oversee its algorithms or set clear rules to ensure that search engines are not systematically biased for editorial or commercial reasons.
This is an impractical and unnecessary idea. As Marissa Mayer, Google’s head of search, argued in the FT, it is better for different search engines to compete vigorously with each other to produce the best and most relevant results. Google may be highly successful in search, but competition is only a free click away.
The second area of concern is Google’s provision of vertical services linked to search – for example, its display of Google Maps when a user looks for an address, or Google comparison shopping data when someone searches for a camera. This affects rival providers in travel and e-commerce.
Barry Diller, chairman of Expedia and InterActiveCorp, protested this week about Google’s $700m acquisition of ITA Software, saying that it would give Google unfair leverage in displaying flight information. Mr Diller wants the deal to be scrutinised carefully by regulators and conditions imposed.
Google’s defence is that it is trying to supply the most useful possible information to users. But the potential for antitrust abuse through the tying of vertical services to search raises clear concerns. European and US regulators should use the ITA deal to examine the issue broadly.
It would be wrong for Google to be hamstrung by regulators simply because its services are superior to rivals, but it needs to be watched with care. Google is not obviously being evil but it is such a powerful technology company that it has the potential to go astray.
--------------------------
Monday, 5 July 2010
Re: Smartphone Subsidies
Dear Lex Team,
You are wrong about your final analysis leading to "uneasy lies the head that wears a crown". Apple is not just developing the cool hardware but also has a support network of more than 200,000 apps. The likes of Nokia, Blackberry, Motorola etc., may reduce the price-gap but they cannot fill the apps-gap.
The only credible source of support operators can have is by embracing Google's android based phones from Chinese / Taiwanese manufacturers with almost 65,000 apps support to get a foot-hold in the market. Funnily, you don't even mention that in your analysis.
Regards,
Pradeep Kabra
------------------------------------------------
Smartphone subsidies
Published: July 4 2010 20:13 in Financial Times
Kingmakers do not take kindly to becoming mere courtiers, so insurrection is only a matter of time. For years mobile phone operators played a delicate game, balancing the power of phone manufacturers’ brands against their own control of customer relationships and a willingness to subsidise handsets. While the carriers risked becoming a dumb pipe, the highly competitive handset market left them room to make decent returns.
Then Apple strolled in and grabbed the industry’s profits. As shown by queues snaking round the block for the latest iPhone, the devices attract customers. Returns for the operators, however, are less clear cut. Some estimates suggest that AT&T, the US carrier, does not break even on an iPhone customer until the 17th month of a 24-month contract. In private, European mobile executives will admit that they only just break even on iPhone customer contracts. The hope is that users spend freely on data services and stick around once their terms are up.
Apple, meanwhile, has kept the average selling price of an iPhone above $600 since the third quarter of 2008. That’s for a device that contains less than $200 worth of parts (not including manufacturing, software and intellectual property costs), according to estimates by iSuppli, a market research firm.
Operators’ powers are diminished, not destroyed, though. While they will not stop subsidising iPhones, they are waiting for a credible pretender to rally round. And
non-Apple smartphone prices continue to fall. Nokia’s next model, the N8, will cost €370. BlackBerry maker Research in Motion recently reported that its average selling price slipped below $300 in its first quarter to the end of May, from more than $350 a year ago. Apple has already developed tiered pricing, selling older iPhones more cheaply. But when the technological gap to the competition narrows, Apple’s price premium must do likewise, or its terrific rate of growth will slow. Uneasy lies the head that wears a crown.
You are wrong about your final analysis leading to "uneasy lies the head that wears a crown". Apple is not just developing the cool hardware but also has a support network of more than 200,000 apps. The likes of Nokia, Blackberry, Motorola etc., may reduce the price-gap but they cannot fill the apps-gap.
The only credible source of support operators can have is by embracing Google's android based phones from Chinese / Taiwanese manufacturers with almost 65,000 apps support to get a foot-hold in the market. Funnily, you don't even mention that in your analysis.
Regards,
Pradeep Kabra
------------------------------------------------
Smartphone subsidies
Published: July 4 2010 20:13 in Financial Times
Kingmakers do not take kindly to becoming mere courtiers, so insurrection is only a matter of time. For years mobile phone operators played a delicate game, balancing the power of phone manufacturers’ brands against their own control of customer relationships and a willingness to subsidise handsets. While the carriers risked becoming a dumb pipe, the highly competitive handset market left them room to make decent returns.
Then Apple strolled in and grabbed the industry’s profits. As shown by queues snaking round the block for the latest iPhone, the devices attract customers. Returns for the operators, however, are less clear cut. Some estimates suggest that AT&T, the US carrier, does not break even on an iPhone customer until the 17th month of a 24-month contract. In private, European mobile executives will admit that they only just break even on iPhone customer contracts. The hope is that users spend freely on data services and stick around once their terms are up.
Apple, meanwhile, has kept the average selling price of an iPhone above $600 since the third quarter of 2008. That’s for a device that contains less than $200 worth of parts (not including manufacturing, software and intellectual property costs), according to estimates by iSuppli, a market research firm.
Operators’ powers are diminished, not destroyed, though. While they will not stop subsidising iPhones, they are waiting for a credible pretender to rally round. And
non-Apple smartphone prices continue to fall. Nokia’s next model, the N8, will cost €370. BlackBerry maker Research in Motion recently reported that its average selling price slipped below $300 in its first quarter to the end of May, from more than $350 a year ago. Apple has already developed tiered pricing, selling older iPhones more cheaply. But when the technological gap to the competition narrows, Apple’s price premium must do likewise, or its terrific rate of growth will slow. Uneasy lies the head that wears a crown.
Monday, 28 June 2010
Re: Only a closer union can save the eurozone
Dear Mr. Munchau,
Many thanks for all the insightful articles you write in FT every week.
In this weeks article, you mention that "Resolution of both the problems require a large fiscal transfer, not from Germany to Greece, but from German public sector to the German bank sector - in the form of new capital. The same would apply to France"
I thought, Capitalism means private business taking risks and if the risk fails then they go under. What is this back-hand solution of transferring funds from public sector to privately managed banks? Why not come to the point directly that the real solution lies not in the fund transfer where in good times the private bankers/share-holders/creditors enjoy and in bad times the public bails them out at the cost/gun-point of recession/depression/higher-taxes/fiscal cleaning etc., but the real solution is WHY NOT CALL THE BANKING SECTOR - A UTILITY SECTOR - AND NATIONALIZE IT!!!
Regards,
Pradeep Kabra
----------------------------------------------------------
Only a closer union can save the eurozone
By Wolfgang Münchau
Published: June 27 2010 19:52 in Financial Times
I was speaking recently to a group of investors who forced me – all but at gunpoint – to tell them how long I thought the euro would last. I normally prefer conditional forecasts but, in this case, I was asked to make an unqualified prediction. And so I yielded. My answer was that the eurozone would probably not survive the decade in its current form. As it turned out, I was the most optimistic person in the room, by far.
There are few people in Brussels – where I live and work – who would consider me an optimist. The point is not so much about how policymakers and investors relate to my predictions, but how the two groups relate to each other. They are worlds apart. Europe’s political classes still believe they are in control of the situation – and that a combination of austerity and financial repression will do the trick. Investors, meanwhile, do not understand how Greece, Spain and Germany can coexist in a monetary union.
I have noticed that whenever the European Council meets in Brussels, the European bond markets tend to slump with short delay. Yields are now close to the level they were at in early May, when the European Council set up the €440bn ($540bn, £360bn) European Financial Stability Facility and when the European Central Bank started to buy bonds. This crisis goes on and on.
The reason is that investors have lost confidence in the political economy of the eurozone. European politicians such as Wolfgang Schäuble, German finance minister, praise their own long-termism. But investors ask with some justification: what is long-termist about a bank bail-out without bank resolution? Or a sovereign bail-out without fiscal union?
I recently had an eye-opening experience appearing in the finance committee of the German Bundestag as a witness to testify on the proposed legislation to ban naked short sales. It turned out that the finance ministry could not produce the basic statistics on short selling, let alone provide even an anecdotal link between short selling and the bond crisis. I told the Bundestag that this cynical piece of legislation has contributed far more to the European bond market crisis than the naked short sales it purports to ban. Helmut Schmidt, the former German chancellor, said later that he almost died laughing when he heard about this legislation.
The proposed ban is the latest reminder that European Union members, and Germany in particular, have not learnt a single lesson from their serial communication failures during the crisis. In February, they made the mistake of announcing a political agreement on a Greek rescue package without backing it up for another three months. In May, they hailed the stability facility as a historic breakthrough in political governance; it then turned out to be little more than bail-out facility.
I only hope that they know what they did when they recently announced the publication of the stress tests for 25 banks. Once these are published, the markets will immediately demand to see the tests for all banks. Once that happens, in turn, governments will need to produce a convincing recapitalisation strategy. I fear, however, that they are once again committing themselves to going down a road without a map.
Without an endgame, this exercise will end in disaster. At some point the markets will realise that large parts of the German and French banking systems are insolvent, and that they are going to stay insolvent. You might think that Europe’s policy elites cannot be so stupid as to commit themselves to stress tests without a resolution strategy up their sleeves. But I am afraid they probably are. Europe’s political leaders and their economic advisers are, for the most part, financially illiterate.
Is there a way out? Yes there is, but the chance of a resolution to the crisis is starting to fade. The first step would have to be a serious attempt to resolve bank balance sheets. This is as much a German and French banking crisis as it is a Greek and Spanish debt crisis. You need to resolve both problems simultaneously. Resolution would require a large fiscal transfer, not from Germany to Greece, but from the German public sector to the German bank sector – in the form of new capital. The same would apply to France.
Beyond this restructuring, the eurozone will need to commit itself to a full-blown fiscal union and proper political institutions that give binding macroeconomic instructions to member states for budgetary policy, financial policy and structural policies. The public and private sector imbalances are so immense that they are not self-correcting. And you have to be very naive to think that peer pressure is going to resolve anything.
There is no point in beating about the bush and issuing polite calls for the creation of independent fiscal councils or other paraphernalia. This is not the time for a debate on second-order reforms. I am aware that, at a time of rising nationalism and regionalism throughout the EU, there is no consensus for such sweeping reforms. But that is the choice the EU’s citizens and their political leaders will have to make – a choice between reverting to dysfunctional and, as it transpires, insolvent nation states, or jumping to a political and economic union.
munchau@eurointelligence.com
---------------------------------------------
Many thanks for all the insightful articles you write in FT every week.
In this weeks article, you mention that "Resolution of both the problems require a large fiscal transfer, not from Germany to Greece, but from German public sector to the German bank sector - in the form of new capital. The same would apply to France"
I thought, Capitalism means private business taking risks and if the risk fails then they go under. What is this back-hand solution of transferring funds from public sector to privately managed banks? Why not come to the point directly that the real solution lies not in the fund transfer where in good times the private bankers/share-holders/creditors enjoy and in bad times the public bails them out at the cost/gun-point of recession/depression/higher-taxes/fiscal cleaning etc., but the real solution is WHY NOT CALL THE BANKING SECTOR - A UTILITY SECTOR - AND NATIONALIZE IT!!!
Regards,
Pradeep Kabra
----------------------------------------------------------
Only a closer union can save the eurozone
By Wolfgang Münchau
Published: June 27 2010 19:52 in Financial Times
I was speaking recently to a group of investors who forced me – all but at gunpoint – to tell them how long I thought the euro would last. I normally prefer conditional forecasts but, in this case, I was asked to make an unqualified prediction. And so I yielded. My answer was that the eurozone would probably not survive the decade in its current form. As it turned out, I was the most optimistic person in the room, by far.
There are few people in Brussels – where I live and work – who would consider me an optimist. The point is not so much about how policymakers and investors relate to my predictions, but how the two groups relate to each other. They are worlds apart. Europe’s political classes still believe they are in control of the situation – and that a combination of austerity and financial repression will do the trick. Investors, meanwhile, do not understand how Greece, Spain and Germany can coexist in a monetary union.
I have noticed that whenever the European Council meets in Brussels, the European bond markets tend to slump with short delay. Yields are now close to the level they were at in early May, when the European Council set up the €440bn ($540bn, £360bn) European Financial Stability Facility and when the European Central Bank started to buy bonds. This crisis goes on and on.
The reason is that investors have lost confidence in the political economy of the eurozone. European politicians such as Wolfgang Schäuble, German finance minister, praise their own long-termism. But investors ask with some justification: what is long-termist about a bank bail-out without bank resolution? Or a sovereign bail-out without fiscal union?
I recently had an eye-opening experience appearing in the finance committee of the German Bundestag as a witness to testify on the proposed legislation to ban naked short sales. It turned out that the finance ministry could not produce the basic statistics on short selling, let alone provide even an anecdotal link between short selling and the bond crisis. I told the Bundestag that this cynical piece of legislation has contributed far more to the European bond market crisis than the naked short sales it purports to ban. Helmut Schmidt, the former German chancellor, said later that he almost died laughing when he heard about this legislation.
The proposed ban is the latest reminder that European Union members, and Germany in particular, have not learnt a single lesson from their serial communication failures during the crisis. In February, they made the mistake of announcing a political agreement on a Greek rescue package without backing it up for another three months. In May, they hailed the stability facility as a historic breakthrough in political governance; it then turned out to be little more than bail-out facility.
I only hope that they know what they did when they recently announced the publication of the stress tests for 25 banks. Once these are published, the markets will immediately demand to see the tests for all banks. Once that happens, in turn, governments will need to produce a convincing recapitalisation strategy. I fear, however, that they are once again committing themselves to going down a road without a map.
Without an endgame, this exercise will end in disaster. At some point the markets will realise that large parts of the German and French banking systems are insolvent, and that they are going to stay insolvent. You might think that Europe’s policy elites cannot be so stupid as to commit themselves to stress tests without a resolution strategy up their sleeves. But I am afraid they probably are. Europe’s political leaders and their economic advisers are, for the most part, financially illiterate.
Is there a way out? Yes there is, but the chance of a resolution to the crisis is starting to fade. The first step would have to be a serious attempt to resolve bank balance sheets. This is as much a German and French banking crisis as it is a Greek and Spanish debt crisis. You need to resolve both problems simultaneously. Resolution would require a large fiscal transfer, not from Germany to Greece, but from the German public sector to the German bank sector – in the form of new capital. The same would apply to France.
Beyond this restructuring, the eurozone will need to commit itself to a full-blown fiscal union and proper political institutions that give binding macroeconomic instructions to member states for budgetary policy, financial policy and structural policies. The public and private sector imbalances are so immense that they are not self-correcting. And you have to be very naive to think that peer pressure is going to resolve anything.
There is no point in beating about the bush and issuing polite calls for the creation of independent fiscal councils or other paraphernalia. This is not the time for a debate on second-order reforms. I am aware that, at a time of rising nationalism and regionalism throughout the EU, there is no consensus for such sweeping reforms. But that is the choice the EU’s citizens and their political leaders will have to make – a choice between reverting to dysfunctional and, as it transpires, insolvent nation states, or jumping to a political and economic union.
munchau@eurointelligence.com
---------------------------------------------
Thursday, 3 June 2010
Re: Bankers have been sold short by market distortions
I feel sorry for Mr. Rajan for writing this article. I thought he is an intellectual. But as often with intellectuals, they get carried away by their knowledge to such an extent that they cannot differentiate between woods and the trees any more.
Coming back to this article, apart from the pretty naive generalisations and assumptions he makes, the awful thing is 'to justify' bankers action to the level of empathy vis-a-vis the regulatory & policy forces unleashed.
An example of a naive generalisations or assumption:
'But short-sellers perform a valuable social function by depriving poorly managed companies of resources they will waste'
I'm sure Mr. Rajan is aware that Short-Sellers don't even own the shares of the company they are shorting. How could they? Then, if they don't hold the shares ie., they are not investors. If they are not investors how are they depriving poorly managed companies of resources they will waste?
I'm sure an investor is smart enough to sell the shares if he feels the management is not up to the task. He or We don't need a short-seller to guide us!!!
Agreed about the regulatory and policy inconsistencies. But that can be discussed as a separate article instead of juxtaposing it with bankers behaviour.
Regards,
Pradeep Kabra
Bankers have been sold short by market distortions
By Raghuram Rajan
Published: June 2 2010 22:37 in Financial Times
Bankers must be heaving a sigh of relief as the shenanigans of the offshore drilling industry have pushed them to the edge of the radar screen of those targeting corporate greed. But it is unlikely their respite will be for long. Inquiries under way are bound to unearth more instances of ethically, and even legally, challenged bankers. When overlaid on images of bankers hankering after their outlandish bonuses soon after being bailed out with public money, the public picture of an industry motivated only by money and without any sense of the larger consequences of its actions will be reinforced. How do we instill more social values in the industry? Or is banker greed mostly good?
Most people do not work for money alone; a primary motivation for many is the knowledge that their work makes the world a better place. Bankers are no different, but their work differs from most other professions in two important ways. First, a broker who sells bonds issued by an electric power project is merely a cog in a gigantic machine, who never sees the plant she helped build. Second, the most direct measure of her contribution is the money she makes for her firm. This is where both the merits of the arm’s-length financial system and its costs arise.
Take for instance a trader who sells short the stock of a company he feels is being mismanaged. He does not see the workers who lose their jobs or the hardship that unemployment causes their families. But short sellers perform a valuable social function by depriving poorly managed companies of resources they will waste. A company whose stock price tanks will not be able to raise financing easily and could be forced to close down.
The trader does not cause the company to go out of business. If he is wrong and the company is well managed, other traders will take the opposite side, buy shares, push up the share price, and make the short seller lose money. It is typically only when the short seller’s opinions come to be widely shared, and company management is truly awful, that the share price tanks. Mismanagement is the source of the company’s troubles; the trader merely holds up a mirror to reflect it.
The best measure of the trader’s value to society is whether he made money from the trade: that indicates he was right to short the firm and that society will benefit from his actions. This is why free-market capitalism works and why bankers usually do good even as they do very well for themselves.
However, when the discipline of markets breaks down, as it sometimes does, the finely incentivised financial system can derail quickly and cause immense damage. The very anonymity of money then makes it a poor mechanism for guiding financiers’ activities toward socially desirable ends. Did the mortgage broker make his fees by offering a variety of sensible options to the professional couple who were looking to upgrade their house, or did he do so by urging an elderly couple to refinance into a mortgage they could not afford? When the broker’s loans are scrutinised by sensible banks that refuse to refinance shaky mortgages, there is a market check on his behaviour that forces him to focus on persuading the professional couple instead of deluding the elderly one. When the market is willing to buy any loan he makes, however, he leans towards easy pickings.
The key then to understanding the recent crisis is to see why markets offered inordinate rewards for poor and risky decisions. Irrational exuberance played a part, but perhaps more important were the political forces distorting the markets. The tsunami of money directed by a US Congress, worried about growing income inequality, towards expanding low income housing, joined with the flood of foreign capital inflows to remove any discipline on home loans. And the willingness of the Fed to stay on hold until jobs came back, and indeed to infuse plentiful liquidity if ever the system got into trouble, eliminated any perceived cost to having an illiquid balance sheet. Chastise the banker who hankers after his bonus, but also pity him for he is looking for his primary measure of self-worth to be restored. Rather than attempting to instill social purpose in him, however, it is probably more useful for society to target the forces that distorted the market.
The writer is professor of finance at the Booth School and author of Fault Lines: How Hidden Fractures still Threaten the World Economy
Coming back to this article, apart from the pretty naive generalisations and assumptions he makes, the awful thing is 'to justify' bankers action to the level of empathy vis-a-vis the regulatory & policy forces unleashed.
An example of a naive generalisations or assumption:
'But short-sellers perform a valuable social function by depriving poorly managed companies of resources they will waste'
I'm sure Mr. Rajan is aware that Short-Sellers don't even own the shares of the company they are shorting. How could they? Then, if they don't hold the shares ie., they are not investors. If they are not investors how are they depriving poorly managed companies of resources they will waste?
I'm sure an investor is smart enough to sell the shares if he feels the management is not up to the task. He or We don't need a short-seller to guide us!!!
Agreed about the regulatory and policy inconsistencies. But that can be discussed as a separate article instead of juxtaposing it with bankers behaviour.
Regards,
Pradeep Kabra
Bankers have been sold short by market distortions
By Raghuram Rajan
Published: June 2 2010 22:37 in Financial Times
Bankers must be heaving a sigh of relief as the shenanigans of the offshore drilling industry have pushed them to the edge of the radar screen of those targeting corporate greed. But it is unlikely their respite will be for long. Inquiries under way are bound to unearth more instances of ethically, and even legally, challenged bankers. When overlaid on images of bankers hankering after their outlandish bonuses soon after being bailed out with public money, the public picture of an industry motivated only by money and without any sense of the larger consequences of its actions will be reinforced. How do we instill more social values in the industry? Or is banker greed mostly good?
Most people do not work for money alone; a primary motivation for many is the knowledge that their work makes the world a better place. Bankers are no different, but their work differs from most other professions in two important ways. First, a broker who sells bonds issued by an electric power project is merely a cog in a gigantic machine, who never sees the plant she helped build. Second, the most direct measure of her contribution is the money she makes for her firm. This is where both the merits of the arm’s-length financial system and its costs arise.
Take for instance a trader who sells short the stock of a company he feels is being mismanaged. He does not see the workers who lose their jobs or the hardship that unemployment causes their families. But short sellers perform a valuable social function by depriving poorly managed companies of resources they will waste. A company whose stock price tanks will not be able to raise financing easily and could be forced to close down.
The trader does not cause the company to go out of business. If he is wrong and the company is well managed, other traders will take the opposite side, buy shares, push up the share price, and make the short seller lose money. It is typically only when the short seller’s opinions come to be widely shared, and company management is truly awful, that the share price tanks. Mismanagement is the source of the company’s troubles; the trader merely holds up a mirror to reflect it.
The best measure of the trader’s value to society is whether he made money from the trade: that indicates he was right to short the firm and that society will benefit from his actions. This is why free-market capitalism works and why bankers usually do good even as they do very well for themselves.
However, when the discipline of markets breaks down, as it sometimes does, the finely incentivised financial system can derail quickly and cause immense damage. The very anonymity of money then makes it a poor mechanism for guiding financiers’ activities toward socially desirable ends. Did the mortgage broker make his fees by offering a variety of sensible options to the professional couple who were looking to upgrade their house, or did he do so by urging an elderly couple to refinance into a mortgage they could not afford? When the broker’s loans are scrutinised by sensible banks that refuse to refinance shaky mortgages, there is a market check on his behaviour that forces him to focus on persuading the professional couple instead of deluding the elderly one. When the market is willing to buy any loan he makes, however, he leans towards easy pickings.
The key then to understanding the recent crisis is to see why markets offered inordinate rewards for poor and risky decisions. Irrational exuberance played a part, but perhaps more important were the political forces distorting the markets. The tsunami of money directed by a US Congress, worried about growing income inequality, towards expanding low income housing, joined with the flood of foreign capital inflows to remove any discipline on home loans. And the willingness of the Fed to stay on hold until jobs came back, and indeed to infuse plentiful liquidity if ever the system got into trouble, eliminated any perceived cost to having an illiquid balance sheet. Chastise the banker who hankers after his bonus, but also pity him for he is looking for his primary measure of self-worth to be restored. Rather than attempting to instill social purpose in him, however, it is probably more useful for society to target the forces that distorted the market.
The writer is professor of finance at the Booth School and author of Fault Lines: How Hidden Fractures still Threaten the World Economy
Sunday, 23 May 2010
Is Mourinho A Real Winner???
I think some of the comments on http://www.bbc.co.uk/blogs/philminshull/2010/05/is_mourinho_making_a_real_mist.html#postcomment are ridiculously biased. They say, Mourinho wins because the foundation and money was already there at Chelsea and Inter Milan. Well they how come Chelsea have never won the Champions League and had not won the premier league for 50 years till Mourinho came and showed them how to? Infact, Chelsea have come close to winning Champions League when Mourinho left and have won the Premier League this season because Mourinho had laid the winning foundation. The same goes for Inter Milan. How come Mancini couldn't even take them beyond Quarter Finals in Champions League, if his foundation was so good?
The fact is Mourinho know how to win. Period. He had done with Porto when nobody knew that a team called Porto even exists. (no pun intended). He had done with Chelsea and would have won them the Champions League had Mr. Abramovich not interfered. Now he has done with Inter Milan. Every one knows, had Mr. Moratti not replaced Mancini, they could never even have dreamt of Champions League finals. Forget winning it.
So guys, show some Respect. Just talk makes you look foolish. You may love him or hate him, but don't forget to respect a person who knows something about winning and creating winning teams.
Finally, He Comes, He WINS & He Moves On....St. Jose Mourinho!!!
Regards,
Pradeep Kabra
The fact is Mourinho know how to win. Period. He had done with Porto when nobody knew that a team called Porto even exists. (no pun intended). He had done with Chelsea and would have won them the Champions League had Mr. Abramovich not interfered. Now he has done with Inter Milan. Every one knows, had Mr. Moratti not replaced Mancini, they could never even have dreamt of Champions League finals. Forget winning it.
So guys, show some Respect. Just talk makes you look foolish. You may love him or hate him, but don't forget to respect a person who knows something about winning and creating winning teams.
Finally, He Comes, He WINS & He Moves On....St. Jose Mourinho!!!
Regards,
Pradeep Kabra
Saturday, 8 May 2010
Why men shouldn't write advise columns & Long live the Queen!!!
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Infact I would say, they shouldn't be allowed in politics as well.
For instance, before the elections in the UK none of the three musketeers in the British politics explained how they will reduce the budged deficit. Infact they behaved as if the word deficit doesn't exist.
Now with the hung parliament around their neck, they scare everybody by saying, deficit reduction is the priority. In the national interest, keep the differences aside and let's sleep together. Even if it happens that one side is the Tories (super-quick deficit reduction, anti-Europe, anti-immigration, pro-nuclear) and the other side is Lib Dems (no-idea what deficit reduction means, pro-europe including joining Euro, pro-immigration (remember, fair-society shit), anti-nuclear including nuclear power)
Long live the Queen!!!
Re: Fool's Gold
Dear Gillian,
In your admirable book 'Fool's Gold' you point out all the reasons behind the financial crisis. But the main cause is 'lack of political reforms' in the US and other places. How can lobbyists get away with ludicrous claims in their own interest in not just the financial industry but from software to food to pharma to you name it.
The fact is, all the big corporates are big donors to the politicians. So the politicians face the same conflict of interest as faced by the rating agencies or by Goldman Sachs for instance.
Unless the political funding is not centralized from a common pool and distributed based on some criteria, it is fair to assume that this is just the beginning of all the future 'jungle-raj' for the few, all in the name of democracy, free-markets, globalization and what not.
Regards,
Pradeep
In your admirable book 'Fool's Gold' you point out all the reasons behind the financial crisis. But the main cause is 'lack of political reforms' in the US and other places. How can lobbyists get away with ludicrous claims in their own interest in not just the financial industry but from software to food to pharma to you name it.
The fact is, all the big corporates are big donors to the politicians. So the politicians face the same conflict of interest as faced by the rating agencies or by Goldman Sachs for instance.
Unless the political funding is not centralized from a common pool and distributed based on some criteria, it is fair to assume that this is just the beginning of all the future 'jungle-raj' for the few, all in the name of democracy, free-markets, globalization and what not.
Regards,
Pradeep
Wednesday, 21 April 2010
Re: The challenge of halting the financial doomsday machine
Dear Mr. Wolf,
Many Thanks for this superb analytical article on the financial doomsday machine.
One of the reasons things came to this level is 'the lack of political reforms'. When the politicians & especially the members of congress in the US are sponsored by the Wall-Street and other corporates, how can 'enforcing prudential regulation' is possible? No wonder, any initiative by the president in US case is shot down by the Congress, is diluted by the lobbyists or killed by the corporate sponsers.
Apart from the official approach mentioned by you, two basic things are needed: 1. The political funding reforms needs to be in place in all the democracies of the world. There cannot be a 'real' democracy without independent political funding (Just like NIN or TV Licence Fee in UK there need to be a Democracy Fee) 2. A change is needed in the structure of the 'limited liability' for the management of business (SME's and Corporates alike) That will bring not just accountability to the management which creates havoc with the structure of business itself for their short-term bonuses and gains but will also aligns risks and rewards evenly.
Regards,
Pradeep Kabra
----------------------------------
The challenge of halting the financial doomsday machine
By Martin Wolf
Published: April 20 2010 19:42 | Last updated: April 20 2010 19:42
Can we afford our financial system? The answer is no. Understanding why this is so is a necessary condition for evaluating ideas for reform. The more aware of the risks one is, the more obvious it becomes that radicalism is the safer option.
People pay too much attention to the direct cost of bail-outs. As Andrew Haldane of the Bank of England, author of several brilliant papers on the crisis, has noted, these costs may be around 1 per cent of gross domestic product in the US and UK. The costs that matter, however, are those of the recession and the huge jump in public debt. If only a quarter of the world’s loss of output during the recession were to prove permanent, the present value of these losses could be as much as 90 per cent of annual world product.
How did this happen? Quite simply, the financial sector has become bigger and riskier. The UK case is dramatic, with banking assets jumping from 50 per cent of GDP to more than 550 per cent over the past four decades. Capital ratios have fallen sharply, while returns on equity have become higher and more volatile. As Mr Haldane notes in another paper, leverage is the chief determinant of returns on equity and increased leverage also explains the level and volatility of banking returns. Finally, the banking sector has also become substantially more concentrated. (See charts.)
Mr Haldane bemoans “a progressive rise in banking risk and an accompanying widening and deepening of the state safety net”. This is a “Red Queen’s race”: the system is running to stand still with governments racing to make finance safer and bankers creating more risk. The route was via liquidity, deposit and capital insurance. Mr Haldane notes that rating agencies value government support for banks. Government support must surely provide a part of the explanation for the low yields on bonds issued by these massively leveraged businesses (see chart).
The combination of state insurance (which protects creditors) with limited liability (which protects shareholders) creates a financial doomsday machine. What happens is best thought of as “rational carelessness”. Its most dangerous effect comes via the extremes of the credit cycle. Most perilous of all is the compulsion upon the authorities to blow another set of credit bubbles, to forestall the devastating impact of the implosion of the last ones. In the end, what happens to finance is not what matters most but what finance does to the wider economy.
Does today’s engorged financial system produce gains that justify these costs? In a recent speech, Adair Turner, chairman of the UK’s Financial Services Authority, argues it does not.* Financial systems are important servants of the economy, but poor masters. A large part of the activity of the financial sector seems to be a machine to transfer income and wealth from outsiders to insiders, while increasing the fragility of the economy as a whole. Given the extent of the government-induced distortions in the system, even the fiercest free marketeer should accept this. It is hard to see any substantial benefit from the massive leveraging up of the economy and, above all, the real estate sector, that we saw recently. This just created illusory gains on the way up and real pain on the way down.
As Mr Turner notes, the promise of securitisation has turned out to be partly illusory. Arguments used in its favour – “market completion” and the ability to extend credit more widely – look highly questionable. Particularly striking was the failure of the credit default swap market to give any forewarning of the financial crisis (see chart). At bottom, the invention of complex securities hugely exacerbated the information and incentive problems inherent in complex financial systems. Even the frequently heard argument that more market liquidity is better than less is far from unimpeachable: it exacerbates rational carelessness.
So what is to be done? In answering this question, one has to start from a recognition of the chief dangers: first, the high-income countries, with their low underlying rate of economic growth and huge costs of ageing, cannot possibly afford another crisis; second, the big issue is the impact on the economy.
Against these standards, what is one to make of ideas now being floated? Three common ideas need to be put in their place.
One idea, popular in US Republican circles, is: “just say no” to bail-outs. This is a delusion. Since financial institutions are powerfully interconnected, the government cannot credibly commit itself to not rescuing the system when in peril.
Another idea, popular among US liberals, is that the chief issue is “too big to fail”. Mr Haldane shows that the implicit insurance to huge banks is bigger than to smaller ones. He agrees, too, that economies of scale in banking are modest. The challenge of managing such complex institutions is enormous. Finally, the diversification these institutions seek is ultimately illusory: they are all exposed to economy-wide risks.
Yet it is important not to exaggerate the significance of size alone. One point is that some of the systems that navigated the crisis relatively safely – Canada’s, for example – are dominated by a stable banking oligopoly. Another is that, as happened in the US in the 1930s, the collapse of many small and undiversified banks can be highly destructive. Size matters. But it is certainly not all that matters.
A third notion is that the big issue is regulatory completeness. It is argued that if only oversight had been effectively imposed, the pattern of overleveraging and default could have been halted. This, too, is unlikely. It is hard to regulate finance against the incentives of those who run it. Fixing the problem has to include changing incentives in simple and transparent ways. To put it bluntly, participants have to fear the consequences of making serious mistakes, not just be told to stop.
In the end, halting the financial doomsday machine is going to involve fundamental changes in policy towards – and the structure of – the financial system. There are two broad approaches now under discussion. The official one is to make something roughly like the present system far safer, by raising capital and liquidity requirements, moving derivatives on to exchanges and enforcing prudential regulation. The alternative is structural reform. Which is the least bad option? I plan to address that issue next week.
* What do banks do, what should they do? www.fsa.gov.uk
martin.wolf@ft.com
Many Thanks for this superb analytical article on the financial doomsday machine.
One of the reasons things came to this level is 'the lack of political reforms'. When the politicians & especially the members of congress in the US are sponsored by the Wall-Street and other corporates, how can 'enforcing prudential regulation' is possible? No wonder, any initiative by the president in US case is shot down by the Congress, is diluted by the lobbyists or killed by the corporate sponsers.
Apart from the official approach mentioned by you, two basic things are needed: 1. The political funding reforms needs to be in place in all the democracies of the world. There cannot be a 'real' democracy without independent political funding (Just like NIN or TV Licence Fee in UK there need to be a Democracy Fee) 2. A change is needed in the structure of the 'limited liability' for the management of business (SME's and Corporates alike) That will bring not just accountability to the management which creates havoc with the structure of business itself for their short-term bonuses and gains but will also aligns risks and rewards evenly.
Regards,
Pradeep Kabra
----------------------------------
The challenge of halting the financial doomsday machine
By Martin Wolf
Published: April 20 2010 19:42 | Last updated: April 20 2010 19:42
Can we afford our financial system? The answer is no. Understanding why this is so is a necessary condition for evaluating ideas for reform. The more aware of the risks one is, the more obvious it becomes that radicalism is the safer option.
People pay too much attention to the direct cost of bail-outs. As Andrew Haldane of the Bank of England, author of several brilliant papers on the crisis, has noted, these costs may be around 1 per cent of gross domestic product in the US and UK. The costs that matter, however, are those of the recession and the huge jump in public debt. If only a quarter of the world’s loss of output during the recession were to prove permanent, the present value of these losses could be as much as 90 per cent of annual world product.
How did this happen? Quite simply, the financial sector has become bigger and riskier. The UK case is dramatic, with banking assets jumping from 50 per cent of GDP to more than 550 per cent over the past four decades. Capital ratios have fallen sharply, while returns on equity have become higher and more volatile. As Mr Haldane notes in another paper, leverage is the chief determinant of returns on equity and increased leverage also explains the level and volatility of banking returns. Finally, the banking sector has also become substantially more concentrated. (See charts.)
Mr Haldane bemoans “a progressive rise in banking risk and an accompanying widening and deepening of the state safety net”. This is a “Red Queen’s race”: the system is running to stand still with governments racing to make finance safer and bankers creating more risk. The route was via liquidity, deposit and capital insurance. Mr Haldane notes that rating agencies value government support for banks. Government support must surely provide a part of the explanation for the low yields on bonds issued by these massively leveraged businesses (see chart).
The combination of state insurance (which protects creditors) with limited liability (which protects shareholders) creates a financial doomsday machine. What happens is best thought of as “rational carelessness”. Its most dangerous effect comes via the extremes of the credit cycle. Most perilous of all is the compulsion upon the authorities to blow another set of credit bubbles, to forestall the devastating impact of the implosion of the last ones. In the end, what happens to finance is not what matters most but what finance does to the wider economy.
Does today’s engorged financial system produce gains that justify these costs? In a recent speech, Adair Turner, chairman of the UK’s Financial Services Authority, argues it does not.* Financial systems are important servants of the economy, but poor masters. A large part of the activity of the financial sector seems to be a machine to transfer income and wealth from outsiders to insiders, while increasing the fragility of the economy as a whole. Given the extent of the government-induced distortions in the system, even the fiercest free marketeer should accept this. It is hard to see any substantial benefit from the massive leveraging up of the economy and, above all, the real estate sector, that we saw recently. This just created illusory gains on the way up and real pain on the way down.
As Mr Turner notes, the promise of securitisation has turned out to be partly illusory. Arguments used in its favour – “market completion” and the ability to extend credit more widely – look highly questionable. Particularly striking was the failure of the credit default swap market to give any forewarning of the financial crisis (see chart). At bottom, the invention of complex securities hugely exacerbated the information and incentive problems inherent in complex financial systems. Even the frequently heard argument that more market liquidity is better than less is far from unimpeachable: it exacerbates rational carelessness.
So what is to be done? In answering this question, one has to start from a recognition of the chief dangers: first, the high-income countries, with their low underlying rate of economic growth and huge costs of ageing, cannot possibly afford another crisis; second, the big issue is the impact on the economy.
Against these standards, what is one to make of ideas now being floated? Three common ideas need to be put in their place.
One idea, popular in US Republican circles, is: “just say no” to bail-outs. This is a delusion. Since financial institutions are powerfully interconnected, the government cannot credibly commit itself to not rescuing the system when in peril.
Another idea, popular among US liberals, is that the chief issue is “too big to fail”. Mr Haldane shows that the implicit insurance to huge banks is bigger than to smaller ones. He agrees, too, that economies of scale in banking are modest. The challenge of managing such complex institutions is enormous. Finally, the diversification these institutions seek is ultimately illusory: they are all exposed to economy-wide risks.
Yet it is important not to exaggerate the significance of size alone. One point is that some of the systems that navigated the crisis relatively safely – Canada’s, for example – are dominated by a stable banking oligopoly. Another is that, as happened in the US in the 1930s, the collapse of many small and undiversified banks can be highly destructive. Size matters. But it is certainly not all that matters.
A third notion is that the big issue is regulatory completeness. It is argued that if only oversight had been effectively imposed, the pattern of overleveraging and default could have been halted. This, too, is unlikely. It is hard to regulate finance against the incentives of those who run it. Fixing the problem has to include changing incentives in simple and transparent ways. To put it bluntly, participants have to fear the consequences of making serious mistakes, not just be told to stop.
In the end, halting the financial doomsday machine is going to involve fundamental changes in policy towards – and the structure of – the financial system. There are two broad approaches now under discussion. The official one is to make something roughly like the present system far safer, by raising capital and liquidity requirements, moving derivatives on to exchanges and enforcing prudential regulation. The alternative is structural reform. Which is the least bad option? I plan to address that issue next week.
* What do banks do, what should they do? www.fsa.gov.uk
martin.wolf@ft.com
Thursday, 8 April 2010
BBC Strategy Review: My Response
This is my response to the BBC Strategy Review:
----------------------------
The BBC's strategic principles
The Director-General has proposed five high level principles which would set the future direction of the BBC. These are:
* putting quality first, including five areas of editorial focus for all BBC services
* doing fewer things better – including stopping activities in some areas
* guaranteeing access for all licence fee payers to BBC services
* making the licence fee work harder – being efficient and offering better value for money
* setting new boundaries
The Trust agrees that the BBC should have a set of published principles and, when these are agreed, we will ensure that the BBC is held to account for acheiving them.
Some of the proposed principles are in response to challenges the Trust has set the BBC – such as focussing on high quality programmes and considering whether the current range of services is too large. We endorse these five principles, although we have not agreed to specific proposals in each area.
BBC Strategy Review: Your Response
The BBC's strategic principles
. Do you think these are the right principles? I agree with all except 'doing fewer things better'. Why not doing more things better? You
guys can do it. Because doing fewer things better is a LICENCE TO SKY to destroy
television in this country. . Should the BBC have any other strategic principles?
Yes. Sports should be one of the pillars of BBC. Sports is not just entertainment but also a cultural issue. All the cosy weekend afternoons from horse-racing to cricket to football have been taken away. Why?
Proposed principle: Putting Quality First
. Which BBC output do you think could be higher quality? 1. Sports - both quantity, variety and quality of coverage. 2. Website - the quality of
information on bbc.co.uk has been going down 3. Online access to archive programs - as we have paid licence fee for those programs we should have access to them.
Offering you something special
. Which areas should the BBC make more distinctive from other broadcasters and media? 1. Education material 2. Sports documentaries 3. Cinematic programs 4. Classics
adaptation from all over the world. Instead of having for example Emma every now and then.
The Five Editorial Priorities
. Do these priorities fit with your expectations of BBC TV, radio and online services? 1. Why only UK drama and comedy. Why not the best drama from the world? 2. Why not the best of Sports? What matters to families are good quality drama, comedy and sports. That brings everybody together.
Proposed principle: Doing fewer things and doing them better
. We welcome your views on these areas. Totally DISAGREE with 'make the BBC's website smaller, with fewer sections.' The BBC's
website is a gem and needs to be preserved and nurtured. More audio-video should be integrated. The resources spent on BBC website also have the ability to share seamlessly irrespective of Television i.e., on mobile phones, PC, etc., That is the content will be available to users anywhere-anytime-any device. The archive needs to be organized for future generations.
Proposed principle: Guaranteeing access to BBC services
. If you have particular views on how you expect BBC services to be available to you, please let us know.
Some backend services can be outsourced to good firms like Google. For instance, instead of spending inhouse resources on creating a search engine, this could be out-sourced to a firm like Google which has all the infrastructure. This can be paid for by selling your iplayer technology with others like Channel 5, Channel 4, ITV and other tv stations across the world. If you earn more money from these and other commercial activities like BBC World Service, selling BBC programs to other channels etc., then the savings or earnings should be passed on to the licence payers in the form of licence fee reduction. That will silence the critics like Sky and Rupert Murdoch as well.
The BBC archive
. Please tell us if you have views on this area. 1. Since we the licence payers have sponsored the creation of programs, we should have
un-fettered access to all the old programs. 2. We, the licence payers should be released a unique no. which we can use to access the programs even when we are traveling 3. You should not let the wonderful programs sit idle. They should be distributed across the world which makes commercial sense and the revenue can be used to cut the license-fee for future. 4. iPlayer's dependency from Microsoft technology should be removed asap. You can use established infrastructure like Youtube to distribute and share the archive data. For example, for UK users, it will be ad-free. For users outside UK, it will be with ads.
Proposed principle: Making the licence fee work harder
. If you are concerned about the BBC’s value for money, please tell us why. Education and Sports are the big misses in BBC's repertoire. For example, the biggest
financial crisis in history and majority of the people don't know what it is. There are no programs explaining the same for Kids, Students, Families. There are no programs on 'the concept of regulation'. No programs on 'leadership and other ethical qualities needed' for the next and present generation. On sports you have bigger hole than that. Apart from no live coverage for majority of the sports which are integral part of every family in the UK, there are no programs on the legends of sports for example. The young kids don't know who is Jack Hobbs or Martina Navratilova.
Proposed principle: Setting new boundaries for the BBC
. Do you think that the BBC should limit its activities in these areas? I totally dis-agree with 'limiting BBC expenditure on sports rights'. I also pity reducing BBC
importing ready-made dramas from US. If that happens then some lovely programs like Mad-Men, Damages will be lost to the viewers. I also feel that while commercial channels will never worry about local media, it is BBC's job to not just provide but expand localised services. Has anybody seen Sky providing local service? There is no money in that so why will they bother. Regarding the complaints of the commercial competitors, BBC should support better regulation in the media sector. For example where is the competition in sports rights? Is this the way a free-market economy works?
. Should any other areas be on this list? You can import wonderful programs from around the world. For example there are lots of
TV gems in India (for example Mirza Ghalib), Polant (Dekalog) etc., This will be cheaper and will be relevant in this globalised world.
About You
. Do you consider yourself to have a disability? No
. Is your ethnic group best described as... Indian
Comment: No Comment . Are You?
Male . What is your age?
35-44
. Where do you live? No Answer
Comment: No Comment
Keep Me Informed
. If you want to be alerted when we publish our views please enter your email address pradeepkumarkabra@googlemail.com
--------------------------------------------------------
BBC Trust - Strategy Review Initial Conclusions - 05Jul2010
Earlier this year you took part in the BBC Trust's consultation on the future strategic direction of the corporation. Today the Trust has published its initial conclusions, focussing on what audiences say matters most to them: BBC programmes and services and the way the BBC spends its money.
We endorse the BBC Executive's underlying ambition to do fewer things better and thereby focus the BBC more effectively on its core mission, ensure that it plays its full part in promoting the move from analogue to digital and have due regard for the BBC's competitive impact.
The Trust does not think a convincing case has been made, as presented, for the closure of 6 Music. The Trust does not agree that there is a consistent strategic rationale for closure on grounds either of promoting digital development or market impact. Nonetheless, the proposal has been helpful in highlighting the need for a further review of the BBC's digital strategy. If, as part of that review, the Executive wants to put together a different proposal for the overall shape of its music radio stations that they think could further increase the distinctiveness of the output, we would consider it.
The Trust notes that the Asian network is performing poorly and will, therefore, consider a formal proposal for the closure of the Asian Network. However, this must include a proposition for meeting the needs of the station's audience in different ways.
The Trust agrees that the BBC should sharpen its focus so that online is truly distinctive and has clearer editorial vision and control. The Trust also endorses the Executive's proposed 25 per cent budget reduction, although it will want to understand and approve the editorial changes involved.
Plans to release more information about senior management and talent pay and to speed up the drive to cut the overall senior manager pay bill.
The Trust will publish its final Strategy Review conclusions in the autumn.
You can read more about the Trust's initial conclusions here:
http://www.bbc.co.uk/bbctrust/our_work/strategy_review/index.shtml
BBC Annual Report and Accounts 2009/10
Today the BBC has also published its Annual Report and Accounts. As in previous years it is in two parts - one from the Trust and the other from the BBC Executive.
http://www.bbc.co.uk/annualreport/
Trust Review of BBC One, BBC Two and BBC Four - Interim conclusions
The BBC Trust has also today published interim conclusions of its review of BBC One, BBC Two and BBC Four:
http://www.bbc.co.uk/bbctrust/our_work/service_reviews/service_licences/reviews_tv.shtml
Trust's service reviews of BBC One, BBC Two and BBC Four
BBC Trust Mailing List
You can receive updates on the BBC Trust's work, including details of consultations and publications, by subscribing to our email service:
BBC Trust - email updates
http://www.bbc.co.uk/bbctrust/news/email_updates/index.shtml
--------------------------------------------
----------------------------
The BBC's strategic principles
The Director-General has proposed five high level principles which would set the future direction of the BBC. These are:
* putting quality first, including five areas of editorial focus for all BBC services
* doing fewer things better – including stopping activities in some areas
* guaranteeing access for all licence fee payers to BBC services
* making the licence fee work harder – being efficient and offering better value for money
* setting new boundaries
The Trust agrees that the BBC should have a set of published principles and, when these are agreed, we will ensure that the BBC is held to account for acheiving them.
Some of the proposed principles are in response to challenges the Trust has set the BBC – such as focussing on high quality programmes and considering whether the current range of services is too large. We endorse these five principles, although we have not agreed to specific proposals in each area.
BBC Strategy Review: Your Response
The BBC's strategic principles
. Do you think these are the right principles? I agree with all except 'doing fewer things better'. Why not doing more things better? You
guys can do it. Because doing fewer things better is a LICENCE TO SKY to destroy
television in this country. . Should the BBC have any other strategic principles?
Yes. Sports should be one of the pillars of BBC. Sports is not just entertainment but also a cultural issue. All the cosy weekend afternoons from horse-racing to cricket to football have been taken away. Why?
Proposed principle: Putting Quality First
. Which BBC output do you think could be higher quality? 1. Sports - both quantity, variety and quality of coverage. 2. Website - the quality of
information on bbc.co.uk has been going down 3. Online access to archive programs - as we have paid licence fee for those programs we should have access to them.
Offering you something special
. Which areas should the BBC make more distinctive from other broadcasters and media? 1. Education material 2. Sports documentaries 3. Cinematic programs 4. Classics
adaptation from all over the world. Instead of having for example Emma every now and then.
The Five Editorial Priorities
. Do these priorities fit with your expectations of BBC TV, radio and online services? 1. Why only UK drama and comedy. Why not the best drama from the world? 2. Why not the best of Sports? What matters to families are good quality drama, comedy and sports. That brings everybody together.
Proposed principle: Doing fewer things and doing them better
. We welcome your views on these areas. Totally DISAGREE with 'make the BBC's website smaller, with fewer sections.' The BBC's
website is a gem and needs to be preserved and nurtured. More audio-video should be integrated. The resources spent on BBC website also have the ability to share seamlessly irrespective of Television i.e., on mobile phones, PC, etc., That is the content will be available to users anywhere-anytime-any device. The archive needs to be organized for future generations.
Proposed principle: Guaranteeing access to BBC services
. If you have particular views on how you expect BBC services to be available to you, please let us know.
Some backend services can be outsourced to good firms like Google. For instance, instead of spending inhouse resources on creating a search engine, this could be out-sourced to a firm like Google which has all the infrastructure. This can be paid for by selling your iplayer technology with others like Channel 5, Channel 4, ITV and other tv stations across the world. If you earn more money from these and other commercial activities like BBC World Service, selling BBC programs to other channels etc., then the savings or earnings should be passed on to the licence payers in the form of licence fee reduction. That will silence the critics like Sky and Rupert Murdoch as well.
The BBC archive
. Please tell us if you have views on this area. 1. Since we the licence payers have sponsored the creation of programs, we should have
un-fettered access to all the old programs. 2. We, the licence payers should be released a unique no. which we can use to access the programs even when we are traveling 3. You should not let the wonderful programs sit idle. They should be distributed across the world which makes commercial sense and the revenue can be used to cut the license-fee for future. 4. iPlayer's dependency from Microsoft technology should be removed asap. You can use established infrastructure like Youtube to distribute and share the archive data. For example, for UK users, it will be ad-free. For users outside UK, it will be with ads.
Proposed principle: Making the licence fee work harder
. If you are concerned about the BBC’s value for money, please tell us why. Education and Sports are the big misses in BBC's repertoire. For example, the biggest
financial crisis in history and majority of the people don't know what it is. There are no programs explaining the same for Kids, Students, Families. There are no programs on 'the concept of regulation'. No programs on 'leadership and other ethical qualities needed' for the next and present generation. On sports you have bigger hole than that. Apart from no live coverage for majority of the sports which are integral part of every family in the UK, there are no programs on the legends of sports for example. The young kids don't know who is Jack Hobbs or Martina Navratilova.
Proposed principle: Setting new boundaries for the BBC
. Do you think that the BBC should limit its activities in these areas? I totally dis-agree with 'limiting BBC expenditure on sports rights'. I also pity reducing BBC
importing ready-made dramas from US. If that happens then some lovely programs like Mad-Men, Damages will be lost to the viewers. I also feel that while commercial channels will never worry about local media, it is BBC's job to not just provide but expand localised services. Has anybody seen Sky providing local service? There is no money in that so why will they bother. Regarding the complaints of the commercial competitors, BBC should support better regulation in the media sector. For example where is the competition in sports rights? Is this the way a free-market economy works?
. Should any other areas be on this list? You can import wonderful programs from around the world. For example there are lots of
TV gems in India (for example Mirza Ghalib), Polant (Dekalog) etc., This will be cheaper and will be relevant in this globalised world.
About You
. Do you consider yourself to have a disability? No
. Is your ethnic group best described as... Indian
Comment: No Comment . Are You?
Male . What is your age?
35-44
. Where do you live? No Answer
Comment: No Comment
Keep Me Informed
. If you want to be alerted when we publish our views please enter your email address pradeepkumarkabra@googlemail.com
--------------------------------------------------------
BBC Trust - Strategy Review Initial Conclusions - 05Jul2010
Earlier this year you took part in the BBC Trust's consultation on the future strategic direction of the corporation. Today the Trust has published its initial conclusions, focussing on what audiences say matters most to them: BBC programmes and services and the way the BBC spends its money.
We endorse the BBC Executive's underlying ambition to do fewer things better and thereby focus the BBC more effectively on its core mission, ensure that it plays its full part in promoting the move from analogue to digital and have due regard for the BBC's competitive impact.
The Trust does not think a convincing case has been made, as presented, for the closure of 6 Music. The Trust does not agree that there is a consistent strategic rationale for closure on grounds either of promoting digital development or market impact. Nonetheless, the proposal has been helpful in highlighting the need for a further review of the BBC's digital strategy. If, as part of that review, the Executive wants to put together a different proposal for the overall shape of its music radio stations that they think could further increase the distinctiveness of the output, we would consider it.
The Trust notes that the Asian network is performing poorly and will, therefore, consider a formal proposal for the closure of the Asian Network. However, this must include a proposition for meeting the needs of the station's audience in different ways.
The Trust agrees that the BBC should sharpen its focus so that online is truly distinctive and has clearer editorial vision and control. The Trust also endorses the Executive's proposed 25 per cent budget reduction, although it will want to understand and approve the editorial changes involved.
Plans to release more information about senior management and talent pay and to speed up the drive to cut the overall senior manager pay bill.
The Trust will publish its final Strategy Review conclusions in the autumn.
You can read more about the Trust's initial conclusions here:
http://www.bbc.co.uk/bbctrust/our_work/strategy_review/index.shtml
BBC Annual Report and Accounts 2009/10
Today the BBC has also published its Annual Report and Accounts. As in previous years it is in two parts - one from the Trust and the other from the BBC Executive.
http://www.bbc.co.uk/annualreport/
Trust Review of BBC One, BBC Two and BBC Four - Interim conclusions
The BBC Trust has also today published interim conclusions of its review of BBC One, BBC Two and BBC Four:
http://www.bbc.co.uk/bbctrust/our_work/service_reviews/service_licences/reviews_tv.shtml
Trust's service reviews of BBC One, BBC Two and BBC Four
BBC Trust Mailing List
You can receive updates on the BBC Trust's work, including details of consultations and publications, by subscribing to our email service:
BBC Trust - email updates
http://www.bbc.co.uk/bbctrust/news/email_updates/index.shtml
--------------------------------------------
Saturday, 3 April 2010
Re: Briefing - South Korea's Industrial Giants
Dear Sir,
In the article's penultimate paragraph you mention that 'What's more, it appears to ignore the lesson so recently exposed by Toyota that family ownership can be a huge weakness as well as a strength'.
The fact is family ownership is always a strength because public ownership now-a-days is without any regulation at all. Any Hedge-Fund can wreck a company's share-price even without owning the shares.
Specifically on the point quoted by you regarding Toyota family, the fact is that Mr. Toyoda is cleaning up the mess created by his predecessor who was under pressure from the 'outside share-holders' to increase the market-share disproportionate to the Toyota's 'Toyota Way' Culture of five points viz., 1. Genchi Genbutsu 2. Chosen 3. Teamwork 4. Sonkei, Soncho 5. Kaizen.
As the recent financial wreck has shown so lucidly that the present system of Western Corporate Governance doesn't take care of all the stake-holders viz., Customer, Employees, Community & Share-holders in that order. The present system is rigged totally in favor of Top Employees i.e., Company Executives and Big Share-Holders facilitated by the Investment Bankers and the M&A Community.
Regards,
Pradeep Kabra
London
-----------------------
The chaebol conundrum
Mar 31st 2010
From The Economist print edition
Korea Inc is back and booming. So it’s time to stop coddling the all-conquering chaebol
PERHAPS it is the result of being sandwiched between the imperial dynasties of China and Japan. It may have something to do with having a nuclear-armed hermit to the north. Whatever the reason, South Koreans nurture a deep sense of insecurity. That makes them good capitalists. So good, in fact, that if any rich country can claim to have done well in the recent global crisis, it is theirs. Last year, despite its dependence on exports and the collapse of world trade, South Korea’s economy grew faster than any other in the OECD.
South Korea’s remarkable resilience is partly down to clever economic management. The government provided lashings of stimulus. But it was not just domestic demand that kept the economy going. The export prowess of those peculiar corporate beasts, called the chaebol (see article), was also responsible.
In the years after the Asian financial crisis of 1997-98, these unwieldy conglomerates, known disparagingly as Korea Inc, were regarded as villains, because of their habits of crony capitalism. Their shabby corporate governance and their dominance of the economy were widely criticised. Since then, bosses have been jailed, transparency increased and corporate governance improved.
Since the global economic crisis they have been regarded as saviours in South Korea. Though the country’s exports slid, its biggest companies, such as Samsung Electronics and Hyundai Motors, gobbled up market share from competitors in Japan, Europe and America. Granted, they benefited from a cheap won. But they also made a fine job of selling things like electronics, chips and ships in fast-growing emerging markets to make up for some of the sales lost in the West. Samsung’s profits this year are forecast at a record $10 billion, and its sales at $130 billion, which would confirm its lead over Hewlett-Packard as the world’s biggest technology company by revenue.
BlackBerry and Apple crumble
The national paranoia has served them well. Though Samsung, for example, is a world leader in televisions and flash memory chips, it continues relentlessly to measure itself against its competitors. Having rebuilt their balance-sheets over the past decade, the chaebol have invested enough in technology, design and branding to remain far ahead of low-cost competitors in China and elsewhere. What’s more, they artfully avoided Japan’s trap of fetishising expensive, state-of-the-art technology for its own sake.
So the chaebol are certainly due an apology from those, including this newspaper, who thought they would be too unwieldy for modern business. But from South Korea’s point of view, they are a narrow base on which to build a country’s economic future. First, they face competition in new forms for which their hierarchical management structures and complicated, dynastic ownership are ill suited. Apple’s iPhone and the ubiquitous BlackBerry crept up on Samsung Electronics, exposing its shortcoming in smart-phones.
Second, the size and strength of the chaebol risk stifling entrepreneurialism elsewhere. By and large, their local suppliers are the only medium-sized South Korean companies to have thrived in recent years. Some young businesses such as internet search and gaming have done well, but these are in fields where the chaebol cannot yet be bothered to tread. If they ever do, they may smother rather than nurture independent talent.
President Lee Myung-bak still seems to be promoting the chaebol. He has just pardoned Lee Kun-hee, the boss of Samsung, who was convicted of tax evasion in 2008, enabling him to retake the reins of Samsung Electronics. The president has also successfully championed his chaebol chums in a contest to provide nuclear power to Abu Dhabi. And his government wants to relax holding-company laws that would make it easier for the conglomerates to own financial firms.
It is one thing to provide leadership. It is another to choose favourites and pick winners. If President Lee wants to promote anyone, it should be South Korea’s underdogs—the small companies that risk getting squashed by the country’s privileged monsters. The chaebol have proved themselves highly successful capitalists. Let them take care of themselves.
----------------------------------------------------
South Korea's industrial giants
Return of the overlord
Mar 31st 2010 | SEOUL
From The Economist print edition
A tycoon comes back as the saviour of Samsung Electronics, leader of South Korea’s remarkable business success. But where’s the crisis?
South Korea's industrial giants
LEE KUN-HEE is a man of few words. So when the 68-year-old decided to come out of court-induced purgatory this month to retake the helm of Samsung Electronics, now the world’s biggest technology company, it was appropriate that he chose Twitter, a keep-it-brief social-networking site, to spread the news.
Mr Lee’s message was not just for employees of Samsung Electronics, by far the biggest part of his empire, but also those of the other 64 firms within the conglomerate that he controls. It was delivered with the sort of attention-grabbing hyperbole that any tweeter would be proud of: “It’s a real crisis now. First-class global companies are collapsing. No one knows what will become of Samsung. Most of Samsung’s flagship businesses and products will become obsolete within ten years. We must begin anew. We must only look forward.”
It did not quite have the pithiness of Mr Lee’s rhetoric in 1993 when he said Samsung was a second-rate company and that its employees should “change everything except your wife and children.” But his words had the same urgent ring of truth about them.
How can that be? It is a question that could be asked by anyone who has recently turned on a flat-screen television, bought a mobile phone, stored masses of data on a flash memory or watched Chelsea’s footballers in shirts sporting Samsung’s name. Far from being a disaster in the making, Samsung Electronics has become one of the world’s strongest brands, known for sleek design, razor-sharp technology and good value.
Think of anything with a screen, from a few centimetres square on a mobile phone, to a laptop, a wide liquid-crystal display or a giant 3D television, and Samsung Electronics will be one of the top two firms in the world making it—or at least the memory chips inside it (see chart). The company’s global market shares are staggering: more than 40% of the flash memory used in sophisticated electronics like the Apple iPhone, almost one in five of the world’s mobile phones and one in six of its television sets. It even makes screens for Sony’s TVs.
Having invested aggressively in new products in 2008, Samsung Electronics sailed through the global financial crisis, almost doubling its operating profit in 2009. This year analysts expect it to generate record profits of over $10 billion. Sales are forecast to be about $130 billion, which is likely to confirm its lead over America’s Hewlett-Packard as the world’s biggest technology company by revenue. Not to be outdone, other parts of the Samsung group have notched up successes. The construction division recently completed the tallest building in the world in Dubai and Samsung Heavy Industries is flush with shipbuilding orders.
In a way that General Motors can only have dreamed of, what has been good for Samsung has been good for South Korea. The group’s products account for about 20% of the country’s GDP, making it huge even by the standards of an economy top-heavy with big firms. When the won tumbled in 2008, raising fleeting fears of a currency crisis, exporting champions like Samsung, Hyundai and LG quickly took advantage, betting that their customers would be willing to buy newer, better models if the price was right.
South Korea’s conglomerates were also well diversified globally—only one-tenth of the country’s exports go to America. That meant sales lost in America were partly made up for by those gained in fast-growing emerging markets like China. Thanks to generous promises of government stimulus, South Korea, one of the rich world’s most export-dependent countries, pulled off the surprising feat of surviving the worst slump in global trade since the second world war with only a fleeting dip into recession.
For that, South Koreans give much of the credit to their industrial conglomerates, or chaebol as they are known, and the rich, inscrutable families who control them and live like royalty in South Korea. Yet Mr Lee’s comeback causes nervous speculation. If Samsung really does face a crisis, what does that mean for South Korea? If Mr Lee believes he is the only person who can avert disaster, what does that say about the business acumen of his potential successors? And if he can walk back into the corner office without even having board approval, can it really be argued that the country is progressing to Western-style standards of corporate governance? Business people have watched, with a mixture of suppressed glee and dread, former role-models such as Toyota and General Motors struggle with huge financial and technical problems. Could this be the fate that Mr Lee fears for his firm?
Get out of jail free
These are pertinent questions for Korea Inc, the business model that has so recently undergone a remarkable rehabilitation. Just over a decade ago, when the South Korean economy was reeling from its near collapse in the Asian financial crisis of 1997-98, it was the chaebol that were widely blamed by the public, the centre-left government of the time and the IMF.
The extent of the mismanagement was shocking. In the 1960s and 1970s, under the dictatorial regime of Park Chung-hee, the chaebol soaked up cheap government financing and relied on official protection from foreign competition. Loosely, the models were the zaibatsu conglomerates that had helped turned Japan into an imperial—and militaristic—power before the second world war.
The chaebol, some of which were started by war racketeers, had the same vast ambitions, albeit for industrial conquest—and they had public money to back them. Samsung expanded from sugar and wool into electrical goods, chemicals and engineering. Hyundai’s founder, Chung Ju-yung, started building roads and then decided to build the cars to drive on them. But many chaebol overburdened themselves with debt as they tried to move up the technological ladder in the 1980s. As they borrowed lavishly to buy capital equipment, South Korea’s current-account deficit soared. Some thought the chaebol had become so big the government could not let them fail. They were spectacularly wrong.
The conglomerates failed in droves. The collapse of Daewoo in 1999 was followed by the bankruptcy of more than half of the then top 30 conglomerates. Four of the country’s five carmakers (even Samsung had ventured into the market) went bust. South Koreans, many of whom had flocked to hand over their gold jewellery in a patriotic gesture to help pay off the foreign debt, were appalled at the level of government and business collusion that came to light.
Under two consecutive left-of-centre governments, many of the chaebol bosses—some now being run by the children of their founders—were prosecuted. Suspended sentences were handed out to the boss of SK in 2003, the former chairman of Doosan group in 2006, and the owner of Hanwa group in 2007. But this was justice for the rich—quite different from justice for the rest. Chung Mong-koo, chairman of Hyundai Motor (which also owns Kia, the country’s second-biggest carmaker) was convicted of embezzlement in 2006. But his prison term was reduced to community service and a $1 billion donation to charity because of his economic importance to the republic. Then in 2008 Mr Lee was convicted on tax-evasion charges, but also spared prison after paying a fine.
Partly chastened, both business and government have embarked on reform. Balance-sheets have improved, as has corporate governance, increasing the rights of minority shareholders and the responsibilities of company directors. Since then, some—though by no means all—of the cross-shareholdings used to disguise the weakness of subsidiaries and protect them from hostile takeovers have been rooted out and replaced with more transparent holding-company structures.
A friend in the Blue House
The reputations of the chaebol—especially in the eyes of South Koreans—recovered further during the 2008-09 global slump. So much so that when you ask experts in Seoul how their conglomerates fared during the crisis, some ask: what crisis? It was not just Samsung Electronics that sparkled. Hyundai increased market share in America every month last year, as its small, well-equipped cars with long warranties benefited disproportionately from the cash-for-clunkers programme.
For the first time in many years the chaebol have a political wind behind them. Lee Myung-bak, who became president in 2008, is a former chief executive from within the Hyundai extended family of firms. In December he pardoned Mr Lee, freeing the way for his return to Samsung. The same month he championed a successful bid by a chaebol-heavy consortium under the aegis of the Korean Electric Power Company to provide nuclear power to Abu Dhabi, pulling the rug from under industry leaders in France and Japan. This year, his government is pushing to relax holding-company laws that would make it easier for the chaebol to own financial firms. “The business community has not seen a political environment this accommodative in the past decade,” CLSA, a broker, said in a recent report.
Japan looks on aghast as the chaebol catch up with more of its large firms. “Of all their competitors on the global stage, the Japanese fear the South Koreans most,” writes Mark Anderson, author of Strategic News Service, a technology newsletter. Some Japanese industrialists acknowledge this publicly. “Korea is much more full of vitality than Japan,” Osama Suzuki, head of Suzuki Motor, lamented in a recent talk to foreign journalists in Tokyo. “Japan is coasting.”
All of which makes Mr Lee’s strident warning, as the head of South Korea’s most successful company, more puzzling. The charitable view is that it may have been just a rhetorical device to soften up opponents to his rehabilitation—and to the eventual transfer of power to his son, Lee Jae-yong, Samsung Electronics’ chief operating officer. But it may also reflect deeper fears that the days of relying on manufacturing as a growth strategy, for all its technical sophistication, are numbered. The most obvious cause for concern is China. The acquisition on March 28th of Volvo by Geely, a Chinese carmaker, is the latest example of low-cost Chinese producers’ determination to build global brands.
In computer chips, Samsung Electronics is comfortably ahead of China for now. But the skills needed in that business are described by one Samsung expert as like running a “digital sashimi shop”—the trick is to get products so swiftly to market that they do not lose their freshness. There is no inherent reason why Chinese firms cannot eventually catch up. What is more, as Mr Anderson points out, China is more open to imports and foreign direct investment than South Korea, which helps China’s quest for intellectual property.
An even bigger threat comes from America. Late last year Apple finally got permission from South Korea’s telecoms authorities to waive a rule prohibiting the domestic sale of iPhones. Demand for the iPhone has since exploded, leaving Samsung and its domestic rival LG (which together have sold seven out of ten phones in South Korea), looking uncharacteristically leaden. Smart-phones accounted for just 1% of the market, but Apple has been selling some 4,000 iPhones a day, making South Korea one of the gadget’s hottest markets. Even the finance ministry has launched an iPhone application—the Glossary of Current Affairs in the Economy—to unexpected popular appeal.
For Samsung and LG this problem is magnified at the global level, and not just against Apple but also against firms like Google and Research in Motion, maker of the BlackBerry. For all its success in mobile phones, Samsung is an also-ran in the global smart-phone market. The South Korean company has rushed to remedy that with its own smart-phone platform, Bada, and by producing mobile phones that use Google’s low-cost Android operating system. As a result, Samsung hopes to sell more smart-phones in America than any other firm this year.
To win, however, Samsung needs more than sleek hardware. It is also outgunned by the iPhone’s 140,000 applications, which means it needs more creative input into its products. That will mean encouraging a less hierarchical, more inventive, corporate culture. The fluid ecosystem surrounding mobile technology may mean Samsung will need to engage more openly in partnerships with other firms, as it already has with DreamWorks Animation, creator of films such as “Shrek”, to help in the launch of 3D television. But such team efforts are not naturally in the DNA of a company that likes to keep its suppliers in the corporate family.
To their credit, Samsung executives did not appear to be complacent, even before Mr Lee’s call to action. They do not want to abandon what Samsung does best—making cutting-edge hardware—just because China is on the warpath or to chase Apple. They greatly value the Samsung brand, which has been painstakingly built through good design over many years.
But they do speak of change, albeit in an evolutionary way. They intend to offer affordable smart-phones to the masses, not just to the top of the market. To improve content, they are concentrating on hiring software engineers rather than hardware experts. And to help stimulate ideas they have offered flexible hours to their notoriously hard-working employees, as well as hiring more young people and women. Nor have they stopped benchmarking against their competitors.
But there is still the bottom line to worry about. “Samsung Electronics may be the largest technology company in the world by sales, but it’s far from global number one by profit,” Lee Keon-hyok of the Samsung Economic Research Institute acknowledges. Profit margins leave something to be desired. In the quarter ending on December 31st, Samsung Electronics reported operating-profit margins of 9%. Apple’s were 36%. Moreover, the South Korean firm can hardly dispute that its market-share gains—especially against Japanese rivals such as Sony—were helped by a cheap won. But in a country where being number one is almost an obsession, these are elements that are likely to make Samsung strive harder.
No leeway
Arguably the most difficult challenge Samsung Electronics faces is internal, and as in most things at the company that ultimately comes back to the patriarch. As Steve Jobs has proved at Apple, nothing beats having a visionary leader—and Mr Lee is one of those. It was his decision, back in 1993, to concentrate the sprawling empire on certain world-class technologies, like chips, mobile phones and display screens. He is credited with instilling the mantra of first-class product design among his staff.
But the manner of Mr Lee’s return may raise as many problems as it solves. When he stepped down in 1998, the hope was it would usher in a reform in Samsung Electronics’ corporate governance so that investors outside his sphere of influence—about half are foreigners—would have a clearer view of the way the company was run. His son was given different managerial posts, which groomed him for the top job better than many other “chaebol princes”. A murky Strategic Planning Office that sat atop the Samsung family of companies and allocated resources was disbanded. No one doubted that Mr Lee continued to pull strings from behind the scenes. But the first traces of Western-style corporate governance were apparent.
His return, without a board meeting to approve it, appears to have put that process into reverse. Already there is speculation that he will revive the “control tower” system of group-wide oversight. His comeback may make it even less likely that Samsung will embrace a more transparent holding-company structure as, say, LG has.
Most troubling, argues Jang Hasung, dean of the University of Seoul’s Business School, is that the “emperor-management” approach suggests Mr Lee is not confident enough in the company’s numerous other executives around the world—including his son—to lead the company into the future. This problem is true of the chaebol in general; succession issues loom everywhere. What’s more, it appears to ignore the lesson so recently exposed by Toyota that family ownership can be a huge weakness as well as a strength.
“His decision to come back gives the impression that he’s the only one who can fix whatever crisis it is he’s talking about,” Mr Jang says. With so much of South Korea’s future at stake, maybe it is the next generation of leadership that Mr Lee should be tweeting about.
In the article's penultimate paragraph you mention that 'What's more, it appears to ignore the lesson so recently exposed by Toyota that family ownership can be a huge weakness as well as a strength'.
The fact is family ownership is always a strength because public ownership now-a-days is without any regulation at all. Any Hedge-Fund can wreck a company's share-price even without owning the shares.
Specifically on the point quoted by you regarding Toyota family, the fact is that Mr. Toyoda is cleaning up the mess created by his predecessor who was under pressure from the 'outside share-holders' to increase the market-share disproportionate to the Toyota's 'Toyota Way' Culture of five points viz., 1. Genchi Genbutsu 2. Chosen 3. Teamwork 4. Sonkei, Soncho 5. Kaizen.
As the recent financial wreck has shown so lucidly that the present system of Western Corporate Governance doesn't take care of all the stake-holders viz., Customer, Employees, Community & Share-holders in that order. The present system is rigged totally in favor of Top Employees i.e., Company Executives and Big Share-Holders facilitated by the Investment Bankers and the M&A Community.
Regards,
Pradeep Kabra
London
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The chaebol conundrum
Mar 31st 2010
From The Economist print edition
Korea Inc is back and booming. So it’s time to stop coddling the all-conquering chaebol
PERHAPS it is the result of being sandwiched between the imperial dynasties of China and Japan. It may have something to do with having a nuclear-armed hermit to the north. Whatever the reason, South Koreans nurture a deep sense of insecurity. That makes them good capitalists. So good, in fact, that if any rich country can claim to have done well in the recent global crisis, it is theirs. Last year, despite its dependence on exports and the collapse of world trade, South Korea’s economy grew faster than any other in the OECD.
South Korea’s remarkable resilience is partly down to clever economic management. The government provided lashings of stimulus. But it was not just domestic demand that kept the economy going. The export prowess of those peculiar corporate beasts, called the chaebol (see article), was also responsible.
In the years after the Asian financial crisis of 1997-98, these unwieldy conglomerates, known disparagingly as Korea Inc, were regarded as villains, because of their habits of crony capitalism. Their shabby corporate governance and their dominance of the economy were widely criticised. Since then, bosses have been jailed, transparency increased and corporate governance improved.
Since the global economic crisis they have been regarded as saviours in South Korea. Though the country’s exports slid, its biggest companies, such as Samsung Electronics and Hyundai Motors, gobbled up market share from competitors in Japan, Europe and America. Granted, they benefited from a cheap won. But they also made a fine job of selling things like electronics, chips and ships in fast-growing emerging markets to make up for some of the sales lost in the West. Samsung’s profits this year are forecast at a record $10 billion, and its sales at $130 billion, which would confirm its lead over Hewlett-Packard as the world’s biggest technology company by revenue.
BlackBerry and Apple crumble
The national paranoia has served them well. Though Samsung, for example, is a world leader in televisions and flash memory chips, it continues relentlessly to measure itself against its competitors. Having rebuilt their balance-sheets over the past decade, the chaebol have invested enough in technology, design and branding to remain far ahead of low-cost competitors in China and elsewhere. What’s more, they artfully avoided Japan’s trap of fetishising expensive, state-of-the-art technology for its own sake.
So the chaebol are certainly due an apology from those, including this newspaper, who thought they would be too unwieldy for modern business. But from South Korea’s point of view, they are a narrow base on which to build a country’s economic future. First, they face competition in new forms for which their hierarchical management structures and complicated, dynastic ownership are ill suited. Apple’s iPhone and the ubiquitous BlackBerry crept up on Samsung Electronics, exposing its shortcoming in smart-phones.
Second, the size and strength of the chaebol risk stifling entrepreneurialism elsewhere. By and large, their local suppliers are the only medium-sized South Korean companies to have thrived in recent years. Some young businesses such as internet search and gaming have done well, but these are in fields where the chaebol cannot yet be bothered to tread. If they ever do, they may smother rather than nurture independent talent.
President Lee Myung-bak still seems to be promoting the chaebol. He has just pardoned Lee Kun-hee, the boss of Samsung, who was convicted of tax evasion in 2008, enabling him to retake the reins of Samsung Electronics. The president has also successfully championed his chaebol chums in a contest to provide nuclear power to Abu Dhabi. And his government wants to relax holding-company laws that would make it easier for the conglomerates to own financial firms.
It is one thing to provide leadership. It is another to choose favourites and pick winners. If President Lee wants to promote anyone, it should be South Korea’s underdogs—the small companies that risk getting squashed by the country’s privileged monsters. The chaebol have proved themselves highly successful capitalists. Let them take care of themselves.
----------------------------------------------------
South Korea's industrial giants
Return of the overlord
Mar 31st 2010 | SEOUL
From The Economist print edition
A tycoon comes back as the saviour of Samsung Electronics, leader of South Korea’s remarkable business success. But where’s the crisis?
South Korea's industrial giants
LEE KUN-HEE is a man of few words. So when the 68-year-old decided to come out of court-induced purgatory this month to retake the helm of Samsung Electronics, now the world’s biggest technology company, it was appropriate that he chose Twitter, a keep-it-brief social-networking site, to spread the news.
Mr Lee’s message was not just for employees of Samsung Electronics, by far the biggest part of his empire, but also those of the other 64 firms within the conglomerate that he controls. It was delivered with the sort of attention-grabbing hyperbole that any tweeter would be proud of: “It’s a real crisis now. First-class global companies are collapsing. No one knows what will become of Samsung. Most of Samsung’s flagship businesses and products will become obsolete within ten years. We must begin anew. We must only look forward.”
It did not quite have the pithiness of Mr Lee’s rhetoric in 1993 when he said Samsung was a second-rate company and that its employees should “change everything except your wife and children.” But his words had the same urgent ring of truth about them.
How can that be? It is a question that could be asked by anyone who has recently turned on a flat-screen television, bought a mobile phone, stored masses of data on a flash memory or watched Chelsea’s footballers in shirts sporting Samsung’s name. Far from being a disaster in the making, Samsung Electronics has become one of the world’s strongest brands, known for sleek design, razor-sharp technology and good value.
Think of anything with a screen, from a few centimetres square on a mobile phone, to a laptop, a wide liquid-crystal display or a giant 3D television, and Samsung Electronics will be one of the top two firms in the world making it—or at least the memory chips inside it (see chart). The company’s global market shares are staggering: more than 40% of the flash memory used in sophisticated electronics like the Apple iPhone, almost one in five of the world’s mobile phones and one in six of its television sets. It even makes screens for Sony’s TVs.
Having invested aggressively in new products in 2008, Samsung Electronics sailed through the global financial crisis, almost doubling its operating profit in 2009. This year analysts expect it to generate record profits of over $10 billion. Sales are forecast to be about $130 billion, which is likely to confirm its lead over America’s Hewlett-Packard as the world’s biggest technology company by revenue. Not to be outdone, other parts of the Samsung group have notched up successes. The construction division recently completed the tallest building in the world in Dubai and Samsung Heavy Industries is flush with shipbuilding orders.
In a way that General Motors can only have dreamed of, what has been good for Samsung has been good for South Korea. The group’s products account for about 20% of the country’s GDP, making it huge even by the standards of an economy top-heavy with big firms. When the won tumbled in 2008, raising fleeting fears of a currency crisis, exporting champions like Samsung, Hyundai and LG quickly took advantage, betting that their customers would be willing to buy newer, better models if the price was right.
South Korea’s conglomerates were also well diversified globally—only one-tenth of the country’s exports go to America. That meant sales lost in America were partly made up for by those gained in fast-growing emerging markets like China. Thanks to generous promises of government stimulus, South Korea, one of the rich world’s most export-dependent countries, pulled off the surprising feat of surviving the worst slump in global trade since the second world war with only a fleeting dip into recession.
For that, South Koreans give much of the credit to their industrial conglomerates, or chaebol as they are known, and the rich, inscrutable families who control them and live like royalty in South Korea. Yet Mr Lee’s comeback causes nervous speculation. If Samsung really does face a crisis, what does that mean for South Korea? If Mr Lee believes he is the only person who can avert disaster, what does that say about the business acumen of his potential successors? And if he can walk back into the corner office without even having board approval, can it really be argued that the country is progressing to Western-style standards of corporate governance? Business people have watched, with a mixture of suppressed glee and dread, former role-models such as Toyota and General Motors struggle with huge financial and technical problems. Could this be the fate that Mr Lee fears for his firm?
Get out of jail free
These are pertinent questions for Korea Inc, the business model that has so recently undergone a remarkable rehabilitation. Just over a decade ago, when the South Korean economy was reeling from its near collapse in the Asian financial crisis of 1997-98, it was the chaebol that were widely blamed by the public, the centre-left government of the time and the IMF.
The extent of the mismanagement was shocking. In the 1960s and 1970s, under the dictatorial regime of Park Chung-hee, the chaebol soaked up cheap government financing and relied on official protection from foreign competition. Loosely, the models were the zaibatsu conglomerates that had helped turned Japan into an imperial—and militaristic—power before the second world war.
The chaebol, some of which were started by war racketeers, had the same vast ambitions, albeit for industrial conquest—and they had public money to back them. Samsung expanded from sugar and wool into electrical goods, chemicals and engineering. Hyundai’s founder, Chung Ju-yung, started building roads and then decided to build the cars to drive on them. But many chaebol overburdened themselves with debt as they tried to move up the technological ladder in the 1980s. As they borrowed lavishly to buy capital equipment, South Korea’s current-account deficit soared. Some thought the chaebol had become so big the government could not let them fail. They were spectacularly wrong.
The conglomerates failed in droves. The collapse of Daewoo in 1999 was followed by the bankruptcy of more than half of the then top 30 conglomerates. Four of the country’s five carmakers (even Samsung had ventured into the market) went bust. South Koreans, many of whom had flocked to hand over their gold jewellery in a patriotic gesture to help pay off the foreign debt, were appalled at the level of government and business collusion that came to light.
Under two consecutive left-of-centre governments, many of the chaebol bosses—some now being run by the children of their founders—were prosecuted. Suspended sentences were handed out to the boss of SK in 2003, the former chairman of Doosan group in 2006, and the owner of Hanwa group in 2007. But this was justice for the rich—quite different from justice for the rest. Chung Mong-koo, chairman of Hyundai Motor (which also owns Kia, the country’s second-biggest carmaker) was convicted of embezzlement in 2006. But his prison term was reduced to community service and a $1 billion donation to charity because of his economic importance to the republic. Then in 2008 Mr Lee was convicted on tax-evasion charges, but also spared prison after paying a fine.
Partly chastened, both business and government have embarked on reform. Balance-sheets have improved, as has corporate governance, increasing the rights of minority shareholders and the responsibilities of company directors. Since then, some—though by no means all—of the cross-shareholdings used to disguise the weakness of subsidiaries and protect them from hostile takeovers have been rooted out and replaced with more transparent holding-company structures.
A friend in the Blue House
The reputations of the chaebol—especially in the eyes of South Koreans—recovered further during the 2008-09 global slump. So much so that when you ask experts in Seoul how their conglomerates fared during the crisis, some ask: what crisis? It was not just Samsung Electronics that sparkled. Hyundai increased market share in America every month last year, as its small, well-equipped cars with long warranties benefited disproportionately from the cash-for-clunkers programme.
For the first time in many years the chaebol have a political wind behind them. Lee Myung-bak, who became president in 2008, is a former chief executive from within the Hyundai extended family of firms. In December he pardoned Mr Lee, freeing the way for his return to Samsung. The same month he championed a successful bid by a chaebol-heavy consortium under the aegis of the Korean Electric Power Company to provide nuclear power to Abu Dhabi, pulling the rug from under industry leaders in France and Japan. This year, his government is pushing to relax holding-company laws that would make it easier for the chaebol to own financial firms. “The business community has not seen a political environment this accommodative in the past decade,” CLSA, a broker, said in a recent report.
Japan looks on aghast as the chaebol catch up with more of its large firms. “Of all their competitors on the global stage, the Japanese fear the South Koreans most,” writes Mark Anderson, author of Strategic News Service, a technology newsletter. Some Japanese industrialists acknowledge this publicly. “Korea is much more full of vitality than Japan,” Osama Suzuki, head of Suzuki Motor, lamented in a recent talk to foreign journalists in Tokyo. “Japan is coasting.”
All of which makes Mr Lee’s strident warning, as the head of South Korea’s most successful company, more puzzling. The charitable view is that it may have been just a rhetorical device to soften up opponents to his rehabilitation—and to the eventual transfer of power to his son, Lee Jae-yong, Samsung Electronics’ chief operating officer. But it may also reflect deeper fears that the days of relying on manufacturing as a growth strategy, for all its technical sophistication, are numbered. The most obvious cause for concern is China. The acquisition on March 28th of Volvo by Geely, a Chinese carmaker, is the latest example of low-cost Chinese producers’ determination to build global brands.
In computer chips, Samsung Electronics is comfortably ahead of China for now. But the skills needed in that business are described by one Samsung expert as like running a “digital sashimi shop”—the trick is to get products so swiftly to market that they do not lose their freshness. There is no inherent reason why Chinese firms cannot eventually catch up. What is more, as Mr Anderson points out, China is more open to imports and foreign direct investment than South Korea, which helps China’s quest for intellectual property.
An even bigger threat comes from America. Late last year Apple finally got permission from South Korea’s telecoms authorities to waive a rule prohibiting the domestic sale of iPhones. Demand for the iPhone has since exploded, leaving Samsung and its domestic rival LG (which together have sold seven out of ten phones in South Korea), looking uncharacteristically leaden. Smart-phones accounted for just 1% of the market, but Apple has been selling some 4,000 iPhones a day, making South Korea one of the gadget’s hottest markets. Even the finance ministry has launched an iPhone application—the Glossary of Current Affairs in the Economy—to unexpected popular appeal.
For Samsung and LG this problem is magnified at the global level, and not just against Apple but also against firms like Google and Research in Motion, maker of the BlackBerry. For all its success in mobile phones, Samsung is an also-ran in the global smart-phone market. The South Korean company has rushed to remedy that with its own smart-phone platform, Bada, and by producing mobile phones that use Google’s low-cost Android operating system. As a result, Samsung hopes to sell more smart-phones in America than any other firm this year.
To win, however, Samsung needs more than sleek hardware. It is also outgunned by the iPhone’s 140,000 applications, which means it needs more creative input into its products. That will mean encouraging a less hierarchical, more inventive, corporate culture. The fluid ecosystem surrounding mobile technology may mean Samsung will need to engage more openly in partnerships with other firms, as it already has with DreamWorks Animation, creator of films such as “Shrek”, to help in the launch of 3D television. But such team efforts are not naturally in the DNA of a company that likes to keep its suppliers in the corporate family.
To their credit, Samsung executives did not appear to be complacent, even before Mr Lee’s call to action. They do not want to abandon what Samsung does best—making cutting-edge hardware—just because China is on the warpath or to chase Apple. They greatly value the Samsung brand, which has been painstakingly built through good design over many years.
But they do speak of change, albeit in an evolutionary way. They intend to offer affordable smart-phones to the masses, not just to the top of the market. To improve content, they are concentrating on hiring software engineers rather than hardware experts. And to help stimulate ideas they have offered flexible hours to their notoriously hard-working employees, as well as hiring more young people and women. Nor have they stopped benchmarking against their competitors.
But there is still the bottom line to worry about. “Samsung Electronics may be the largest technology company in the world by sales, but it’s far from global number one by profit,” Lee Keon-hyok of the Samsung Economic Research Institute acknowledges. Profit margins leave something to be desired. In the quarter ending on December 31st, Samsung Electronics reported operating-profit margins of 9%. Apple’s were 36%. Moreover, the South Korean firm can hardly dispute that its market-share gains—especially against Japanese rivals such as Sony—were helped by a cheap won. But in a country where being number one is almost an obsession, these are elements that are likely to make Samsung strive harder.
No leeway
Arguably the most difficult challenge Samsung Electronics faces is internal, and as in most things at the company that ultimately comes back to the patriarch. As Steve Jobs has proved at Apple, nothing beats having a visionary leader—and Mr Lee is one of those. It was his decision, back in 1993, to concentrate the sprawling empire on certain world-class technologies, like chips, mobile phones and display screens. He is credited with instilling the mantra of first-class product design among his staff.
But the manner of Mr Lee’s return may raise as many problems as it solves. When he stepped down in 1998, the hope was it would usher in a reform in Samsung Electronics’ corporate governance so that investors outside his sphere of influence—about half are foreigners—would have a clearer view of the way the company was run. His son was given different managerial posts, which groomed him for the top job better than many other “chaebol princes”. A murky Strategic Planning Office that sat atop the Samsung family of companies and allocated resources was disbanded. No one doubted that Mr Lee continued to pull strings from behind the scenes. But the first traces of Western-style corporate governance were apparent.
His return, without a board meeting to approve it, appears to have put that process into reverse. Already there is speculation that he will revive the “control tower” system of group-wide oversight. His comeback may make it even less likely that Samsung will embrace a more transparent holding-company structure as, say, LG has.
Most troubling, argues Jang Hasung, dean of the University of Seoul’s Business School, is that the “emperor-management” approach suggests Mr Lee is not confident enough in the company’s numerous other executives around the world—including his son—to lead the company into the future. This problem is true of the chaebol in general; succession issues loom everywhere. What’s more, it appears to ignore the lesson so recently exposed by Toyota that family ownership can be a huge weakness as well as a strength.
“His decision to come back gives the impression that he’s the only one who can fix whatever crisis it is he’s talking about,” Mr Jang says. With so much of South Korea’s future at stake, maybe it is the next generation of leadership that Mr Lee should be tweeting about.
Friday, 19 March 2010
Re: China and Germany unite to impose global deflation
Dear Mr. Wolf,
Thanks for this insightful article which goes beyond economics and enters the realm of political double-talk deduction.
Many articles on this topic by distinguished journalists/economists including yours repeatedly and with some obvious merit mention that 'Germany should "consume" more'. From what I see, Germany is one of the richest countries on the planet with a per-capita of $35,000. Majority of the Germans live in comfort with all the modern amenities including world-class infrastructure.
My question is in what sphere can Germany increase its consumption? When the East Germany was integrated they spent billions on its infrastructure. Now that is almost at par with the West. Isn't it the time to enlarge the debate from self-consumption where none required to spending where it is a matter of life & death for people i.e, poor Africa to India? That would not just lead to a balanced growth but also create new markets for future?
Your thoughts on this would be appreciated.
Regards,
Pradeep Kabra
China and Germany unite to impose global deflation
By Martin Wolf
Published: March 16 2010 22:59 | Last updated: March 16 2010 22:59, Financial times
“Chermany” spoke last week and the world listened. Was what it said coherent? No. Was what it said self-righteous? Very much so. Was what it said dangerous? Yes. Will wiser views still prevail? I doubt it.
You may have heard of Chimerica – a neologism invented by Niall Ferguson, the Harvard historian, and Moritz Schularick of the Free University of Berlin, to describe a supposed fusion between the Chinese and American economies. You may also have heard of Chindia, invented by Jairam Ramesh, an Indian politician, to describe the composite new Asian giant. Let me introduce you to Chermany, a composite of the world’s biggest net exporters: China, with a forecast current account surplus of $291bn this year and Germany, with a forecast surplus of $187bn (see chart).
China and Germany are, of course, very different from each other. Yet, for all their differences, these countries share some characteristics: they are the largest exporters of manufactures, with China now ahead of Germany; they have massive surpluses of saving over investment; and they have huge trade surpluses. (See charts.)
Both also believe that their customers should keep buying, but stop irresponsible borrowing. Since their surpluses entail others’ deficits, this position is incoherent. Surplus countries have to finance those in deficit. If the stock of debt becomes too big, the debtors will default. If so, the vaunted “savings” of surplus countries will prove to have been illusory: vendor finance becomes, after the fact, open export subsidies.
I am beginning to wonder whether the open global economy is going to survive this crisis. The eurozone may also be in some danger. Last week’s interventions by Wen Jiabao, China’s premier, and Wolfgang Schäuble, Germany’s finance minister, illuminate these dangers perfectly.
The core of Mr Schäuble’s argument was not about the mooted European Monetary Fund, which could not, even if agreed and implemented, alter the pressures created by the huge macroeconomic imbalances within the eurozone. His central ideas are: combining emergency aid for countries running excessive fiscal deficits with fierce penalties; suspending voting rights of badly behaving members within the eurogroup; and allowing a member to exit the monetary union, while remaining inside the European Union. Suddenly, the eurozone is not so irrevocable: Germany has said so.
Three points can be drawn from this démarche from Europe’s most powerful country: first, it will have an overwhelmingly deflationary impact; second, it is unworkable; and, third, it might pave the way for Germany’s exit from the eurozone.
I explained the first point last week. If Germany gets what it wants, the world’s second-largest economy would play an altogether negative role in the search for a way out from the global slump in aggregate demand. The eurozone would not be exporting the demand the world now needs. It would export excess supply, instead.
Imagine that weaker eurozone countries were forced to contract their fiscal deficits sharply. This would surely weaken the entire eurozone economy. But the result would also be fiscal deterioration in Germany and France. Imagine that Germany then did don the hair shirt. Would it instruct France to do the same? After all, France already has a general government deficit forecast by the Organisation for Economic Co-operation and Development at close to 9 per cent of gross domestic product this year. Does Mr Schäuble imagine France could be fined? Surely not. Yet it is not Greek public finances that threaten the stability of the eurozone. These are a mere bagatelle. The threat is the public finances of big countries. Since Germany could not force such countries to behave and has no chance of expelling any member it disapproves of from the eurozone, it would have to leave itself. That is the logic of Mr Schäuble’s ideas. This must be obvious to him, too.
Germany is in a supposedly irrevocable currency union with some of its principal customers. It now wants them to deflate their way to prosperity in a world of chronically weak aggregate demand. Mr Wen has the same idea. But the economy he wants to pursue this goal is the US. Fat chance!
Speaking at the end of the National People’s Congress, Mr Wen declared: “What I don’t understand is depreciating one’s own currency, and attempting to pressure others to appreciate, for the purpose of increasing exports. In my view, that is protectionism.” He also insisted he was worried about the safety of China’s dollar investments.
What, I wonder, does Premier Wen mean by this, apart from telling the US to leave China’s exchange rate policies alone? If the US desire for a weaker dollar is “protectionist”, how much more so is China’s determination to keep its currency down, come what may? There is nothing evidently “protectionist” about asking a country with a huge current account surplus to reduce it, at a time of weak global demand. If I understand China’s declared position correctly, it wants the US to deflate itself into competitiveness, instead, via fiscal and monetary contraction and, presumably, falling domestic prices. That would be dreadful for the US. But it would be dreadful for China and the rest of the world, too. It is also not going to happen. China surely knows that.
Behind all this is a fundamental divide. Surplus countries insist on continuing just as before. But they refuse to accept that their reliance on export surpluses must rebound upon themselves, once their customers go broke. Indeed, that is just what is happening. Meanwhile, countries that ran huge external deficits in the past can cut the massive fiscal deficits that result from post-bubble deleveraging by their private sectors only via a big surge in their net exports. If surplus countries fail to offset that shift, through expansion in aggregate demand, the world is inevitably caught in a “beggar-my-neighbour” battle: everybody seeks desperately to foist excess supplies on to their trading partners. That was a big part of the catastrophe of the 1930s, too.
In this battle, the surplus countries are most unlikely to win. A disruption of the eurozone would be very bad for German manufacturing. A US resort to protectionism would be very bad for China. Those whom the gods wish to destroy, they first make mad. It is not too late to look for co-operative solutions. Both sides have to seek to adjust. Forget all the self-righteous moralising. Try some plain common sense, instead.
Thanks for this insightful article which goes beyond economics and enters the realm of political double-talk deduction.
Many articles on this topic by distinguished journalists/economists including yours repeatedly and with some obvious merit mention that 'Germany should "consume" more'. From what I see, Germany is one of the richest countries on the planet with a per-capita of $35,000. Majority of the Germans live in comfort with all the modern amenities including world-class infrastructure.
My question is in what sphere can Germany increase its consumption? When the East Germany was integrated they spent billions on its infrastructure. Now that is almost at par with the West. Isn't it the time to enlarge the debate from self-consumption where none required to spending where it is a matter of life & death for people i.e, poor Africa to India? That would not just lead to a balanced growth but also create new markets for future?
Your thoughts on this would be appreciated.
Regards,
Pradeep Kabra
China and Germany unite to impose global deflation
By Martin Wolf
Published: March 16 2010 22:59 | Last updated: March 16 2010 22:59, Financial times
“Chermany” spoke last week and the world listened. Was what it said coherent? No. Was what it said self-righteous? Very much so. Was what it said dangerous? Yes. Will wiser views still prevail? I doubt it.
You may have heard of Chimerica – a neologism invented by Niall Ferguson, the Harvard historian, and Moritz Schularick of the Free University of Berlin, to describe a supposed fusion between the Chinese and American economies. You may also have heard of Chindia, invented by Jairam Ramesh, an Indian politician, to describe the composite new Asian giant. Let me introduce you to Chermany, a composite of the world’s biggest net exporters: China, with a forecast current account surplus of $291bn this year and Germany, with a forecast surplus of $187bn (see chart).
China and Germany are, of course, very different from each other. Yet, for all their differences, these countries share some characteristics: they are the largest exporters of manufactures, with China now ahead of Germany; they have massive surpluses of saving over investment; and they have huge trade surpluses. (See charts.)
Both also believe that their customers should keep buying, but stop irresponsible borrowing. Since their surpluses entail others’ deficits, this position is incoherent. Surplus countries have to finance those in deficit. If the stock of debt becomes too big, the debtors will default. If so, the vaunted “savings” of surplus countries will prove to have been illusory: vendor finance becomes, after the fact, open export subsidies.
I am beginning to wonder whether the open global economy is going to survive this crisis. The eurozone may also be in some danger. Last week’s interventions by Wen Jiabao, China’s premier, and Wolfgang Schäuble, Germany’s finance minister, illuminate these dangers perfectly.
The core of Mr Schäuble’s argument was not about the mooted European Monetary Fund, which could not, even if agreed and implemented, alter the pressures created by the huge macroeconomic imbalances within the eurozone. His central ideas are: combining emergency aid for countries running excessive fiscal deficits with fierce penalties; suspending voting rights of badly behaving members within the eurogroup; and allowing a member to exit the monetary union, while remaining inside the European Union. Suddenly, the eurozone is not so irrevocable: Germany has said so.
Three points can be drawn from this démarche from Europe’s most powerful country: first, it will have an overwhelmingly deflationary impact; second, it is unworkable; and, third, it might pave the way for Germany’s exit from the eurozone.
I explained the first point last week. If Germany gets what it wants, the world’s second-largest economy would play an altogether negative role in the search for a way out from the global slump in aggregate demand. The eurozone would not be exporting the demand the world now needs. It would export excess supply, instead.
Imagine that weaker eurozone countries were forced to contract their fiscal deficits sharply. This would surely weaken the entire eurozone economy. But the result would also be fiscal deterioration in Germany and France. Imagine that Germany then did don the hair shirt. Would it instruct France to do the same? After all, France already has a general government deficit forecast by the Organisation for Economic Co-operation and Development at close to 9 per cent of gross domestic product this year. Does Mr Schäuble imagine France could be fined? Surely not. Yet it is not Greek public finances that threaten the stability of the eurozone. These are a mere bagatelle. The threat is the public finances of big countries. Since Germany could not force such countries to behave and has no chance of expelling any member it disapproves of from the eurozone, it would have to leave itself. That is the logic of Mr Schäuble’s ideas. This must be obvious to him, too.
Germany is in a supposedly irrevocable currency union with some of its principal customers. It now wants them to deflate their way to prosperity in a world of chronically weak aggregate demand. Mr Wen has the same idea. But the economy he wants to pursue this goal is the US. Fat chance!
Speaking at the end of the National People’s Congress, Mr Wen declared: “What I don’t understand is depreciating one’s own currency, and attempting to pressure others to appreciate, for the purpose of increasing exports. In my view, that is protectionism.” He also insisted he was worried about the safety of China’s dollar investments.
What, I wonder, does Premier Wen mean by this, apart from telling the US to leave China’s exchange rate policies alone? If the US desire for a weaker dollar is “protectionist”, how much more so is China’s determination to keep its currency down, come what may? There is nothing evidently “protectionist” about asking a country with a huge current account surplus to reduce it, at a time of weak global demand. If I understand China’s declared position correctly, it wants the US to deflate itself into competitiveness, instead, via fiscal and monetary contraction and, presumably, falling domestic prices. That would be dreadful for the US. But it would be dreadful for China and the rest of the world, too. It is also not going to happen. China surely knows that.
Behind all this is a fundamental divide. Surplus countries insist on continuing just as before. But they refuse to accept that their reliance on export surpluses must rebound upon themselves, once their customers go broke. Indeed, that is just what is happening. Meanwhile, countries that ran huge external deficits in the past can cut the massive fiscal deficits that result from post-bubble deleveraging by their private sectors only via a big surge in their net exports. If surplus countries fail to offset that shift, through expansion in aggregate demand, the world is inevitably caught in a “beggar-my-neighbour” battle: everybody seeks desperately to foist excess supplies on to their trading partners. That was a big part of the catastrophe of the 1930s, too.
In this battle, the surplus countries are most unlikely to win. A disruption of the eurozone would be very bad for German manufacturing. A US resort to protectionism would be very bad for China. Those whom the gods wish to destroy, they first make mad. It is not too late to look for co-operative solutions. Both sides have to seek to adjust. Forget all the self-righteous moralising. Try some plain common sense, instead.
Thursday, 11 February 2010
Adam & Paul - Movie Review
Is this drugs movie season or what? After 'Requiem For A Dream' now comes 'Adam And Paul'. In the former, the guy sends his gal to get fucked and raped for money and drugs. In the latter, Paul takes drugs from Adams pockets after the latter dies and leaves him on street.
Addicts are brain dead. They are shredded of any ability to make, build or maintain any kind of relationships. Unfortunately, they are worse than slaves.
I read in today's Financial Times Lex Column that Reckitt Benckiser's anti-addiction drug for Heroine called Suboxone created profits of £345 million for this year and they are unhappy because it has lost its exclusivity and it's generic counterparts will be in the market soon.
What a society we live in. The West 'rich kids' buy the drugs from Afganistan/Mexico/Columbia to sponsor their guns/arms and the research community in the West in-turn spends its budget on finding cure for the addiction. I thought there were 'bigger' problems in the world!!!
Addicts are brain dead. They are shredded of any ability to make, build or maintain any kind of relationships. Unfortunately, they are worse than slaves.
I read in today's Financial Times Lex Column that Reckitt Benckiser's anti-addiction drug for Heroine called Suboxone created profits of £345 million for this year and they are unhappy because it has lost its exclusivity and it's generic counterparts will be in the market soon.
What a society we live in. The West 'rich kids' buy the drugs from Afganistan/Mexico/Columbia to sponsor their guns/arms and the research community in the West in-turn spends its budget on finding cure for the addiction. I thought there were 'bigger' problems in the world!!!
Tuesday, 9 February 2010
Re: Staff ownership can save a company's soul
Dear Mr. Skapinker,
Thanks for the article in today's FT. You mention that 'if the owners had wanted to keep the company out of the hands of short-term investors, they should not have listed it on the stock market'
Well, what about regulation then? A company is owned by not just the share-holders but but stake-holders viz., employees, customers, society-in which they serve and share-holders ofcourse. It is the job of the government and the regulation to make sure that the rights of the stake-holders are maintained. But unfortunately, it is a jungle-raj out there. There is no regulation at all.
The saddest part is good writers like you rather than pointing out the deficiencies in regulation, say that 'the owners should not have sold if they were so concerned about the short-term investors'
Regards,
Pradeep Kabra
--------------------------
Staff ownership can save a company’s soul
By Michael Skapinker
Published: February 8 2010 19:38 | Last updated: February 8 2010 19:38 in Financial Times
“Stand up if you hate Manchester United.” This tribal cry from the football club’s enemies doesn’t stir me. I do not hate Manchester United. I am indifferent to them. Adult passion for football clubs has always struck me as slightly ridiculous.
You do not, all the same, have to be a football fan to think that United’s current state is a shabby advertisement for capitalism. The club listed on the London Stock Exchange in 1991. Malcolm Glazer, the US sports tycoon, and his family bought it from its shareholders in 2005, loading it with so much debt that the club has laboured under it ever since.
United refinanced the debt last month with a £500m bond issue, which required the Glazer family to reveal that they had extracted £23m in management fees from the club. The fans think it wrong that outsiders can borrow millions to take over their club, use its takings to pay the interest, and then pay themselves a handsome fee. Who can blame them?
Also feeling cross are descendants of George Cadbury, who built up the UK confectionery company. Last week, Cadbury passed into the hands of Kraft of the US.
Felicity Loudon, George Cadbury’s great-granddaughter, said her ancestors would be “turning in their graves” over the sale to a company that “makes cheese to go on hamburgers”. Peter Cadbury, a great- grandson, said: “It is regrettable that a company which took 186 years to build up has had its future decided by investors whose aims are short term.”
Perhaps, but if the Cadburys had wanted to keep the company out of the hands of short-term investors, they should not have listed it on the stock market.
There are alternatives to a public listing, for both football clubs and companies. The Spanish clubs Barcelona and Real Madrid, as illustrious as United, are owned by club members.
John Lewis, the UK retailer, is owned by its 69,000 employees. I may not be a football supporter, but I am a fan of John Lewis. The mood in its stores is markedly different from any other company. The staff are more attentive and professional. They own the place and it shows.
I am not alone. John Lewis was recently named Britain’s favourite retailer for the third year in succession by Verdict, the research group. Its Christmas sales outstripped those of its rivals and Waitrose, its food arm, was the fastest-growing food retailer.
John Spedan Lewis, the founder’s son, was stricken by the discovery, early in the 20th century, that he, his brother and his father earned more between them than the entire workforce in the two stores they then owned. Rather than saying this was what he needed to stop him becoming a banker, he shortened the working week, set up a staff committee and eventually, after his father’s death, transferred ownership to the staff.
Not all employee-owned companies tell the same happy story. Another attempt at employee ownership, United Airlines of the US, ended up with the mechanics calling a strike, which was only narrowly averted. They, along with their fellow employees, were majority owners of the company and had their own people on the board, which meant they would have been striking against themselves.
United was not a healthy company to start with. Like most old-style airlines, its staff costs and working practices were dragging it down. The staff received their 55 per cent stake in 1994 in return for concessions on pay and benefits. The September 11 2001 attacks led to a sharp downturn in United’s business, exposing the flaws in the company’s setup.
Employee ownership should align employees’ interests with those of the company, but as Jeffrey Gordon of Columbia Law School explained in a 2003 paper, United staff hired after 1997 held no shares, so that half the mechanics had no stake in the company. Even for those who did, their stakes were small and they could not cash them in until they retired or left.
John Lewis’s partnership was set up to avoid these problems. Everyone has a stake, in return for which they receive an annual bonus. Each successful year provides the incentive for the employee-owners to do even better.
Not that the John Lewis tale has been an unbroken idyll. In 1999, encouraged by stories that selling the company could give them a windfall of £100,000 each, some staff members started pressing for John Lewis to go public.
The move came to nothing, but the temptation for the owners of a successful company to cash in is always there. A stock market listing provides advantages, such as ease of raising capital, but it also means the company could fall into the hands of complete strangers. Those who take that risk should not complain when it goes bad.
michael.skapinker@ft.com
More columns at www.ft.com/michaelskapinker
----------------------------------------
Dear Pradeep,
Many thanks for your email. The problem is precisely the one you have mentioned: the shareholders do own the company and no regulator can stop them selling their shares, unless there are monopoly issues. That's the situation in the UK, anyway. Most other countries are more protectionist.
Regards,
Michael
----------------------------------------
Dear Michael,
Thanks for the reply. I was referring to the context of debt. In the specific case of Cadbury/Kraft, Kraft has a debt of $30 billion. Correct, the regulators can't stop the share-holders from selling the shares. But there can be a regulatory structure vis-a-vis share-holding pattern/division, debt/equity etc., I don't believe in protectionism for the sake of it. What I'm referring is regulation so that all the stake-holders are rewarded fairly.
Regards,
Pradeep
----------------------------------------
Pradeep,
Thanks. The question of how much debt acquirers should be allowed to take on is a relevant one which I hope to address.
Michael
-----------------------------------------
Thank you. I know our debate can only do that much.
The real rules are set by the politicians who are financed and lobbied by the vested powerful interests.
But then, no harm in trying.
Regards,
Pradeep
-----------------------------------------
Thanks for the article in today's FT. You mention that 'if the owners had wanted to keep the company out of the hands of short-term investors, they should not have listed it on the stock market'
Well, what about regulation then? A company is owned by not just the share-holders but but stake-holders viz., employees, customers, society-in which they serve and share-holders ofcourse. It is the job of the government and the regulation to make sure that the rights of the stake-holders are maintained. But unfortunately, it is a jungle-raj out there. There is no regulation at all.
The saddest part is good writers like you rather than pointing out the deficiencies in regulation, say that 'the owners should not have sold if they were so concerned about the short-term investors'
Regards,
Pradeep Kabra
--------------------------
Staff ownership can save a company’s soul
By Michael Skapinker
Published: February 8 2010 19:38 | Last updated: February 8 2010 19:38 in Financial Times
“Stand up if you hate Manchester United.” This tribal cry from the football club’s enemies doesn’t stir me. I do not hate Manchester United. I am indifferent to them. Adult passion for football clubs has always struck me as slightly ridiculous.
You do not, all the same, have to be a football fan to think that United’s current state is a shabby advertisement for capitalism. The club listed on the London Stock Exchange in 1991. Malcolm Glazer, the US sports tycoon, and his family bought it from its shareholders in 2005, loading it with so much debt that the club has laboured under it ever since.
United refinanced the debt last month with a £500m bond issue, which required the Glazer family to reveal that they had extracted £23m in management fees from the club. The fans think it wrong that outsiders can borrow millions to take over their club, use its takings to pay the interest, and then pay themselves a handsome fee. Who can blame them?
Also feeling cross are descendants of George Cadbury, who built up the UK confectionery company. Last week, Cadbury passed into the hands of Kraft of the US.
Felicity Loudon, George Cadbury’s great-granddaughter, said her ancestors would be “turning in their graves” over the sale to a company that “makes cheese to go on hamburgers”. Peter Cadbury, a great- grandson, said: “It is regrettable that a company which took 186 years to build up has had its future decided by investors whose aims are short term.”
Perhaps, but if the Cadburys had wanted to keep the company out of the hands of short-term investors, they should not have listed it on the stock market.
There are alternatives to a public listing, for both football clubs and companies. The Spanish clubs Barcelona and Real Madrid, as illustrious as United, are owned by club members.
John Lewis, the UK retailer, is owned by its 69,000 employees. I may not be a football supporter, but I am a fan of John Lewis. The mood in its stores is markedly different from any other company. The staff are more attentive and professional. They own the place and it shows.
I am not alone. John Lewis was recently named Britain’s favourite retailer for the third year in succession by Verdict, the research group. Its Christmas sales outstripped those of its rivals and Waitrose, its food arm, was the fastest-growing food retailer.
John Spedan Lewis, the founder’s son, was stricken by the discovery, early in the 20th century, that he, his brother and his father earned more between them than the entire workforce in the two stores they then owned. Rather than saying this was what he needed to stop him becoming a banker, he shortened the working week, set up a staff committee and eventually, after his father’s death, transferred ownership to the staff.
Not all employee-owned companies tell the same happy story. Another attempt at employee ownership, United Airlines of the US, ended up with the mechanics calling a strike, which was only narrowly averted. They, along with their fellow employees, were majority owners of the company and had their own people on the board, which meant they would have been striking against themselves.
United was not a healthy company to start with. Like most old-style airlines, its staff costs and working practices were dragging it down. The staff received their 55 per cent stake in 1994 in return for concessions on pay and benefits. The September 11 2001 attacks led to a sharp downturn in United’s business, exposing the flaws in the company’s setup.
Employee ownership should align employees’ interests with those of the company, but as Jeffrey Gordon of Columbia Law School explained in a 2003 paper, United staff hired after 1997 held no shares, so that half the mechanics had no stake in the company. Even for those who did, their stakes were small and they could not cash them in until they retired or left.
John Lewis’s partnership was set up to avoid these problems. Everyone has a stake, in return for which they receive an annual bonus. Each successful year provides the incentive for the employee-owners to do even better.
Not that the John Lewis tale has been an unbroken idyll. In 1999, encouraged by stories that selling the company could give them a windfall of £100,000 each, some staff members started pressing for John Lewis to go public.
The move came to nothing, but the temptation for the owners of a successful company to cash in is always there. A stock market listing provides advantages, such as ease of raising capital, but it also means the company could fall into the hands of complete strangers. Those who take that risk should not complain when it goes bad.
michael.skapinker@ft.com
More columns at www.ft.com/michaelskapinker
----------------------------------------
Dear Pradeep,
Many thanks for your email. The problem is precisely the one you have mentioned: the shareholders do own the company and no regulator can stop them selling their shares, unless there are monopoly issues. That's the situation in the UK, anyway. Most other countries are more protectionist.
Regards,
Michael
----------------------------------------
Dear Michael,
Thanks for the reply. I was referring to the context of debt. In the specific case of Cadbury/Kraft, Kraft has a debt of $30 billion. Correct, the regulators can't stop the share-holders from selling the shares. But there can be a regulatory structure vis-a-vis share-holding pattern/division, debt/equity etc., I don't believe in protectionism for the sake of it. What I'm referring is regulation so that all the stake-holders are rewarded fairly.
Regards,
Pradeep
----------------------------------------
Pradeep,
Thanks. The question of how much debt acquirers should be allowed to take on is a relevant one which I hope to address.
Michael
-----------------------------------------
Thank you. I know our debate can only do that much.
The real rules are set by the politicians who are financed and lobbied by the vested powerful interests.
But then, no harm in trying.
Regards,
Pradeep
-----------------------------------------
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