A Third Pill

Last week I had a conversation with a friend about #occupywallstreet, and at one point I observed that Estonia must be the most quintessentially capitalist and unabashedly neoliberal country in the present-day Europe — to the point that, perhaps also uniquely for Europe, there is almost zero resistance. Of course, one could refer to the fact that social democrats managed to more than double their constituency in last elections — but apart from making some noises about fast increasing social and economic stratification and the abstract need to “put people first,” they too are simply too scared to go against the standing orthodoxy of Estonia as the last bastion of Chicago-School-style capitalism and protestant ethics in Europe. Anyone trying to publicly challenge the wisdom of that notion — or indeed, suggest that it could be somehow different in the future — would risk looking like an idiot (or worse) in the eyes of Estonian voters. However, this is where my friend, quite correctly, pointed out that there in fact is resistance to neoliberal capitalism in Estonia. It is only that this resistance is not progressive but reactionary, ranging from ultra-orthodox catholic to extreme nationalism, who both see Estonia having joined the EU as a catastrophe that unfortunately could not be averted but should now be undone.

Of course, my friend was right. And this is the reason why today’s demonstration in Tallinn in support of #occupywallstreet ended up looking akin to something that you’d get if you crossed Salvador Dali with Aki Kaurismäki.

At around noon there was a sparse crowd in the middle of the Freedom Square, with about perhaps 20% of it being made up by reporters and cameramen from all the major media companies. Most of the people seemed rather unsure about why exactly they were there, apart from the fact that it had something to do with Swedish banks and Estonian government, and the general sense of impending doom. After a brief introduction the first speaker to have the stage was Ivar Raig (a well-known Euro-skeptic) who made a token reference to #ows and then proceeded to explain how Estonia’s participation in the EFSF is €2,000 out of every Estonian pocket and thus unconstitutional. After this entirely unsurprising if still otherwise relatively sane speech, an older gentlemen took the stage in order to read out aloud his manifesto “to all the people of the world” that started innocently enough but somehow got to the point where the speaker was advocating for an international effort to “discover the speed exceeding that of the speed of light” (apparently possible under some obscure formula by Albert Einstein) that would enable the mankind to colonize inhabitable planets elsewhere in our galaxy once our Earthly resources get depleted in next couple of decades. At that point his microphone was turned off and the next speaker stepped up — and suffice to say that it only went downhill from there. Finally at around 2pm another gentleman concluded the meeting with words to the tune that “we are here not to start a revolution rather than draw attention to the fact that Europe is reeling to the left and everywhere one looks there is moral relativism and the decay of traditional family values.”

The whole travesty was of course particularly tragic in the context of what is going on in NY right now, which I have been following rather closely. Sure, there must be people at Zuccotti Park too who think that our salvation lies in faster-than-light space travel, but in general #occupywallstreet raises some extremely interesting questions about the nature and legitimacy of representative democracy in today’s world. It is basically the first time after 1968 when there is a real, tangible effort to try something new, something that resists (or at least tries to resist) being absorbed into partisan politics — on this there is an interesting recent article by Bernard E. Harcourt in NY Times. This is Žižek’s proverbial “third pill” that rejects both trying to “fix the capitalism” (something that apparently rather few people outside the G20 meeting in Paris deem possible or even desirable) or struggle against it on its own terms (in a form of “list of political demands” that could then be voted upon).

In order to keep up with what is going on, I have recently been reading at a rather ferocious pace, catching up on a lot of stuff that I had long planned to read, such as Bakunin, Kropotkin, Proudhon, Gramsci, and on to Negri, Virno, Ranciére, Laclau, Mouffe, Callinicos, Žižek and Graeber — all pretty radical fare, and absolutely fascinating. I even read Lenin this week, for the first time in my life as far as I can remember :). I am still working it all through, and I won’t get into it here anyway, lest this post turn into a multi-part essay.

On a related note — a local daily paper has asked me to write them something and a couple of days ago I told them that okay, I will write an essay on radical democracy and resistance in the style of a travelogue à la Tocqueville’s De la démocratie en Amérique if they buy me a return ticket to New York, so that I can go and live this thing for a week at Zuccotti Park. Although the initial response was rather enthusiastic, the next day I received a response that their editor-in-chief had figured €600 being too much for them to dish out for that sort of a thing. I am almost tempted to go and write the thing on my own — but then again, the said editor-in-chief (name withheld to protect the innocent) was probably right in judging that this is a topic that would really interest very few people in Estonia, most of whom I suppose I know personally anyway.


What makes the world go round?

Well, it ain’t love, that’s for sure. That much physicists and economists agree upon.

When I entered Tartu University in my young and tender years to be taught the intricacies of finance it was the first fundamental point to learn and remember that without money the world would grind to a halt. The whole world, as we were supposed to see, was a giant market, brimming with proverbial hungry cobblers and barefoot bakers who would be reduced to barter their way around lest there be a wonderful invention known as money. For us future bankers, investors and other assorted financiers, this was an undisputed and universal fact about the world, it was the way how the world is, a fundamental category like “energy” must be for students of physics. And indeed, in finance — and perhaps in economics at large — the universal existence of money is something most people simply assume. If pressed, they would probably concede that there must have been times and places where money did not exist, but this was only because it was not yet discovered. This way money is seen much like electricity (which is a fundamental, primordial form of energy, waiting to be harnessed), rather than, say, an internet (which is a particular human creation).

This view of affairs has gone nowhere from the economics departments of the universities and is well alive and kicking also in the public discourse, as exemplified by books such as Niall Ferguson’s 2008 book The Ascent of Money. Suffice to say that I am personally less than convinced about Ferguson’s bold claim that “the ascent of money has been essential to the ascent of man,” at least in the rather narrow sense of money as a medium, measure, standard and store of the underlying financial value of everything. In fact I have now already for a few years thought of teaching a sort of deconstructivist and comparative course on money as a broad social phenomenon, but recently a book came out that appears to have pretty much beat me to it. There’s a teaser interview with David Graeber on nakedcapitalism.com where he discusses some of the principal points of Debt: The First 5,000 Years. I think I can now just skip the idea of course and point people towards the book.

As an interesting follow-up note on this — the above interview apparently caught the attention of Robert P. Murphy at the von Mises Institute who, quite predictably, felt inclined to rush in all guns blazing, and this in turn elicited this highly amusing response by Graeber. It is not short, but very much worth it even for the ethnographic material alone.

Talking the talk

Economist reports that an increasing number of US business schools have instituted an oath, sworn by their freshly minted MBA-s before them being launched into the wide and wild world of international finance and pledging to play a “positive role in society”.

Having spent about 15 years in the investment banking industry (broadly defined), you will have to excuse me for not letting out a sigh of relief over the issue of immoral markets and predatory capitalism with its inherent culture of greed henceforth being solved. As anyone who has so much as met a true-blood investment banker can readily attest, playing a positive role in society is not something that would rank very high in the collective agenda of the profession. Their motivation for getting out of the bed in the morning tends to be something completely different and will probably remain so in the future. If someone wants to make their mark in terms of improving the collective lot of the humankind, MBA is an unlikely education choice, and to make your graduates swear a solemn oath to that end is not going to magically change this.

However, the changes in curriculum that have been reported over the last couple of years by several top-tier business schools are perhaps much more interesting and, in the long run, could potentially have a real impact. Scrapping core subjects such as marketing or strategy in favor of problem framing, innovation or business and society might in fact be little else than rearranging the deck chairs — but if this ends up as a genuine shift away from telling people what the world is like towards teaching them how to conceptualize it in a different ways, then this may well prove to have a real impact. The MBA programs have been increasingly criticized both for being irrelevant as well as producing look-and-think-alike zombies — it remains to be seen if those changes will be perceived as an improvement on either of those accounts.

Who wants to be a millionaire?

A.D. 1125: In this year sent the King Henry, before Christmas, from Normandy to England, and bade that all the mint-men that were in England should be mutilated in their limbs; that was, that they should lose each of them the right hand, and their testicles beneath. This was because the man that had a pound could not lay out a penny at a market. And the Bishop Roger of Salisbury sent over all England, and bade them all that they should come to Winchester at Christmas. When they came thither, then were they taken one by one, and deprived each of the right hand and the testicles beneath. All this was done within the twelfth-night. And that was all in perfect justice, because that they had undone all the land with the great quantity of base coin that they all bought.

The Anglo-Saxon Chronicle, 1124-27

It may have come to some of your’s attention that, as of last week, yours truly is not an investment banker any more. And none too soon, it seems.

Yesterday, in anticipation of the approaching shopping season, UK minister of finance Alistair Darling launched, to quote the Epicurean Dealmaker, a scathing attack against “chalk stripe suits, Soho strip clubs, and London property values,” by announcing that all discretionary bonuses in the industry north of £25,000 stand to get taxed at non-deductible rate of 50% against the employer’s net income. And a day later, Nicolas Sarkozy tentatively agreed to join the ride with Obama summoning a meeting of top bankers in the White House on Monday with an ominous agenda of “discussing bonuses and the economy” (although it currently seems that the US caps are going to be much more lenient). Firing a warning shot over the heads of London’s banking community, HM Treasury has also ruled that loans to staff, deferred bonuses, share-based payments and temporary salary increases will all be caught. There seems to be some confusion as to whom precisely this modern-day castration applies. If it is indeed “businesses regulated under the Financial Services and Markets Act” rather than simply “banks” as most of the news agencies report, then we’re also talking of hedge fonds, advisory boutiques and independent asset management firms. The only thing that the ruling doesn’t cover seems to be “guaranteed bonuses”, as extending the tax claim to those would apparently had exposed the Treasury to a legal challenge under the Human Rights Act (sic!).

Expectedly, this all has London’s contemporary mint-men howling with rage.

It would, of course, be beyond naïve to expect that investment bankers now shed their bespoke suits for sackcloth and sprinkle ashes on top of their heads–and that the industry will subsequently adjust to the annual £25,000/pp bonus cap (which honestly is an insult when compared with present levels of renumeration in the City). It simply means that for accountants and tax lawyers Christmas has arrived early this year, and will probably run well into Q2 of 2010. The UK regulators have created a hydra that they will be very, very busy battling with for years to come.

And the reason why this fight is such a desperate one is because, while no doubt pleasing the torch and pitchfork crowd to no end, the current ruling deals with effects rather than causes. The bankers’ bonuses did not create the financial crisis. They were not helping, for sure, but neither were they the cause. The idea of investment bankers living for their year-end windfalls and not giving a dime about what happens after December 31 is a deeply flawed one–I will not get into this here, but if you’re interested then go and read this piece. It really is a case of a goose that lays golden eggs and every investment banker sleep-deprived analyst can explain you that it is a trivially easy choice to sacrifice a couple of those eggs (which is what Goldman’s executive board seems to have done this week) in order to keep the goose alive and in good health.

So, the reason why investment bankers make obscene amounts of money is because investment banks make it by boatloads, and that it simply happens to be a business where people matter a lot, and as long as there’s a lot of money to be distributed, it will, one way or another. Thus the proper way to curb those 7- and 8-figure bonuses is not to apply a tax from hell to payouts but to cap the profitability of the banks themselves. For this, however, I am not holding my breath. It is both a lot easier and probably also a lot more popular to wage a valiant battle with the hydra of bankers’ bonuses.

Have a good crisis!

George Soros who, by his own words, has been “having a very good crisis” is reportedly dishing out $50 million, with $150 million in matching funds to follow, to set up an institute (lining up four former Nobelists in economics), establish a journal and set aside money for research grants and conferences – all to foster a sea change in what he and many others consider a few decades worth of economic science dominated by “free-market fundamentalism”. While I don’t really doubt Soros’ motivations what makes this bit of news more than a little ironic is that his most famous and probably still the most profitable bet against the Bank of England was to effectively demonstrate that just as free markets work until they don’t, the same also applies to regulated ones. And, while it may be convenient to forget it, the billions that Bank of England lost in its titanic struggle against Quantum and other hedge funds in 1992 was “a taxpayers’ money” too, just like what was (and still is) thrown at 2009 crisis by governments and central banks all around the world.

Coming back to the initiative – the stated aim of the whole endeavor is currently a negative definition: it is apparently against the prevailing orthodoxy. It would be a lot more interesting instead to hear what will they all stand for. In the light of the recent events it has became very easy to cry wolf and denounce laissez-faire capitalism and free markets. It is a lot more difficult to come up with a serious alternative though. As the perceived center of problems seems to gravitate towards the past liberalization and de-regulation of financial markets, the obvious and understandable knee-jerk reaction has been to go in the opposite direction and call for more regulation. At a closer examination this will not look such a promising route, however.

In Stanford’s “Policy Review”, Arnold Kling makes a very convincing, if lengthy and a bit technical point that the failure to preempt the crisis was not due to not having a proper regulatory framework in place, or regulators not having enough power or proper tools in their hands to react to what they should have seen as pending problems. It was due to the lack of knowledge and understanding. And therefore the answer, the way to avoid the same thing happening in the future, is likely not to be found in having more regulation – for the regulation is going to fail the same way as markets did.

Happy now?

happyI happened to leaf through the Financial Times today and came across this very interesting piece of news. Apparently there has been a bunch of people working, led by Nobel laureates Joseph Stiglitz and Armatya Sen, trying to figure out a more meaningful way to measure and assess economic progress than this reflected by the all-important GDP growth. Of course, in many ways the flaw is an obvious and glaring one, and has been pointed at many times already. Gross Domestic Product that GDP stands for is a general and aggregate metric that simply reflects the monetary value of goods produced and services rendered within the borders of a nation. And while in general it is certainly true that there exists a positive correlation between high GDP value and high standard of living, the relationship is not a trivial nor a direct one. For one thing, GDP measure completely neglects the dimension of distribution of wealth and value created in the society, and while it may be tempting to claim that “rising tide lifts all the boats”, in practice it is a fact of life that some boats get lifted more than others. Another well known fact is that in terms our personal happiness, the absolute amount of money (or goods, or whatever) we happen to possess is quite a bit less important than the relative wealth compared to that of our immediate social circle, or society in general. And so, what Sarkozy was suggesting is that measuring the success or failure of economic policies based on GDP growth leads us astray – and therefore that measure should be dropped and replaced with a more meaningful one(s), that would take into account things like availability and quality of health care, or time available for leisure, etc.

This all reminded me immediately of my trip to Bhutan last year. Bhutan has long been famous for pursuing GNH instead of GDP. GNH, a shorthand for Gross National Happiness, is a complex metric that is meticulously traced and aims to reflect a wide range of different aspects of society and thus provide an overall view of human happiness instead of narrowly focusing on the creation of financial wealth – which from the Buddhist point of view is, if anything, detrimental to the project of being happy. Bhutanese holistic approach to being happy consists of 72 different components and includes things that would probably seem rather esoteric for most westerners, such as “Frequency of prayer recitation”, “Ability to understand lozey”, “Zorig chusum skills”, “Knowledge of mask and other dances performed in tshechus” and “Purchase of second hand clothes”. But in general, this all further underlines the point that being happy is something that is inevitably grounded in local circumstances and is difficult to directly convert into dollars or ngultrums – although it clearly seems to be the case that while being rich is no guarantee towards being happy,  it is easier not to be unhappy if you have more money rather than less.

It remains to be seen what comes out of this – and whether it is simply another knee-jerk reaction to the anniversary of the financial crisis (though it seems that Stiglitz’s workgroup got started already 18 months ago, therefore predating the onset of meltdown by about half a year). I for one remain skeptical to the demise of GDP as a measure of economic performance – we have had things like Human Development Index and so on for many years and while there is no serious doubt to their usefulness, they haven’t came to replace the hard and easy applicability of GDP. But I guess we’ll see, and I would be rather glad to be wrong on this account.

West coast here we come

guatemalaSo tonight we will leave Guatemala and fly first to San Salvador and then on to San Fransisco. Six days is not long enough time to do a country like Guatemala full justice, but we did manage to take a trip along the main gringo trail around the Guatemala City, taking in places like Antigua, Chichicastenanga and Panajachel. In addition it enabled us to skip the whole Bible and Jell-O Belt in favour of a very friendly and colourful country – all in all a good deal.

On the news front there was an interesting bit last week – in addition to recently overshooting their estimate on the cost of the UK bank bailout to the tune of £70 billion (missing the mark roughly by 50%), IMF was forced to aknowledge that their official figures on the Eastern European external debt levels were grossly overestimated. The ratio of external debt to foreign exchange reserves for the Czech Republic was adjusted from 236% to 89%,  in the case of Estonia the respective cut was from initially reported 210% to somewhat more benign 132% – with more likely to follow. Unfortunately this doesn’t mean that all is well in the proverbial Kingdom of Denmark, and I for one wouldn’t expect investors rushing to buy CEE assets or setting up new factories now that they learned that the leverage is much lower than formerly thought. It does, however, mean that both the risk of a complete meltdown as well as the outcome, should it still happen, is a lot less drastic than it appeared before. With all that in mind, it is really interesting to note is how little attention did this news get. I suspect that had this thing been the other way around – i.e. IMF correcting the indebtness figures upward by about 2x – the whole thing would have been all over the place. I guess it simply goes to underline how scared everyone is – good news are treated as inconsequential as everybody knows that the situation is bad.