Reinventing For Bad Times

For the last several weeks, you have likely been a riveted and bewildered spectator to a slow motion horror film. You have watched with a mix of awe and trepidation the dizzying fall of global stock markets. Venerable institutions like Lehman Brothers and Merrill Lynch have crumbled before your eyes.

During the past decade, financial institutions and hedge funds have used what is essentially fake capital, packaged under exotic “derivatives” to take enormous gambles with other people’s money, all the while rewarding themselves in the billions of dollars. Derivatives, ironically, were designed to reduce risk. But in the hands of wily Wall Street investment houses they were transformed into instruments that allowed capital to be multiplied several times.

Under federal law, a bank is restrained from leveraging itself no more than 10 times its capital base. But these unregulated high coasting investment banks and hedge funds leveraged 30 to 35 times their capital. Thus extended, it is easy to be exceedingly successful even with mediocre performance. An anemic 2% return on capital multiplied 35 times yields a whopping 70% return. Any wonder that everyone operating in this fake economy was whooping it up.

So long as no one questioned (or understood) the inherent risks, everything was rosy. But at the first hint of trouble, starting with the foreclosure crisis, panic set in. Just as a 2% profit multiplied 35 times is scintillating, a 1% loss repeated 35 times is deluging. Those who spun the cobwebs that masked the enormous risks on which they had constructed their castles, comprehended well the economic tsunami they had unleashed.

It is hard to sympathize with the arrogant and pompous fat cats who lived high on the hog all these years as they come crashing down. Notwithstanding the massive infusion of capital in the market by governments all over the world, we are on the cusp of a global recession that will linger for some time.

Unbridled capitalism, championed by Wall Street and the Republican Party, has collapsed as decisively as the autocratic socialist Soviet state did 17 years earlier. Unfortunately, the Bush administration and its inept minions were so blinded by their political and ideological orthodoxies of deregulation that they refused to stir even as the tremors of the impending tsunami grew louder.

It is time to move past spent and outmoded economic and philosophical obsessions. We need new, thoughtful economic models that foster and reward individual entrepreneurship while also regulating and managing avarice and risk.

Indian Americans benefited greatly as the rising tides of the last decade lifted all boats. Tens of thousands of them made their fortunes on Wall Street. We, like all Americans will, no doubt, suffer harshly as the economy deflates. Already thousands have been laid off on Wall Street and even more layoffs are on the horizon. In India, the stock market has fallen by almost 60% from its peak at the start of this year, among the most precipitous declines in the world.

But brace yourself; the worst has yet to come. Indian Americans ought to be prepared for these hard times. Your just have to be as imaginative and inventive as you were that hapless first moment when you arrived on American shores.