Tuesday 9 April 2013
THATCHER'S LEGACY
Mr Jaithirth Rao's wrote an obituary for Margaret Thatcher (The Economic Times, India, Op-Edit, April 9th) that reads like Mark Antony's peroration at Caesar's burial except that Mr.Rao came to praise Thatcher, not to bury her. Essentially he credits her with everything except sliced bread. We need to place Thatcher's contribution in perspective.
Mr Rao's assertion that but for Thatcher we'd all be socialists now, queuing up for life's necessities, is as inaccurate as it is alarmist and unfounded. In so far as any personal credit is due at all for this so-called dismantling of Socialism, it should go to Ronald Reagan.
Notwithstanding her visceral dislike of socialism as a political system or an economic philosophy neither the idea of bankrupting the Evil Empire nor the execution thereof was Thatcher's. Socialism's own failures assured its demise. Let alone bankrupting the Soviets, Britain was itself barely solvent. Mr.Rao's claim reminds me of comedian Spike Milligan's claim of playing a key role in the down fall of Hitler!
The UK's physical location willy nilly placed it in the forefront America's confrontation with the USSR. Thatcher was the voice of the anti-soviet rhetoric thanks to her oratory skills in comparison to the complexity-challenged Reagan. The means, the materiel, the desire, all resided in Washington. In any case, Gorbachev was already moving to dismantle (perestroika, glasnost) the old Soviet system even before the West got to know him. We cannot ignore the lasting damage done by her opposition to sanctions on the apartheid regime in South Africa. We have witnessed what the precipitate dismantling of Soviet State has wrought – a unipolar world without any counterweight to that unipolar power, emergence of a confrontational brand of Islam, and the strife in resource-rich middle east. Achievements to be celebrated? Hardly.
Thatcher used democratic means to acquire power but was not a true democrat by temperament or intent. She supported oppressive regimes that made a mockery of her claims to support democratic aspirations of people around the world. Think South Africa or Pinochet's Chile . She supported the American invasion of Grenada, a tiny island incapable of defending itself let alone threatening its neighbours. Her democratic credentials were exposed by the rebellion in her own party culminating in Geoffrey Howe's resignation and the ascent of John Major.
Much credit is given to her for destroying Britain's militant labour unions and perhaps deservedly so. That view ignores the fact that the power and hold of the unions, led by coal unions, were weakened by the flow of oil and gas from North Sea.
Thatcher unleashed two trends which came back to bite Britain. One was to make London the centre of new forms of financial buccaneering. The other was to usher in the “home owner democracy”. Home ownership was promoted as a virtue in itself. The rush to own homes gave a fillip to the economy in the short run. This trend was neither desirable nor sustainable as later events were to prove. More than a million home owners on the verge of retirement around 2010 were at risk of losing their homes, unable to pay off their loans. Her support for the Financial sector, and neglect of manufacturing saw Britain lose whatever manufacturing edge it had, over the next two decades.
Commentators aver that Thatcher's quintessential Englishness and abrasiveness alienated the Scots, for one, and kept the Irish troubles on the boil. Scottish devolution is almost a reality now and without Thatcherite abrasion Northern Ireland is quiet. She was a shrewd, ambitious, ruthless, and divisive politician who played a larger than life role in British politics but cleverly accepted credit for developments of which she was neither the instigator nor the executor.
Lord Ashdown put it very succinctly in a TV interview: she was very good at destroying things: labour unions, her own party, international comity and the like.
Additionally, see this analysis: http://business.time.com/2013/04/09/was-thatcherism-good-or-bad-for-the-economy/?xid=newsletter-daily
Or this
http://krugman.blogs.nytimes.com/2013/04/08/did-thatcher-turn-britain-around/
Monday 8 April 2013
THE THREE C's
Long ago when I started my first job in a bank I was taught that three C's were central to assessing a borrower. Character, Credit and Cash. You may quibble why would a guy who already has Cash borrow from a bank? It is not as dumb as it appears at first glance.
"Character" is an obvious one, isn't it? I wouldn't lend to men of bad character. In those days men of "good character" did not throw their money after fast women and slow horses. They just gritted their teeth through bad times, and tightened their belts. They did not renege on their promises. Nor did they jump ship and swim for the shore at the first hint of trouble - they stayed on board and were the last to abandon ship or sank with it. They also did not ring fence their private assets so as to defeat creditors and bankers should their business go belly up.
Today there are hundreds of examples of businessmen doing well for themselves even as their businesses are floundering. Newspaper headlines are full of them.The government facilitated this with an act that wrung concessions from lenders, creditors and even employees so as to put the business back on its feet; when the business' health was restored, it is handed right back to the people who ran it to the ground in the first place, thus paving the way for Rescue Act II.
The second C, "Credit", is quite vague. A person must be credit worthy in order to get credit. Does getting credit make him creditworthy or does being creditworthy get him credit? In the olden days it clearly meant those who had the assets but not the liquidity. The assumption was that a man with assets will not default on his commitments to repay. Something like saying a person is solvent, but not liquid.
"Creditworthiness" and "Collateral" were used interchangeably until the latter was declared antisocial by the socialist brigade. This brigade had invented the self-serving and politically-driven banking practices which were apparently designed to stop the rich monopolizing the limited credit available in the economy. The new practice actually created many credit monsters who knew how to play the system - monsters without even the most basic business scruples. Collateral and "creditworthiness" overnight became dirty words and could halt your upward progress in your banking career.
Now we come to the third requisite, "Cash". So the basic question: why would someone with cash want to borrow more cash? For the reason that it is cheaper to use borrowed cash than your own. A bit of leverage improves your RoI, says finance theory. It may make your business more risky, but it improves returns to the shareholders. Since the shareholders have already risked their capital by investing it in a business, why not take a whole lot more risk in order to get greater returns? After all the additional risk is taken not with their own money but with the Bankers' money.
For the record, the third C of the "three Cs theory of lending" referred to the business' ability to generate cash; not to its already existing cash hoard but to the business' future Cash Flows.
Why this primer on bank lending? I was reminded of it by what happened recently.
Yesterday I was at a wedding. I heard one wag propound his "Three Cs theory of Marriages". According to him the aspiring bride should be able to Cook, Clean and Conceive.
It is comforting to know that traditional values have not been forgotten.
"Character" is an obvious one, isn't it? I wouldn't lend to men of bad character. In those days men of "good character" did not throw their money after fast women and slow horses. They just gritted their teeth through bad times, and tightened their belts. They did not renege on their promises. Nor did they jump ship and swim for the shore at the first hint of trouble - they stayed on board and were the last to abandon ship or sank with it. They also did not ring fence their private assets so as to defeat creditors and bankers should their business go belly up.
Today there are hundreds of examples of businessmen doing well for themselves even as their businesses are floundering. Newspaper headlines are full of them.The government facilitated this with an act that wrung concessions from lenders, creditors and even employees so as to put the business back on its feet; when the business' health was restored, it is handed right back to the people who ran it to the ground in the first place, thus paving the way for Rescue Act II.
The second C, "Credit", is quite vague. A person must be credit worthy in order to get credit. Does getting credit make him creditworthy or does being creditworthy get him credit? In the olden days it clearly meant those who had the assets but not the liquidity. The assumption was that a man with assets will not default on his commitments to repay. Something like saying a person is solvent, but not liquid.
"Creditworthiness" and "Collateral" were used interchangeably until the latter was declared antisocial by the socialist brigade. This brigade had invented the self-serving and politically-driven banking practices which were apparently designed to stop the rich monopolizing the limited credit available in the economy. The new practice actually created many credit monsters who knew how to play the system - monsters without even the most basic business scruples. Collateral and "creditworthiness" overnight became dirty words and could halt your upward progress in your banking career.
Now we come to the third requisite, "Cash". So the basic question: why would someone with cash want to borrow more cash? For the reason that it is cheaper to use borrowed cash than your own. A bit of leverage improves your RoI, says finance theory. It may make your business more risky, but it improves returns to the shareholders. Since the shareholders have already risked their capital by investing it in a business, why not take a whole lot more risk in order to get greater returns? After all the additional risk is taken not with their own money but with the Bankers' money.
For the record, the third C of the "three Cs theory of lending" referred to the business' ability to generate cash; not to its already existing cash hoard but to the business' future Cash Flows.
Why this primer on bank lending? I was reminded of it by what happened recently.
Yesterday I was at a wedding. I heard one wag propound his "Three Cs theory of Marriages". According to him the aspiring bride should be able to Cook, Clean and Conceive.
It is comforting to know that traditional values have not been forgotten.
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