I have been reading a major debate on economics in many blogs – Indian and American. And the views range from one extreme to another. Sauvik proposes to teach the concept of trade and private enterprise to 5 year olds. Vipin tells us to beware of bankers, many of whom haven’t even done undergraduate economics.
Frankly, I get a little lost with all this 30,000 feet kind of mass generalisations about how people spend or earn money and what they are likely to do given certain situations – whether they will follow X-ist school or Y-ist logic or Z-ist philosophy.
There was an old joke that one of the professors in my alma mater IIMB had cracked in class – put five economists in a room and you will get seven theories, each one obfuscating the issue even more.
Is there a simple way to see things which is like you see it and say, “hey, that’s so true!!“. Something that doesn’t need you to read 567 pages of charts, data, theorisations, quotes from dead economists and the odd Bob Dylan lyric. For the last item, my Discman does a good job.
Anyway, my psuedo economics funda is if you know what you want to do with your life, find the most optimal way of getting there. So I buy depending on what I need to get on with my life. I don’t buy because I am a capitalist or communist or Keynesian or Austrian or whatever.
Let me try and put my psuedo economic lens on some ongoing current issues.
Bankers decided it was good business to give loans to people who were hitherto considered bad debts. They worked out neat adjustable interest rate models where by they were expected to make more money out of it than a regular credit sale. Based on this proposition, debt securitisation products were neatly packaged and offered to other investors across the world. Trillions of dollars worth of investments were made on the premise that hitherto notified bad debt borrowers would pay back their loans at interest rates higher than normal. And even if they did not pay back, there would be collateral like property which would be available.
The borrowers defaulted. Or some say, chose to default.
So what school of economics were these bankers applying when they went ahead doling out credit? If I put money in a sink and throw water after it, I don’t get my money back. It gets washed away down the drain. Unless, the sink has some device where the money gets doubled and is thrown back at me. In which case, it is not a sink in the first place, rather a fountain. So I should throw money into a fountain, like Fontana di Trevi. So if I lend money to people, I must make sure that these people have a sustainable livelihood that will ensure payback. When their livelihoods are threatened, then for my own survival, I must get them back on the road (rather than ask for more money from outside, thus increasing my own debts). Mohammad Yunus tells CNN why Grameen Bank borrowers want to pay back their loans as fast as possible
Jet Airways sacks 1900 people and then Naresh Goyal takes them, Air India gives 15,000 leave without pay for 2-3 years. Flights are withdrawn. Jet and Kingfisher decide to form a co-operatatively compete. The fixed component of fares (called taxes and surcharges) are increased. Various salaries are being cut.
Normally, in a conservative, politically charged country like India, sacking employees is one of those things that, while making sound business logic, are impossible to pull off. Air India conveniently went for Voluntary Leave and not retrenchment. On the other hand, Jet’s bold step gave Naresh Goyal a sleepless night.
So how do we explain this using economic theory? The chief reason given for the above crisis is the high fuel prices. But both Jet and Kingfisher have a Rs. 2,900 crore fuel bill still to pay. So in effect, they were collecting fuel surcharge on every ticket for the last one year or so. This surcharge has been increasing in line with the rise in fuel prices. Yet, these guys havent actually paid the oil companies. So what have they done with the money?
What is the mathematics involved here? Somewhere cost structures are imploding and the axe is falling on the softest part of it – the employees. There are a number of non-essential items that can easily be dispensed with. For starters, airlines can cut down on lounge costs, airport services, advertising, etc. Mallya for example will do well to bring back cash from his struggling sports ventures – F1, IPL, football I-League. Having moved to e-tickets, the cost of printing tickets has been eliminated. The next big cost reduction can be cutting down boarding passes. The e-ticket, a print-out of which is carried by the passenger, can simply be endorsed with the boarding card details. For some time, things like cold towels, chocolates, etc can be suspended. I’m sure most passengers are not hung up on these items.
So there it is. My look at two crises in recent times. In future posts, I’ll try and look some more closer issues – traffic in Mumbai, housing, etc.