Sunday, November 9, 2008

Capitalism needs a new culture

Nov 8, 2008

Individualism must be replaced by personal and social responsibility

By Lydia Lim

DARE we hope that Singapore's economy, and that of the world, will emerge stronger and better from the ashes of the current financial crisis?

In a week when citizens of the United States elected as their first African-American president a man whose campaign was founded on hope, a fitting answer seems to be: Yes we can, we must.

The Wall Street culture that preached 'greed is good' and celebrated individual profit at others' expense has been on the ascendant for over two decades.

It spread to Singapore, which like many other countries, was led to believe that capitalism as practised in America was the fastest, surest way to economic growth.

It was a culture that encouraged those who mastered the markets to believe they operated in an amoral realm, where old-fashioned notions of right and wrong simply did not apply.

The princes of this universe were those who knew how to gamble with borrowed funds and pass off financial risk to others more ignorant than themselves.

Such values permeated society. As people watched investment bankers grow obscenely rich, they too wanted in. Who could afford to pass up the tantalising opportunities to make a pile overnight?

In recent years, the more perceptive among us began to detect signs of trouble.

I recall one local employer complaining that each time there was a bull run on the stock market, his employees got lazy.

They lost their desire to do real work, preferring instead to sit around the office exchanging notes on market movements and placing bets on stocks and shares.

Many older Singaporeans bemoaned the younger generations' lack of thrift but were dismissed as fuddy-duddies.

Rising asset prices lent credence to the belief that the more one spent, the more one stood to gain.

There seemed no reason to hold back - even if one lacked funds, one could always borrow to finance one's purchases.

Not any more.

The credit crisis that began when some US home-owners failed to meet payments on their sub-prime mortgages, is now set to cause millions around the world to lose their homes, their savings and their jobs.

Nobel laureate economist Joseph Stiglitz has diagnosed the problem as a lack of alignment between private rewards and social returns.

Financial markets, he said in his testimony before US lawmakers on the future of regulation, exist to enable the real economy to be more productive, by mobilising savings, allocating capital and managing risk, transferring it from those less able to bear it to those more able.

Instead, financial markets in the US and elsewhere encouraged spendthrift patterns which led to near-zero savings; they misallocated capital and instead of managing risk, they created it, leaving huge risks with ordinary Americans who are now bearing huge costs because of these failures, he said.

Despite failing the society they were meant to serve, executives in the financial sector continued to reap huge rewards for themselves.

They were also allowed to exploit the ignorance of others through means such as securitisation - the process of taking an illiquid asset and turning it in a security, that is, a contract that can be assigned a value and traded.

'In the old days, those originating mortgages held on to them; banks knew the people to whom they had lent money,' Professor Stiglitz said.

'When there was a problem in repayment, they could understand its nature and work with a family on a payment plan. It was in everyone's interest for the family not to be thrown out into the street.

'Securitisation was based on the premise that 'a fool was born every minute'. Globalisation meant that there was a global landscape on which they could search for those fools - and they found them everywhere.

'Mortgage originators didn't have to ask, is this a good loan, but only, is this a mortgage I might somehow pass on to others,' he added.

With the meltdown, the theory that markets know best and must be left unfettered to work their magic has been well and truly discredited.

Governments need to step in to regulate and ensure financial markets work the way they are meant to.

But beyond that, the world needs a new culture to replace that of Wall Street.

Businessman and Singapore Management University chairman Ho Kwon Ping believes East Asia should forge its own form of neo-Confucian capitalism that is communitarian in ethos, as opposed to the excessive individualism propagated by Wall Street.

The world has suffered a terrible setback to growth and development, but it has also been presented with a chance to seed a new culture of personal and social responsibility.

We need to build a new consensus that true prosperity is shared prosperity, because only then is it sustainable.

We need a new understanding of what it means to really master financial markets.

It cannot mean the kind of innovation that allows a few to sell junk bonds to others for personal profit. It must mean the kind of creativity that paves the way for people and businesses to be secure and flourish.

Surely that is a far worthier goal for young bankers to work towards than their next posh car.

In his testimony before the US Congressional Committee, Prof Stiglitz argued that the regulations he recommended would not stifle but encourage real innovation.

Too much of the American financial sector's creativity had been directed towards circumventing regulations, he said.

'Elsewhere there has been real innovation - the Danish mortgage market is an excellent example, with low transaction costs and much greater security,' he added.

The credit crisis has led to a renewed recognition of the need for markets to promote human values - integrity, fairness, protection for the vulnerable.

That is cause for optimism.

These values may be just what capitalism needs to reinvigorate itself.

[I'm all for a new culture, but labelling it Confucian capitalism sounds too much to be like cultural elitism or cultural one-upmanship; now that the west has dropped the ball, let me show you how the east would have done it. Spinning an East-West dichotomy introduces a cultural value system that serves no purpose but will only add baggage to the system. The best system is one that works. And it is not unique to confucian societies or to the east if the Danish mortgage market is any indication.]

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