Sudip Bandyopadhyay’s Blog

“To believe that there is no way out of the present crisis for capitalism is an error” said Mr. Vladimir Lenin exactly 90 years ago, in March 1919, faced with another economic crisis, While discussing the dire straits of capitalism, he made the aforesaid comment and was  unwilling to write an epitaph of capitalism. That particular expectation of Lenin’s, unlike some he held, proved to be correct enough. Even though American and European markets got into further problems in the 1920s, followed by the Great Depression of the 1930s, in the long haul after the end of the Second World War, the market economy has been exceptionally dynamic, generating unprecedented expansion of the global economy over the past 60 years.

The question that arises most forcefully now is not so much about the end of capitalism as about the nature of capitalism and the need for change. The crisis, no matter how unbeatable it looks today, will eventually pass, but questions about future economic systems will remain. The economic difficulties of today do not call for some “new capitalism”, but they do demand an open-minded understanding of older ideas about the reach and limits of the market economy. What is needed above all is a clear-headed appreciation of how different institutions work, along with an understanding of how a variety of organisations – from the market to the institutions of state – can together contribute to producing a more decent economic world.  There is no need for radical surgery on capitalism.  Adherents to Keynes’s message were so eager to get this simple policy implemented, that they failed to notice –  that the General Theory also had a deeper, more fundamental message about how capitalism worked. It explained why capitalist economies, left to their own devices, without the balancing of governments, were essentially unstable. It also explained why, anti-cyclical policies must not be adopted only when a crisis is under way. Applied in advance – they can be the guarantors of a more just and democratic society.

The domestic capital markets last week remained range bound and were driven more by global news flows rather than local events. Both the indices Sensex and Nifty closed moderately up by around 4-5%, which was triggered by short covering in local markets. Last week saw the Dow Jones moving up by around 8% with the Nasdaq also surging by about 10% typically being a bear market pull-back rally. The World Bank in its recent report estimated global contraction of about 1-2% in CY2009. This is the second institution to officially confirm a sharp global slowdown after the IMF.   Perhaps the greatest reason for hope at present is that almost all hope seems to have been lost.  The latest global sell-off of stocks has been accompanied by commentary that no longer speculates on a rebound but instead tries to work out how much worse things could get.  Last week’s comment by Warren Buffett, still easily the world’s most respected investor, that the economy had “fallen off a cliff”, only helped to underline this mood.  He had previously garnered headlines during the crisis with calls to buy stocks.  Meanwhile, “good” news is ignored.  Commodity prices are rising, which might imply an early revival in economic activity.  Oil was up 50 per cent from its December low at one point last week.  Yet no one is seizing on this as an excuse to be optimistic about shares. Extreme negativity does not mean that the market is well into the “revulsion” phase, when it finds a bottom at which all the worst possible outcomes have been priced into shares.  If the world economy somehow outperforms that most gloomy prediction, it might then even be possible to make some gains.

On the domestic front, Jan 09 IIP numbers showed negative growth for second consecutive month. Inflation kept on moderating further and reached a 3 year low of 2.43% as against 3.03% last week. FIIs sell off in cash segment continued although it has slowed down considerably. This was also reflected in pressure on the rupee which registered a low of Rs 52.03 against dollar during the week. Markets typically witnessed a bear market pull-back from technical support levels, however upside still remains capped as higher levels are being used by FIIs for exiting positions. Looking at March-end scenario, domestic mutual funds are also likely to see cash outflows which may also put pressure on markets. In the absence of any further triggers, the market on the whole is likely to remain range bound, going forward in the medium term. Any monetary action by RBI , may act as a positive surprise for the market, during this week.

( ** this is the transcript of the weekly column I write for Economic Times )