End of the free market era?

As I write this, the world is waiting with bated breath for the US govt to approve the bailout plan scheduled for voting tomorrow. World over stock markets have tanked and soothsayers have been active with their doomsday scenario. And the recent developments in the US financial markets which have been swift & dramatic have added to all this tumult. 

A Jurassic sized drama is being played out, Gargantuan sized companies going kaput & filing for bankruptcies, others being bought or sold in the marriage of Titans and the biggest of all, the US Fed reserve amidst all this drama appears in its bailout act as the benevolent Godzilla in the financial Armageddon.

Alan Greenspan may have termed this “Once in a Century Crisis” but he could well have sown the seeds of it during his tenure as the Fed chairman. His era of low interest rates spawned an economic boom that built up the Housing bubble, and the free markets fed on it with typical capitalistic carnivorous appetite that left several,now defunct Investment Banks & Financial Institutions choking with toxic assets. 

The moot point in all this “How did a systemic collapse happen in one of the most mature markets in the world? Where were the checks & balances in the system?”. Now I am speaking of a system that has given the world standard practices like SOX compliance, GAAP etc., ignoring systemic risks. Talking of risks, author & economist Peter Bernstein wrote in his book “Against the Odds’ how the financial sector has spawned a new breed of experts who make it a job to peer into the future and figure out the kind of risks that lie arrayed there. 

Didn’t they see it coming? or to be more precise, what were they doing when the so called ‘excesses’ took place? . Well at least you didn’t need an expert to figure out what would happen if NINJA (a type of low credit history customer with no income & job) class of borrowers were being financed by the system. All these kinds of assets went bundled as complex products and sold perhaps in search of new sources of profit. And the contagion spread, now threatening global financial markets.

The apostle of free markets, Milton Friedman had systematically built up a case for free markets that became the bedrock of US policies after the Great depression . Milton had argued for free markets that are devoid of govt interference by holding the case of great depression against Govt mismanagement. But today as the financial system chokes of toxic assets & slides into a very likely recession, the Govt in a U turn has swiftly gone about effecting bailouts, brokering deals and pursing for tougher regulations perhaps as anti thesis to Friedman’s views. Will the US of A revert to pre depression era laws signaling the end of free markets remains to be seen .

The Indian Road to Perdition

Almost every year after the monsoon season, a clichéd story unfolds on Indian Roads. A good season and the receding rains would have left behind scarred roads battered with potholes. Thereafter for some months and possibly until the next monsoons commuting becomes a part of one big Indian Jamboree . 

Imagine the narrow congested roads where motorists, bicycles, 3 wheeled rickshaws, the odd Tonga or bullock cart not to forget stray cattle and pedestrians forced to walk on the roads by hawkers on pavements, all jostling for their bit of space in a unruly manner and dodging the potholes at the same time!

Mofusil areas as compared to cities i guess bear a bigger brunt of this catastrophe. By the time, the Govt and local authorities respond with their elephantine inertia, the larger public would have resigned to their fate on the roads & would have gotten used to it. Usually the response mechanism or the remedy brought fourth is worse than the ailment, potholes filled with mud and loose gravel accentuates the pain by making the roads even more un-commutable not to mention the dust and dirt it raises to make it one hellish experience. 

For a country with the second largest road network in the world, over 3.3 million kilometres, & carrying over 40% of total traffic, it’s nothing short of monumental tragedy. Yet everything trudges on. By World Bank estimates, every year bad roads cost India about 3-4 per cent of its gross domestic product which was more than $1.3 trillion in 2007.

The Govt every year spends Crores of rupees through its I&B ministry educating drivers on how to drive steadily and save precious fuel. But the same authority is oblivious to the monumental wastage and; drain such bad roads bring to the national exchequer . Actually bad roads put a lot of strain on multiple systems and its cascading effect on productivity loses & wastage of resources could be running into billions of rupees. 

Lets begin with the simple laws of motion, when the traffic grinds to an average of 5-10 kms instead of the normal 25- 40 kms speed in cities, the frequent gear changes & breaking increases the average fuel consumption by at-least 25% - 40% across all category of vehicles. The slowing moving traffic means that the efficiency of a city’s traffic management system’s (measured in peak number of vehicles plying on road) also comes down. 

Add to this , the wastage on business productivity when people reach their workplaces late or business deliveries that fall behind schedule. Anybody who understand the concept of time value of money will comprehend the kind of loss I am talking about. Third, for inter city/inter state transportation , bad roads means vehicles arriving late on schedule and higher breakdown rates on road. The costs of rescheduling & maintenance of Govt run transport vehicles itself might run into several hundred Crores of rupees.

The opportunity cost of all this vis-a-vis a viable alternative or better road management solution does not seem to be on the agenda of town planners, state govts & the central planning commission. What is needed a comprehensive policy on surface transport mgt which lays emphasis on the uniform usage of standard road laying & maintenance procedures. 

Thankfully a trend has begun to surface in the Mumbai & Kolhapur municipalities, the former has successfully tried a ‘carbon core’ method of filling potholes which uses water as a primer & has been certified by IIT Mumbai and Central Road Research Institute as a durable option. The latter has decided to privatise the entire road infrastructure in Kolhapur city and award the maintenance and operating contract to a prominent Infrastructure Company. What’s unique about this model is that it won’t create any additional financial burden on the local citizens or authorities.