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The developed world is officially in recession. Communist China is losing it. Independent India is fumbling through. People worldwide are losing jobs while others are barely getting by. While governments announce stimulus packages and economic experts do fire fighting, there is no getting away from the fact that these are short-term band-aids as the global economy is in the ICU for surgery. There is no magic wand to wave so we can go back to the way we were.

Watching the power brokers, financial experts and corporate leaders look for a way out, debating heatedly and tearing their heads off looking for a solution and fighting in the process has made most people realise that we are past the stage of A stitch in time saves nine. So, who will take the lead in getting us out of this royal messmultilateral institutions, governments, independent regulators or businesses themselves?

Multilateral Institutions: There is a group of people who think multilateral institutions like the World Bank and IMF should step in and take over the reins from national and multinational banks that are stuck with toxic assets. However, the question ariseswho regulates these multilateral institutions? This will lead to more power play and lobbying by certain countries at the expense of others. Multilateral institutions will not be guided by economic fundamentals but by global politics. This is jumping from the frying pan into the fire. It will only worsen the situation.

Governments: Most politicians including President Obama make the case for increasing the role of the government. This is suggested in two ways. One, the government will increase spending tax payers money by increasing salaries of governmental employees like the Indian government. The second is through stimulus packages with conditions that will effectively make the private sector become puppets of the government. Letting the government into the private sector and have them dictate terms on what can/cannot be done will lead to nationalization of the industry. We had this happen in India with the License Raj and the slogan Be Indian, Buy Indian which only killed competition and increased brain drain. All these measures defy economic sense, increase protectionism and kill competition.

National Regulators: An independent body which audits and makes sure financial institutions dont commit fraud. This has been tried but it has failed miserably like in the case of Satyam and Enron. It is also not possible for regulators to keep track of global movements of capital especially in complex international transactions. Therefore, more regulation is not the answer as it doesnt necessarily increase accountability.

Business Companies: Businesses can take the lead. However, currently, they are unable to function normally due to a multitude of factors, the main problem being that they had invested their money and profits in financial institutions, which due to bad economic practices and incompetent management went under. When these banking institutions drowned, they took the money of the companies with them. So, currently, businesses are like humans in hospitals recovering from a major operation and it will take time for them to get back to normal.

So what do we do? We need to understand two things before we find a way out.

Getting Back to Economic Fundamentals
This might sound nice and you may have heard it several times but what does this mean? It means three things:

You cannot consume more than you produce: This is a fundamental principle and is taught in primary schools. Remember the fifth standard Math lesson on Profit & Loss? Well, if you have forgotten, play the game Lemonade Tycoon to refresh your memory. Looks like heads of governments and financial institutions should play it as well as they seem to have forgotten it. If you consume more than you produce then you are in debt. If you get someone to finance your debt, we enter power play. If you borrow Rs 1, you are in their power. However, if you borrow Rs 100 bn, they are in your power because if you dont return it, they will lose both principal and interest. Many countries like Japan and China thought it wise to lend money to the US and other countries, so the citizens of these countries would be able to spend it to buy Japanese and Chinese manufactured goods. This way, Japan and China posted massive growth rates. However, during a meltdown, the borrowers are unable to buy and payback interest. This has led to failure of these economies.

Assets and Liabilities: Assets is what puts money into your pocket and liabilities is that which takes money out from your pocket. Lately, this definition has become fudged. For example, many people who have home loans assume their home is their asset. It is important to ask whose asset? In the case of a home, for which you have taken a bank loan, it is the banks asset and your liability until you have paid off the loan. Just because you live in it does not make it your asset.

Speculation vs Trade: Financial institutions, especially investment banks, ignored basic economics facts. They created artificial value for stuff that was worth nothing and invested their depositors money in it. So, it isnt surprising that it all went bust. This is especially true for derivative trading which governments of different countries allowed because they make money though it is worse than gambling as it ignores demand and supply. By blocking basic items that are required by the manufacturing industry and inflating the cost price to such a level that leads to increase in production cost, increased prices of goods that make industries unfit to compete in the open market, effectively killing them. This leads to slowdown in the overall growth of the economy and rising unemployment, making it a vicious cycle.

Not Letting Power Mask Incompetence
The questionhow did so many financial institutions with over decades/centuries of practice just collapse? If they didnt collapse, they are barely able to make their ends meet. This is because most people in todays financial sector are incompetent. They got there because hiring practices in the globalized era changed from looking for competent people who can handle any situation to hiring powerful people or those related to powerful people so they can use influence to get things done. Ability and talent was replaced with incompetence and who do you know. This has happened across sectors and especially in the government and financial sectors. Now businesses are effectively crippled as incompetent people are unable to do trouble shooting and problem solving. The only way out is going back to the fundamentals:

Ban derivative trading: Before globalization, people would buy actual shares with real cash and would keenly follow the growth of the company. Financial institutions, which lent or invested money of its depositors would monitor the company as it was in their self interest to do so. Businesses wouldnt expand like crazy but would be cautious with their money and investments. The investor, financial institutions and businesses would all be able to monitor the other as they were accountable to one-another. Derivative trading has made this impossible as global financial institutions, foreign governments and individuals are able to invest and pull out money at will. This is even worse than casino gambling as in a casino only one person will winthe player or the casino. If one wins, the other loses and therefore we can keep track of the money. In derivative trading, tracking money and accountability is non-existent. If so many people and businesses are losing money, somebody is gaining, as money cannot vanish. Who? No one knows.

Independent monitors: While government projects should be open to global competition, quality control and constant monitoring by independent monitors should be made mandatory. The way we have NGOs for human rights, we need them for monitoring execution of large governmental projects. As Chinese goods have proved repeatedly, cheap is not necessarily better. In a country like ours, riddled with corruption, the only way to monitor proper execution of a project that takes into account quality and timely execution is independent monitors that could include people of the area who will be affected by the project.

Change hiring practices: Competent people who can do trouble shooting and problem solving on their own should be hired instead of I know a powerful person types. Hiring should be based on ability and talent instead of need and pull. In the case of government owned institutions like public sector banks, employees should be given shares of the institutions, so they have a personal stake in their performance. Incompetence should be punished by unemployment and jail terms as it is the taxpayers money which is at stake.

Global to Glocal: If a foreign investor, financial institution or government wishes to invest, they should be audited in the country where the investment is made and should be subjected to the same laws applicable to a local investor. This will get rid of short-term speculators who create artificial value leading others to invest in the same. Glocal is not protectionism the way Obama proposes or temporary nationalization that Indian government suggests, or conditional bailouts of companies that others recommend. Global institutions can exist but they should be in the country for the long term. This can be done only if their operations are localized, not through joint ventures, but they should physically exist in each country of operation where their investments should be for a minimum of five years or more. In addition, instead of allowing joint ventures with local companies as it is now being done, they should be required to exist locally, so they can be held accountable if they commit fraud. This will eliminate fly-by-night operators and short-term investors who dont think twice about making a quick buck and pulling out when needed.

It is time for competent people to come back and take up the reins, and for governments and power brokers to step aside. It is time to go Glocal.

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