IdeasinSubvertingCapitalism&Democracy

Systemicfaultsthatcausedthefinancialcrisis

RahulP.Deodhar

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Summary

Theideaspresentedinthebookaresummarisedbelow.

ChapterI) DominatedbyFinance

1) Bargaining power helped finance take over theorganisations.

ChapterII) TheRuleofOrganisations

1) Organisations used their design to take over society.This established the dominance of finance on ourpresent‐daylife.

ChapterIII) BargainingPower

2) Bargaining power can be understood using Michael

Porter’sfiveforcesmodel.a) If applied iteratively we might be able to create

modelofoureconomy,asitexiststoday.b) Economy therefore seems to be an emergent

system.Itisfractalinnature.

ChapterIV) MoneyandBanking

1) Moneyhastworoles,mediumofexchangeandstoreofvaluea) Theroleofmoneychangesasnewinformationthat

changesthevalueofmoneyarrives.b) Money itself is a commoditywhosevalue changes

withitsowndemandsupplyequation.

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2) Money in demand deposits seems to function asmediumofexchange.a) Onlydemanddepositsshouldbeinsured.

3) Economicgrowthhasthreesourcesa) When volume growth happens in existing

transactionsb) Whennewtransactionsaredevelopedc) Whenun‐monetizedtransactionsaremonetized.

4) Inflationispreferredoverdeflation.5) Agold‐basedmonetarysystemisnotfeasible.6) Increaseinmoneysupplymustcompensateincreasein

transactionsandchangesinvelocity.7) Money is also locked in as inventory to finance

transactions.8) Therearetwotypesofvelocity

a) Across the income pyramid (top down or bottomup)

b) Withinanincomeclass9) Weneedtofindmeanstomeasurevelocityofmoneyin

clearterms.a) Possibly, velocity can be expressed similar to

degrees of separation or the way informationspreads

10) Bailoutsthatcreatemoneywithnearzerovelocityareuseless

11) Bankingreservesshouldbecountercyclicaltocreatearobustsystem

12) Crisis reduces available money indicating a thresholdmoneysupplyforgiveneconomicactivity.

13) AnyinstitutewithAsset‐Liabilitymismatchisatrisk.a) Itiswellknownthatbanksarerequiredtomanage

theserisksandhenceregulatedb) Shadowbankingsystemalsotakestheserisksand

notregulated.14) Banks should reinvent themselves as micro‐credit

markets15) Low interest rates make egotistical mega‐projects of

largecorporatesattractivetobankers.a) Theycreatelargerassetinonetransactionb) Theyarebackedbyreputedcorporates

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c) Thusmal‐investmentiscreated16) Householdsdonotfullyunderstandtheconceptofdebt

ChapterV) ExcessMoneyParadigm

1) Even expenses and assets have a hierarchy – just likeneedsa) Certain assets, like derivatives, only occur in high

incomeclassbaskets2) Excessmoneysupplydoesnotcreateinflationiflimited

torestrictedassetclasses3) Each asset class has a price expansion margin.

Restrictedassetshavehighermargins.4) Centralbanksmustmonitorinflation

a) Theymustfollowassetpricesandpriceexpansionmargins.

5) Sloshmoneyhypothesisa) Excess US money supply created a slosh money

fundthatinitiallyinvestedgloballyb) ThefundcamebacktoUS.c) It followed the asset hierarchy and created asset

bubbles

ChapterVI) GrowthatIndividualLevel

1) We need new metrics to measure growth at anindividuallevel.Twopossiblemetricsweneedare:a) Wagecontentofjobb) Jobprofileofawage

2) Itispossiblethatinflationtargetingmayberestrictingincomegrowthofcertainpeople.a) We need more investment in productivity

enhancementforthisclass.

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ChapterVII) MarketsandGovernment

1) Markets and governments both express the will ofpeopleandhencearecompetingsystems.a) But markets are exclusive and governments are

inclusive hence markets should always besubordinatedtogovernments

2) Citizens have role to play in both markets andgovernments. However citizens often get confusedbetweentheseroles.

3) Taxesneedtobesimplified

ChapterVIII) PoliticsandPower

1) Financingpoliticalsetupisstillachallengethatneedsto be resolved. It is promoting hidden agenda withingovernment.

2) Weneedrestorationofupperhouseofparliaments totheirrightfulroleoflong‐termstrategyformulation.

3) Weneedtoexaminehowweselectpoliticalcandidates.Wearefacedwithelectionvs.selectiondilemma.

4) Political parties have copied bargaining powerelements of organisations. However they have notcopied the essential elements of efficiency andinformationsystems.

ChapterIX) Attribution

1) Property rights as we currently have them areinadequate.a) They are more appropriate to single owner

scenarios.b) Theyaredesignedforfirstwaveworld

2) Weneedtoexpandpropertyrightstoincludemultiple‐ownersanddiffusedownership.

3) Weneedtoaddresponsibilitytopropertyrights.

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4) Attribution is enhanced version of property rights. Itneedsbetterinfrastructuretomakeitwork.

ChapterX) LawandRegulation

1) Roleofregulationisto:a) Defineownershiprightsandresponsibilitiesb) Defineactionc) Definethetimingofaction

2) Regulation suffers from necessary and sufficientconditionproblem

3) To contain too‐big‐to‐fail we need a systemic riskfocussedregulation.a) Sizeisnotavalidcriteria

4) Weneedtoexpandthescopeoflawtopreparefornextcentury.Weneed:a) Micro‐contractenforcementb) Costscalableenforcementmechanism

ChapterXI) TheburdenofMedia

1) Mediadeservesa lotofblamefor failure toreport thecrisis.a) Media has a flawed business model that allowed

organisationstotakeover.b) Mediafacessamedilemmaasratingsagencies.c) We need to withdraw the special rights to non‐

journalistd) We need to redefine journalism to exclude

“celebrityexperts”.

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Disclaimer

Thecontentsofthebookrepresenttheviewsoftheauthor.Theviewsdonotrepresentanyadvicetobuy,sellordealinanyfinancial instruments.The author expects the reader to exercise caution and judgement indealingwiththeideas.Theauthorwillnotbeliableforanyactionsarisingout of, but not limited to, misinterpretation or wrongful application ofideasrepresentedinthisbook.

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AbouttheAuthor–RahulPrakashDeodhar

Rahul is a buy‐side financial analyst. He has over 10 years experiencespanning manufacturing, consulting, investment banking firms. He hasadvisedawiderangeof clients includingFortune500companies,banks,hedgefundsandprivateequityfundsamongothers.He is interested in the changing equations of value, the next chapter ofwealthcreationanditsimplication.Hisinterestscentrearoundfourareasviz., investment management, economics, poverty alleviation anddevelopmentofeducation.RahulisbasedinMumbai.HeisamechanicalengineeringandMBA.Alotof his ideas are shared freely on his website and his blog. He can bereachedatrahuldeodhar@gmail.com.Linkshttp://www.rahuldeodhar.comhttp://rahuldeodhar.blogspot.com(financeandeconomics)