Knock Knock ; Who's there ? Nobody !

By any reckoning, this should be an extremely successful business. You have a fantastic distribution set up - reaching every nook and corner of your geography that nobody else can - in what is essentially a distribution business. You have an envious relationship with the consumers. In many places your representative was a trusted friend and confidante. People looked forward to his arrival. You had a state sanctioned monopoly. You have a significant price advantage. You enjoy innumerable fiscal benefits that no competitor enjoys. You have a great brand , so great that collection of your merchandise was a major hobby with an English word specifically only for this. Songs have been written about you that have reached the top of the charts - here (this is the first version - the Beatles and the Carpenters came later) , in case you are musically inclined. 

With such advantages. you should be roaring away to glory, shouldn't you ? And yet you are a colossal failure and a sitting duck in almost every country. I am referring to the business of postal services. Everywhere in the world, the Post Office is a massive white elephant and a complete dinosaur, if you'll pardon the mixed metaphors. When was the last time you licked a stamp and sent something by post  ?

Popular perception is that the business has been made obsolete because of technology. The advent of E Mail and then subsequently, the mobile phone has made postal services. fit only for a museum. Nobody writes a letter any more. So goes the wisdom. Nothing could be farther from the truth.

The postal services have failed because they have a been a government monopoly, have never considered themselves as a business and have been the best example of the worst management in history. That's why they have failed. If you need any further proof of it, simply consider the number of courier companies, who essentially offer the same services and who are thriving.

There is actually a colossal increase in the volume of physical mail. The amount of commercial mail is massive - just consider the amount of stuff, you may consider as junk mail, but which still arrives at your doorstep. Just as the advent of computers actually increased the amount of paper consumed, the advent of email has done nothing to reduce the volume of snail mail. Yes, you may have never written an inland letter for a decade or more, but consider how many times you have couriered something. 

Postal services in every country, and especially so in India, have been subjected to such bad management that it must be considered almost a crime. There is a bloated workforce. There is very poor management talent working in the organisation.  There has been no modernisation and investment whatsoever - just peep into the local post office, in case you can find it, and you will be looking at the 18th century. Governments have contributed by keeping prices of some products ridiculously low - for example to send a post card anywhere in India costs 50 paise (provided you can find a 50p coin which is almost not legal tender nowadays).  If ever there was an example required of the grossest inefficiency of the public sector and a shameful case of a proud organisation brought to its knees, this has to be it.

Why is this so. There have been other government monopolies which have been threatened by technology, but which have still done reasonably well. Why is the Post Office an universal failure ? I can postulate, but I shall leave it to Distinguished Academics (at least two members of this species are readers of this blog) to perhaps present their research findings.

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Cry for me, Argentina

Its time to change Andrew Lloyd Webber's famous song in Evita. There's no option, but to cry for Argentina. How else can you react to the awful move by Cristina Fernandez, Argentina's President, to nationalise YPF, two weeks ago ?

YPF, Argentina's largest oil and gas company is 57% owned by Repsol, the Spanish oil giant. Ms Fernandez's grouse against Repsol is that it is not investing in increasing production in YPF. This is partly true, but the real reason why YPF is not expanding production is that her government has artificially kept petroleum product prices low . No company is going to invest for very little profit. So the good lady has decided to nationalise the company. No doubt, a pittance would be paid to Repsol, well below the market value of its shares in YPF. This is daylight robbery, of the kind Ramamritham (of Vodafone fame) would feel proud.

Is this any way to treat your largest foreign investor ? Spain and the EU are up in arms and threatening a fight. Spanish companies have significant investments in Argentina, united by a common language, of course. Argentina can kiss good bye to any foreign investor from now on. Already it is an international economic pariah having defaulted on its sovereign debt in 2001. However much you hate international finance, you need investors for any economic activity.

Does any serious country nationalise anything these days ? Is there any more proof needed that nationalisation and state control of industry does not work ?

An interesting by line is the parallel with Indian politics. Cristina Fernandez is a Rabri Devi. Her husband Nestor Kirchner was the strongman of Argentina. When the constitution limited him for a consecutive presidential term in 2007, he installed his wife as President and , well ...... The plan was that he would return back in 2011 as President. Unfortunately, God willed otherwise and he died. So, the lady continues.

The worrying thing is that what this lady is doing might be read, and emulated, by another lady who's running another Eastern state in India. Thankfully, the latter lady apparently does not read any newspapers other than those that only write about her greatness. She certainly doesn't read this blog and there is little risk that the Argentinian precedent will be known to her. But still ,.........

The real worry is that Ramamritham has learnt about this move in the opposite corner of the world. You see, the problem with Ramamritham is that he reads widely, maybe even this blog !! The real worry is that he will take a leaf out of Ms Fernandez's book.

Andrew Lloyd Webber will have to produce another musical then. "Sonia" the musical, will feature the hit song, Cry for me, India !

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Bank Nationalisation

The US is struggling to come to grips with the unpleasant choice of having to nationalise some of its banks. Citicorp looks set to become the first major bank in the US to become part nationalised, with the government likely to take up a 40% stake. Frannie Mae and Freddie Mac, while not being banks, are in effect nationalised, as is AIG. In the UK, Northern Rock was the first to be taken over and HBOS and RBS are already majority owned, with every likelihood of becoming fully government owned.

Nationalisation is a dirty word in the more capitalist of economies. Through bitter experience, these countries have realised that government ownership of business does not work. Especially in the US, it would be political suicide to nationalise. And yet what can governments do in the crisis situation that we face today. It has doled out a large sum of money to Bank of America and Citibank just recently and now the market value of both these banks is lower than the amount the government gave each of them. How long can it keep shovelling money in ? Even Alan Greenspan , the doyen of laissez faire capitalism, now favours "temporary nationalisation" .

The prevailing view amongst most free market experts is that governments will have to nationalise the banks, restructure them by creating a "bad bank" to isolate the worthless assets, get credit moving again and then quickly get out once greater normalcy comes to markets. Nobody wants government involvement once the good times come again.

I am a die hard free markets man. To me, nationalisation, is a painful word. And yet, I think that the above prescription from the free market votaries is a bit rich, especially the "get out when the good times come" part.

Governments are, and will be, involved in the financial services industry for two reasons. One is that unlike any other industry, this industry carries a systemic risk which can bring down the whole economy, like what we are witnessing today. The second is that implicitly, there is a sovereign guarantee on bank deposits - no government can watch a run on a major bank and do nothing. If the government is therefore a guarantor of last resort, it is completely hypocritical for the industry to then argue that governments leave them alone, except when there is a crisis.

My humble two penny contribution to the debate. Governments have no option but to take part, or complete, ownership of the troubled banks. It is distasteful, but there does not appear to be any other alternative. Even the US Republicans are slowly coming around to this view. Post restructuring, at the right time in the future, governments divest their shareholding, making a profit for the tax payer. Its absolutely imperative that the existing shareholders of the banks lose their shirts, not the government. But even after divestment, governments retain a golden share, which will rest with an independent regulator, and not with the politicians. This golden share will ensure that extremely stringent regulations are brought to ensure that the probability of recent events recurring again are very remote.

Regulations have to make financials services a boring business. Capital adequacy ratios have to be massively increased and set in stone - unchangeable whatever be the circumstances. The nature of activities each type of financial institution can undertake, has to be severely limited. Anti trust measures should ensure that no institution becomes so big that "it cannot be allowed to fail". Very severe restrictions need to be placed on the types of instruments that can be created and traded - no more instruments of mass destruction. Perhaps an additional profit tax to create a fund for the day when another disaster will surely come - the history of the world is littered with painful bubbles. Innovation will, alas, be severely curtailed. Profitability of these institutions will become limited. Liquidity might become restricted as speculation, which provides the liquidity, will diminish if the opportunities for making extraordinary money are not there. Maybe every economic opportunity may not get the funding it deserves. But so be it.

Government should not run businesses, for sure. But they must be the schoolmaster, with cane in hand and corporal punishment freely allowed.

Financial services should become an utility industry. Dull and boring maybe. The best brains may not want to work there. Perhaps that might be to the good. We'll know we are safe when the banker is mentioned in the same breath as a train spotter.

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