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Capitalism 2.0: Credit

Posted on Tuesday, Apr 7th 2009

As I have been dialoging with friends and colleagues on Capitalism 2.0, Sridhar Vembu, CEO of Zoho, wrote in response to Capitalism 2.0: Value Creation vs. Value Destruction : “I have a somewhat different take; I believe easy credit from Federal Reserve + leveraged speculation (i.e speculating with borrowed money) create a toxic combination that destroys real economic value. Short selling itself is only an intermediate symptom.

Basically artificially created credit – not backed by real savings in the economy but manufactured out of thin air by the Federal Reserve – is the fuel for the speculator. We saw that in the proliferation of build-to-flip mindset – which is an optimal strategy when you consider the credit-fueled speculation operating in the markets, allowing flipping to be successful, for a time at least. So the whole mindset of all market participants get warped.

I would put the entire blame for this state of affairs on Greenspan/Bernanke. All bubbles start with monetary policy – ALL of them! Without the easy credit fuel, no bubble can inflate much.”

I have long been disturbed by America’s obsession with living beyond its means. The value-system I grew up with in India was debt is bad, savings are good, and by no means you are to live beyond your means. Here, it’s the opposite. People constantly buy houses that they cannot afford, buy stuff they do not really need, private equity firms do business on debt, giving it the fancy name, leverage.

And here we are, over-extended in every direction, and the government is now neck-deep in debt trying to salvage the situation.

Capitalism 2.0 will need to tighten credit policies, which will have enormous repercussions. No more spending like there is no tomorrow. No more everyone must own a home. No more artificial growth.

Capitalism 2.0 needs to focus on real economic growth. Value creation. Business creation. Job creation. Demand creation. And all this from revenues, not credit.

This segment is a part in the series : Capitalism 2.0

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It´s sad that government tries to create artificial consumption this way. It´s sad that government elevates itself to think that it can solve people´s problems without changing people´s habits. Sad, sad sad.

Rafael Wednesday, April 8, 2009 at 8:09 AM PT