Banking on Neo-Confician Capitalism

Low interest rates and easy loan terms encouraged people and businesses around the globe to live beyond their means. Those loans were based on assets that have since plummeted in value, explains Ho Kwon Ping, chairman of the board of trustees for Singapore Management University. Investment banking and speculation create instant winners and losers, increasing income inequality. He explains that “The globalisation of capitalism in the past half-century has resulted in two major socio-cultural variants”: Western-style capitalism with its emphasis on risk-taking and entrepreneurship and a less common communitarian form based in Asia. That latter form, or neo-Confucian capitalism, could, “if thoughtfully enhanced, nurtured and developed, replace the highly individualistic, Darwinian ethos of Anglo-American capitalism, or the state welfarism of Euro-capitalism,” writes Ho. Regulation alone will not end the problems of speculation, he notes, warning that income inequality threatens the stability and prosperity of society. – YaleGlobal

Banking on Neo-Confician Capitalism

Ho Kwon Ping
Friday, September 5, 2008

It's university graduation season again and invariably, many graduates I encounter want to become investment bankers.

In less than a year, financial stocks have plummeted by over 70 per cent in value. Millions of Americans and Britons have lost their homes. Countless millions more around the world have seen their net wealth drop precipitously, possibly never to recover within their working lives. Who to blame? Investment bankers, of course, who devised all those sub-prime mortgages and other cute "products" with long, exotic names.

As someone noted, never in history have so many people lost so much money

due to the actions of so few.

Why then would young graduates want to be investment bankers? Well, to begin with, because investment bankers reward themselves pretty well, regardless of how others are doing. Bonuses paid in London's financial district totalled f6 billion 6815.7 billion) this year, though the total losses of financial services companies were 10 times greater.

And in case you think that pay should correlate with performance, don't be naive. Last year, the CEO of a large private equity fund walked away with a US8350 million (SS499 million) bonus, though his just-listed company's share price had tanked by 37 per cent.

Nobel laureate Joseph Stiglitz recently noted that the Wall Street financial system "paid bankers to gamble. When things turned out well, they walked away with huge bonuses. When things go badly, as now, they do not share in the losses. Even if they lose their jobs, they walk away with huge sums".

To be fair to the maligned financial engineers, others also got rich during the good years. In 1994, the average American CEO was paid about 90 times more than the average blue-collar worker. Today, it is 180 times.

But it is still mainly bankers who buy the thousand-dollar wines and Bentley convertibles. In America's Fortune 1,000 industrial companies, CEOs make around

two to five times more than their immediate subordinates. In Wall Street, the top

dog earns around 20 to 40 times more than his immediate subordinates.

It's not surprising then that income inequality in the United States is at an all-time high. The share of the national wealth owned by the top 1 per cent of Americans has more than doubled – from 20 per cent in 1976 to more than 50 per cent today. Through changes to the tax system, an American private equity partner can today pay less taxes than the cleaning lady in his office, according to economist Paul Krugrnan.

How did all this happen with no one complaining? The simple answer is that in a period of continually rising asset prices – in this case, of houses – living standards became detached from income and tied to asset value. People simply borrowed more to finance their lifestyles, and this was possible because of the housing bubble.

When was the last time the US had nearly the same income inequality as today? Answer: 1929, the eve of the Great Depression. The 1920s was a decade of enormous wealth and booming prosperity for the very rich and, as one historian noted, it was fuelled by "the magic of leverage". Sound familiar?

Back then, it was through investment trusts sponsoring one after another in one huge financial house of cards. Today, it is home owners leveraging off ever-rising home values to borrow more than at any time in American history. It is private equity funds borrowing over 30 times their equity, to buy inflated assets and yet return stellar profits to investors.

The globalisation of capitalism in the past half-century has resulted in two major socio-cultural variants. The dominant variant – Anglo-American capitalism – was built on very high income inequality as the incentive for risk-taking and wealth creation and had all its flaws recently exposed.

The genteel conspiracy between Wall Street and its compliant multilateral- agency partners (read: International Monetary Fund) is now breaking down. The legitimacy of this collusion, once never questioned, has been frayed by blatant hypocrisies. As one observer noted, the sub-prime mortgage crisis and its aftermath have done to US leadership in financial markets what Guantanamo Bay has done to the US moral high ground in human rights.

The German President has even derided private equity fund managers as "locusts" and sub-prime peddlers as "monsters", and called for a return to what he called "a continental European banking culture".

However, the European model, influenced – "infected", Americans would say – by democratic socialist tendencies after World War 11, produced welfare capitalism with its stifling effect on individual initiative and entrepreneurship. It's not a particularly inspiring alternative to Wall Street.

Successive financial crises have proven one consistent point: Regulation by itself cannot prevent excessive speculation or collusive behaviour. Greed fuels speculative booms and aggravates busts, but it can only be reined in, not by regulation alone, but by a moral framework – the value system of the entire society, within which business is practised.

As East Asia emerges as a major economic region, it should not simply adopt the Anglo-American or European models, but create its own alternative. The common, recurring socio-ethical tradition of East Asia is its communitarian, family-focused webs of mutual obligations. This communitarianism can, if thoughtfully enhanced, nurtured and developed, replace the highly individualistic, Darwinian ethos of Anglo-American capitalism, or the state welfarism of Euro-capitalism.

Of course, critics will argue that this neo-Confucian capitalism is compatible with crony capitalism, as the 1997 Asian financial crisis highlighted. They have a point. But the flaws of East Asian culture do not negate the need to develop a socio-cultural alternative to the Wall Street ethos. Indeed, they only make more urgent that East Asian thought leaders refine and redefine neo-Confucian values.

After all, the only long-term solution is to change a society's entire reward system, and this can be done only if society changes the ways it views itself.

US presidential hopeful Barack Obama got it right when he said the country has lost "its sense of shared prosperity". It is the shared sense of prosperity which is at the very heart of neo-Confucian capitalism, and which East Asia needs to rediscover as the root of its success and the inspiration for its future.

The writer is chairman of the board of trustees of the Singapore Management University.

Copyright © 2008 Singapore Press Holdings Ltd. Co.