Saturday, July 02, 2022

Roe v Wade: the economics of abortion

Martin Sandbu, writing in FT, argues that the recent US Supreme Court judgement overlooks the economic implications of abortion and the judgement is flawed for that reason. (Please see my earlier post below first).

In his judgement, Justice Alito said that a balance has to be struck between the "interests of a woman who wants an abortion" and the individual states'  "interest in protecting fetal life". It was for individual states to determine where that balance lay.

Sandbu argues that not granting abortion in the interest of protecting fetal life has serious economic implications for the women involved. He cites a study that has shown that women denied abortion are more likely to end up in poverty than those who were not. There are other studies that have shown that women who had the right to abortion had a better chance of finishing college and getting a professional occupation.

The right to abortion not only has implications for poverty and inequality in society, it also influences the equations between the sexes. Besides, Sandbu argues, those who profess concern for fetal life have not shown much interest in providing the necessary economic support to those denied abortion and who are compelled to raise children in trying circumstances. The anti-abortionists often are also against welfarist measures.

These are all valid and fairly incontrovertible points. But how does change the fundamental proposition put forward by the US Supreme Court? Faced with all the above facts, it is legislatures that have to make choices and they have to make those choices based on their understanding of the will of the people. If people in a given state believe that denying abortion results in an incorrect balance between individual and societal interests, they are free to give expression to their will through the power of the ballot.

I'm afraid the point I made in my earlier post on the subject does not change: the Supreme Court ruling is about what the Constitution says, it is not about taking a position on abortion

Roe V Wade: it's about interpreting the US Constitution

There has been outrage over the judgement of the US Supreme Court overturning the historic judgement in Roe V Wade that affirmed women's right to abortion. 

A commonly heard observation is that right-wingers, who hate abortion, have been planted in the Supreme Court by Republican administrations and they have had their way.

One needs to be clear about what the US Supreme Court has said. The Court does not say that abortion is bad and should be outlawed. No, it says that the US Constitution does not include the right to abortion. So, if people want the right to abortion, it is up to individual states to make legislation that reflects the will of the people. 

The SC is interpreting the Constitution as it understands the document. It is not taking a position on abortion. If the people of the US want an overarching legislation that confers the right to abortion across states, it is is up to Congress to make suitable amendments to the US Constitution. I'm afraid many of the harsh comments on the judgement seem to overlook these points.

FT has provided excerpts from the judgement that make the above points crystal clear. Here is a quote from the majority judgement written by Justice Samuel Alito:

We hold that Roe and Casey (another ruling on the abortion question) must be overruled. The constitution makes no reference to abortion, and no such right is implicitly protected by any constitutional provision, including the one on which the defenders of Roe and Casey now chiefly rely — the Due Process Clause of the Fourteenth Amendment. That provision has been held to guarantee some rights that are not mentioned in the constitution, but any such right must be “deeply rooted in this nation’s history and tradition” and “implicit in the concept of ordered liberty”.

A concurring judgement by Justice Cavanagh provides the clarification I mention above:

 To be clear, then, the court’s decision today does not outlaw abortion throughout the United States. On the contrary, the court’s decision properly leaves the question of abortion for the people and their elected representatives in the democratic process.  ..... In sum, the constitution is neutral on the issue of abortion and allows the people and their elected representatives to address the issue through the democratic process. In my respectful view, the court in Roe therefore erred by taking sides on the issue of abortion.

 

Saturday, June 11, 2022

Fintech fantasies: banks aren't going to disappear

There is talk of 75 digital banks coming into the banking sector in India. There has also been talk of Fintech, of which digital banks are a subset, posing a threat to traditional banks.

I have looked at the literature and the evidence thus far. I don't buy the argument that Fintech poses a threat to banks. 

Here is my article in BS, Fintech challenge is a fantasy.

Here is the article in full for those who can't access the article at the website.

FINGER ON THE PULSE

T T RAM MOHAN

 Fintech challenge is a fantasy

Digital banks are a threat, not so much to banks as to banking stability on account of the systemic risk they pose

 

The government is poised to launch 75 digital banks soon, so the headlines proclaimed. If you thought a sleek set of new banks was going to challenge incumbents, you would have been mistaken. What will be launched are Digital Banking Units (DBUs). These are a new way of making available digital products of existing banks and non-banking financial companies (NBFCs).  

What exactly are DBUs? The Reserve Bank of India (RBI) has a definition that runs into four lines. In essence, these are outlets where people can avail of banking products mostly on their own. There will be personnel to assist them but these will be kept to the minimum. In other words, a DBU can be seen as a branch that operates mostly in a digital (or paperless) mode. 

If the idea is to increase penetration or inclusion in under-served areas, scepticism is in order. Even highly literate customers prefer the convenience of walking into a normal branch to meet many of their banking needs. To suppose that in under-served areas, people will be able to help themselves to any but the most basic banking products (say, deposits) is a stretch. 

DBUs may be able to grow deposits quickly but they are unlikely to do be able to do much on the asset or fee income side. To be able to push a range of digital products in under-served areas, banks will need adequate and highly trained staff.  . At best, by eliminating paper, DBUs can reduce processing time and help enhance employee productivity.  

DBUs are one way in which digital products can be offered. In this model, the digital products stay within the bank. Digital products can also be offered through digital banking subsidiaries or by standalone digital banks. In the late 1990s and early 2000s when online banking came into vogue abroad, banks did experiment with digital banking subsidiaries. These did not work and were subsumed into the parent. r Standalone banks based on internet banking did not survive either.

Standalone digital banks (also called neo-banks) have made a comeback, thanks to the mobile phone. They are part of the broader category of players labelled Fintech. Fintech, which is the provision of financial products through electronic platforms, can happen in three ways. One, through entities that compete with banks (such as digital banks). Two, through entities that collaborate with banks by providing a range of services, such as customer acquisition, KYC checks, loan processing and screening, loan collection, risk management, customer management and so on. Three, through entities that eliminate the need for financial intermediation, for example, peer-to-peer lending platforms.

The most direct threat to banks comes from standalone digital banks. These have not happened in India. But we do have evidence of their record elsewhere. The Global Financial Stability Report (April 2022) provides a useful summary. The threat posed by digital banks, it turns out, is vastly exaggerated. 

Digital banks have grown fast in places such as Brazil, the UK and South Korea. The best among them have market capitalisation comparable to that of the top banks, thanks to rapid loan growth. The high valuations ignore the higher risks that digital banks take and their poor margins and profitability.  

Digital banks don’t quite take banks head-on. They typically target high risk customers that banks tend to avoid. These include: Individuals with lower incomes or lower credit scores, commercial real estate and unsecured lending.  Despite the higher risks they take, digital banks have a lower provision coverage than traditional banks. Their yields on loans are about the same. They have a less loyal depositor base but their liquidity ratios are lower.  

Digital banks’ potential for fee income is lower because they deal with lower income clients. You might think they would have lower operating expenses because of the absence of brick-and-mortar. Not at all. What they save on branches is more than offset by huge marketing expenses. Not surprisingly, most are loss-making.   So much for digital banks  threatening traditional banks and taking away market share from them

Digital banks are connected with banks through the inter-bank market and also through the various services they provide. They are lightly regulated at the moment. But as they grow bigger, regulation will have to be tightened, as the GSFR report observes. Digital banks are a threat, not so much to banks as to banking stability on account of the systemic risk they pose. 

That goes for the broader world of fintechs too. Fintechs have made an impact in the payment space. But that does not mean that they can mount a serious challenge to the core banking functions, taking deposits and making loans.  

For one thing, the experience of the past two decades suggests that the centrality of the branch to banking remains. Digital banking cannot wholly substitute the branch when it comes to customer acquisition. It is a tool for customer retention, an added service that banks provide by way of holding on to customers. 

Branches remain relevant, first, because of the sense of solidity they give customers, the ability they confer for cross-selling more than the most basic products and as a 24*7 means of advertising a bank’s presence. As mentioned earlier, digital banks have to spend enormous amounts on acquiring customers.   . Lacking any overall cost advantage, digital banks necessarily have had to seek out riskier, higher-yielding products and customers.

Secondly, banks have not been idle in response to the perceived threat from fintech. They have adopted many of the tools of fintech  and sought to reinvent many of their businesses. They have acquired fintechs. They are collaborating with fintechs by outsourcing activities they think fintechs can do better. 

We have seen this happen with other challengers or innovators. NBFCs were at one time seen as a big threat because they were nimbler than their bigger banking rivals. Banks responded by themselves offering the high-yield products that were considered the preserve of NBFCs. They have done so either within their existing business or through NBFC subsidiaries. We have reached a point where an NBFC’s nirvana lies in turning itself into a bank! The same has happened with micro-finance. Banks have found one way or another to venture into micro-finance. Ditto with payment products. 

What players such as NBFCs, micro-finance institutions and payment entities have done is to get banks to think through their business models and get better. Fintech is likely to serve the same purpose. The notion that fintech will displace banks is a fantasy. Banks will imitate fintechs or swallow them, they aren’t going to disappear.

 







Thursday, June 09, 2022

Russian default will not be Russia's fault

When the West responded to the Russian military operation in Ukraine with brutal sanctions, everybody said a Russian default was imminent. Russia's foreign exchange earnings would collapse, the ruble would go through the floor, the Russian economy would be brought to its knees and Russia would renege on its sovereign dues.

Nothing like that has happened. Russia's export earnings from oil and gas have boomed as  prices have shot up and the West has been unable to avoid buying Russian oil and gas. The Russian ruble has turned out to the best performing currency in recent weeks.

If a Russian default happens, it will not be because Russia does not have the means to repay debt but because sanctions will not allow Russian payments on debt to go through the international system. Until now, servicing of debt payments was exempt from sanctions but the US has now allowed the exemption to expire. Russia has wired a $ 100 million payment that was due but it's not getting cleared. Too bad for the bond holders.

In the case of many of the borrowings from abroad, there is a clause that allows Russia to repay in ruble. For that, bondholders will have to open ruble accounts with Russian banks. That may also not be possible under sanctions. In that event, a Russian default will happen. Perhaps for the first time, a default will happen not because the borrower can't pay but because the lender can't accept the payment! It certainly won't be Russia's fault. 

By the way, whatever happened to the financial crash in China that was supposed to happen after the Evergrande default? No crash has happened, the news of the crash has disappeared from the media.  

Saturday, May 21, 2022

Gerhard Schroeder: How free is the Western world?

Just how much freedom is there today in the West? We know that after 9/11, many governments, including those in the US and the UK, armed themselves with sweeping powers to take away an individual's freedom on suspicion of links with terrorism. There is very little recourse in such cases.

But leaving aside restrictions linked to terrorism, just how much freedom of expression do people have even otherwise? You may not be jailed for certain things but the social and economic costs of veering from the mainstream or establishment line can be pretty steep.

A classic illustration is the hounding of Gerhard Schroeder, former Chancellor of Germany, no less. Schroeder is a friend of Putin's and he has refused to join the strident condemnation of Putin in his country from Russia's actions in Ukraine. Schroeder is certainly open to criticism for his position. But we are seeing is a lot worse. 

Schroeder was Chairman of the supervisory board of Rosneft, the Russian oil company, and Chairman of the shareholders' committee  of the Nord Stream gas pipeline projects. Schroeder came under pressure to quit these positions after the Russian operation in Ukraine. When he refused, he lost access to his office at the Bundestag. Next, the EU parliament drafted a resolution extending sanctions to individuals sitting on the boards of Russian companies. Schroeder has now decided to quit the two boards. 

Schroeder has also faced a storm of outrage consequent to the alleged atrocities in Bucha caused by Russia, he told an interviewer that the incident would have to be investigated, a perfectly reasonable stand to take! It is just not possible to have a legitimate disagreement on some matters in the supposedly free societies of the West. If this is the plight of a former Chancellor of Germany, just imagine what dissenters in, say, the media or academic would have to face.

India has come in for severe criticism in the Western media in recent years for displays of intolerance of dissent. Without in any way justifying acts of intolerance in India, it is time to tell the West: Physician, heal thyself.

Friday, May 20, 2022

Loophole in Places of Worship Act 1991?

The Places of Worship Act 1991 has been in the news. Very simply, it is Act of Parliament whereby the religious character of any place of worship, as it existed in 1947, cannot be disturbed. An exception made to the Act was the dispute site in Ayodhya.

If that is so, how could  the mosque in Varanasi (Gyanvapi) come under challenge? Meaning, how could any court entertain a challenge? That is the stand of prominent Muslim groups. Since the character of the place cannot be changed due to the Act, where is the question of any court entertaining any petition related to the mosque?

I can't pretend to be a legal expert. From what I have read in the papers, it appears the Act has another exemption. It exempts places of worship that qualify as ancient monuments. So, if there is a Shivalinga inside the Gyanvapi mosque, as the Hindu petitioners in the case content, does it become an ancient monument so that the Act does not apply to this site? And if it does not, does that mean access to the site will have to divided between Muslims and Hindus? Or can the Hindus claim the site itself/

In the Ayodhya case, the Supreme Court decided the matter looking at the case as one of a land dispute. The party that could establish that it had had greater access to the land over the centuries won, namely, the Hindus. How would the Gyanvapi dispute be resolved if the petition of the Hindus is considered maintainable?

I await the wisdom of legal experts.

Wednesday, May 18, 2022

Can boards ever keep executive pay in check?

My answer is a blunt 'No'. Boards cannot get executive pay within reasonable bounds- they will almost always tend to err on the excess. 

The latest case in point is JP Morgan. Shareholders at the bank have voted against the pay package recommended by the board for six top executives at the bank, including CEO Jamie Dimon. The package amount to -umm...- only $ 201.8 mn. Dimon stands to get $50 mn from a one-time award. The shareholder vote on exec pay is non-binding in the US. But it does send out a strong signal. Boards may pretend to notice the signal but it is unlikely to change board behaviour a great deal.

The board has conveyed that it is giving a large one-time award to Dimon because it wants him around for many more years. Dimon is 65 and has been at the helm since 2005, that is, for 17 years. If the board thinks nobody in the world can replace Dimon, then it is confessing to a major failure: it has failed to find a successor. It is also acknowledging that JP Morgan's business is unsustainable- there is only one person who can run it.

How absurd! It is not that Dimon is irreplaceable. It is just that the board finds it expedient not to disturb the status quo. And one good reason for that might be that disturbing the status quo could be that any change would be annoying to the CEO.

Boards just can't get executive pay right any more than they can get succession planning right. There is a common reason for the two failings. Boards are in thrall to CEOs. Board members owe their appointments, in large measure, to the CEO and they owe their continuance in office to the CEO. (Forget the nonsense about the Nominations Committee of the board deciding board memberships. Few boards would induct a board member without a nod from the CEO. It would be rare for a board to turn down names proposed by the CEO himself.). And a board membership at the top firms in the world means something- the money is good and the prestige riding on a board position is not to be sniffed at.

I can only reiterate what I have said several times before: we need to change the way board members are appointed if we want serious board room reform. Board members must be appointed by multiple stakeholders- shareholders, banks, financial institutions, employees. Self-selecting boards are a recipe for dysfunction- and spiralling CEO pay, among other things. 

Monday, May 16, 2022

Narcisstic bosses: how does one deal with them?

An article in FT that uses Robert Maxwell, the newspaper baron (long deceased), as a model of a narcisstic boss has a short answer to the question pose above: find another job. But that, as it suggests, is easier said than done: we all have financial needs, so we can't chuck up a job at will.

Very true. But there is another problem as well. There is a high probability that the organisation you move to would also have its share of narcissistic bosses. And the higher you go, the greater the narcissism.

In a book I wrote in 2015, Rethinc: what's broke at today's corporations and how to fix it, I cited a study that showed that the proportion of psychopaths among CEOs was far above that in the general population. Psychopathic traits include things such as a lack of empathy, a tendency to manipulate others, etc. These are qualities one would also associate with narcissism. 

Success in the corporate world- and, perhaps, most walks of life (perhaps, with the exception of advanced research)- is won on the strength of such qualities. This may not sound very pleasant but the heights of success are not for the faint-hearted. It is through a certain disregard for scruple, ruthlessness and self-admiration that people rise. Narcissism breeds success which fuels more narcissim. At the very top, the individual begins to think he is infallible, so he has no patience for anything other than adulation and flattery. He certainly has no room for dissent.

When people go into meetings and stay silent, heartily endorse whatever the boss is saying or indulge in outright flattery, they recognise that these are the things that will help them survive and prosper. They understand they are dealing with a narcissist, if not a psychopath, and fall in line because the costs of not doing so are painfully high. There may be a few honourable exceptions but what I have described here is pretty much the norm.

What can we do about it? Get together will colleagues and take the matter to the board ? No way. There will not be any takers for the petition. And it's no use going to the board because the board too has its fair share of narcissists who will not be able to relate to things such as fairplay and justice.

In government, your job is protected and you can choose to forswear ambition and do your job in your little corner. Alas, in the private sector, there is little choice other than to grow a thick skin. Psychopathic bosses are the primary reason why organisations are so toxic and one reason those toiling in them nurse all kinds of ailments. 

If that sounds a trifle gloomy, please do let me know if you have better suggestions.