Price of Prejudice

November 15, 2008

Sankarshan Acharya
Pro-Prosperity.Com and Citizens for Development

Prejudice comes at a price.  The price can sometimes be huge to wipe out trillions of dollars of wealth of nations.  This note is about prejudice towards a new economic paradigm of Prosperity amid Stability that I happen to have propounded. 

As someone pursuing for a paradigm designed to serve the best interest of humanity, I am not perturbed by either praise or prejudice.  This missive simply stresses the need of this new paradigm of governance for mankind that is now disgruntled with communism, socialism and laissez faire capitalism.   The new paradigm has evolved through my research and experience. 

Experience

I wrote a paper and a book in 2003 to detail the reasons for an impending financial and banking disaster lurking under the veneer of the government-hooted GDP growth in USA.  I sent a memo[1] and a published paper on Safe Banking[2] to the U.S. Congress, proposing preemptive policies in 2003 to avert a simmering crisis.  The policies were based on my research published in major journals like the Journal of Finance and on experience at the Federal Reserve Board, the Federal Deposit Insurance Corporation, major banks and rating agencies since the Savings and Loans crisis. 

The Congress had then sought testimonies and a conference from the Federal Reserve Board on the safety and soundness of the banking system.  But the guardians of the system declared then that the banks were safe and sound.  Now the same guardians have admitted their mistakes.  Economics literature was created to prop up a dogma of market discipline to obviate regulation that led to aggrandizement of Wall Street. 

The Congress has now concluded that the reason for the banking failure is the same as that I had brought before them in my memo and paper in 2003: fire-walled subsidiaries with little capital on a consolidated basis.  The markets are now forcing policymakers towards a safe banking policy. 

The Federal Reserve Board and the Security and Exchange Commission received copies of my papers and memos.  They could not ignore them.  The FRB had hired me from the New York University on a package for the especially skilled and had often expressed, though behind closed doors, that I was the “world’s best expert” on optimal bank regulation.  Praise or prejudice has never perturbed me.  But the Congress and the Bank of International Settlements have indeed adopted my policy research on optimal bank foreclosure and loan loss rules.  The Congressional Budget Office had contacted me in 1990 to help on policies for Fannie and Freddie reorganization.  Top U.S. regulators had once contacted me through a headhunter for a new post of “Director of Market Surveillance” at the Commodity and Futures Trading Commission in the Senior Executive Service cadre, maybe to prevent my memos from reaching the Congress and media.

There is a price of prejudice that a society bears.  The price being borne by humanity now is at least twenty trillion dollars that could have been saved if my paradigm and policies were adopted on time.  But the custodians of society have been prejudiced.  The society is now paying a heavy price.  

Congressmen and Senators are openly suggesting, during testimonies conducted now, that the underlying problems could have been easily averted by the custodians.  A Congresswoman once asked about a new rating model available in 2001 to the rating agencies. I had sent my new rating paradigm from the Financial Analyst Journal to all the ratings agencies in 2001.  The Chief Executive Officer of Moody’s had wanted then to attract me by offering an appropriate package. I was not seeking any attractive package, but the needed responsibility and authority to execute the new model.  The ratings agencies faced grilling by the Congress in late 2008.  But the society has already paid enormously due to their prejudice. 

New Paradigm

I have pursued for adoption of optimal rules of governance in the real world, as outlined in a paper, entitled, Prosperity amid Stability: A New Economic Paradigm for Democratic Capitalism.[3] I wrote on optimal rules in a memo[4] in January 2005 addressed to President Bush with copies forwarded to leaders in the Senate and House.  The paper lists a series of actions undertaken by the Bush Administration following the receipt of this memo.  One event that I have not included in the paper is that the U.S. Congress passed a resolution to praise my alma mater (Indian Institute of Technology) without mentioning my paradigm within a month of receiving the memo. 

There is definite prejudice about mentioning the new economic paradigm anywhere.  That is fine with me, as long as the humanity benefits from such prejudice.  But the humanity is paying a heavy price due to the prejudice.

After the colossal failure of security ratings, a top rating agency recruited an Indian American as its chief executive officer.  After banks lost colossally, a top bank recruited an Indian American as its chief executive officer.  After the colossal failure of financial governance, an Indian American is asked to head the $700 billion bailout operations.  These recruitments may have nothing to do with my origin being India.  I am not raising or implying any prejudice towards Indian Americans, if any.  I do not believe to have faced prejudice for my origin being India, judging from the offers received throughout my career.  But whether my compensation for the service reflects the value of my pursuits for prosperity amid stability is up to humanity to ascertain eventually. 

Prejudice

The prejudice is against my paradigm of “Prosperity amid Stability: a New Economic Paradigm for Democratic Capitalism.” 

The market discipline literature may have emboldened the media and journal editors to not publicize the efficacy of optimal regulation, despite my repeated communication and arguments with them.  The assertion made in the market discipline literature - that banks and markets will self-regulate in the best interest of taxpayers - is based on biased data.  The data are biased because they are generated by the current system which is suboptimal for taxpayers.  My research on optimal bank regulation published in the Journal of Finance shows that taxpayers will optimally require banks to hold positive capitals.  This was used to establish minimum bank capital thresholds in FDICIA 1991.  But these norms were violated when regulators permitted bank holding companies to form fire-walled subsidiaries with less than the minimum required capital on a consolidated basis.  The ex-Chairman of the Federal Reserve Board has admitted recently that his belief that markets will self-discipline was not correct and that he made mistakes.

    

A candid editor of the Cambridge University Press found my writing very persuasive, pertinent and publishable, but he could not get the approval of the publisher.  I have floated a website, pro-prosperity.com, to create the awareness needed for optimal regulation to avert a potential global depression.

The editor of Economic Letters has found most of my papers based on my new paradigm as interesting, but suitable for newspaper columns because of lack of economic analysis.  The basic structure of any good theoretical economic analysis is a trade off to choose an optimal outcome.  Such trade off is common to most theories published in various economics and finance journals.  I have clearly stipulated such tradeoff in my new paradigm.  It is a tradeoff between individual prosperity and social stability.  All the papers I have submitted to Economic Letters are based on such economic tradeoff made to determine optimal choices.  I have communicated this to the editor of Economic Letters.  But I believe that he is prejudiced against my paradigm of prosperity amid stability. 

Even the U.S. Government Accountability Office has issued a circular about not lending funds from the federally insured deposit base to hedge funds in the wake of my paper and memos written to the U.S. Congress that such funding is suboptimal for taxpayers.  The U.K. Prime Minister Gordon Brown has written in Washington Post in October 2008 about such irresponsible and undisclosed lending being the reason for the current financial meltdown.  Will the Economic Letters publish my paper on this topic, submitted a year ago?  I doubt it, but the editor has not rejected this paper yet.

The custodians of the current system of governance may be dreading to publicize my paradigm.  The current system creates lopsided opportunities for a few to usurp wealth from the vast majority.  My paradigm determines optimal rules of governance to create equal opportunities.  The vast majority in a democracy will reject the lopsided rules of governance if they learn how a few custodians can exploit such rules to usurp wealth of the vast majority usuriously. Such usurpation over a protracted period drives the vast majority to bankruptcy and depression, which ultimately erodes even the accumulated prosperity of the few.  Only if the custodians remain myopic, will they dread my paradigm.  Farsightedness should convince them to embrace the new economic paradigm.  But they are prejudiced and are blocking every effort from my side to publicize the paradigm. 

Hope

I believe that President-elect espouses the new paradigm, based on his pronouncements and responses to me so far.  I think he too believes that this paradigm is optimal for mankind and that the humanity will ultimately embrace this model for governance.  I hope that he can adopt it during his presidency to foster individual prosperity amid stability in the United States of America and around the world. 

I believe that even the current custodians of governments around the world are inclined to embrace this paradigm, willy-nilly, in their best interest to avert catastrophes like global depression and warming that can ruin prosperity of all.  Downloads of papers and memos from my website pro-prosperity.com and enquiries from prominent people suggest that everyone is interested in adopting the new economic paradigm of prosperity amid stability.

My paradigm does not entrust the government with power to redistribute wealth.  It is predicated on adopting optimal rules of governance to foster equal opportunities to create a stable environment for everyone to achieve the highest possible wealth based on individual talent, skills and perseverance.     

The current economic paradigm and philosophy can cause catastrophes like global depression or warming.  It can lead to many confusions of the type vivid in the testimony held by Congress on October 23, 2008 while examining if mortgage giants like Fannie Mae and Freddie Mac should be privatized.[5]

I believe that humanity will ultimately reject the current paradigm because it is based on maximization of the utility of individual net-worth without caring for the instability wrought by individual actions.  I hope that everyone including the media and journals will eventually embrace the new paradigm to help replace the current lopsided philosophy, entrenched around the world.