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Friday, May 25, 2012

Fiddling as capitalism burns

Special to The Japan Times

HONG KONG — The BBC World business news presenter in Singapore was happily discussing the prospect of Facebook becoming, as he claimed, "a trillion dollar company" through its initial public offering. His error says a lot about the increasing sloppiness and dumbing down of the BBC's business coverage and its determination to push business into show business.

Facebook's flotation and the continuing wailing Greek tragedy illustrate savagely that Western capitalism is losing its way. The so-called leaders of the world are fiddling while the basic structures are in danger of coming crashing down.

Facebook (still not recognized as a legitimate word by the Microsoft spell- checking device) duly got its $104 billion valuation, and its 28-year-old founder, Mark Zuckerberg, took his place as the third-richest person on earth, worth about $20 billion until the share price dropped on the second day of trading. That is surely more than enough reward basically for a bright dorm-room idea of persuading people to part with their personal information to make contact with other people and exchange photos and gossip! Zuckerberg now must demonstrate that he can run a company subject to stockholder pressures.

Meanwhile, on the other side of the United States, the self-styled leaders of the world's biggest economies argued and squabbled and essentially did nothing to sort out the problems that confront the real world of jobs and economic growth.

A Greek exit (or Grexit) from the euro could carry a $1 trillion price tag with cascading damage, but Grexit is only one aspect of a wider problem of heavily indebted Western economies. Spain's banking problems are mounting, illustrated by Moody's downgrading of that nation's entire banking system.

Threats to the European banking system run further and deeper than Spain, and damage in any one country would send out aftershocks that would shake the whole European edifice. This, remember, rests on flimsy, almost half-baked, foundations. There is a pan-European community with a European currency for 17 of its 27 members, but fiscal matters are left to national governments, and banking supervision is left to national central banks.

On top of this is the vital issue of austerity versus growth. The revolt against austerity helped Francois Hollande to defeat Nicolas Sarkozy in France and has seen governments tottering across Europe as electorates protest against a policy of cutbacks. In Greece, which has suffered longest, the people are in open revolt.

At Camp David, President Barack Obama joined other leaders in urging German Chancellor Angela Merkel to relent on her policy of austerity-first. After arguments running late into the night, the leaders of the Group of Eight developed countries committed themselves in the communique to "take all necessary steps" to strengthen their economies. "Our imperative is to promote growth and jobs," it said.

It is always pertinent to ask whether these communiques are worth the paper they're written on, let alone the time and expense of the meetings, if there is no attempt to reach a meeting of minds.

It is hard to find evidence of any such meeting of minds. By all accounts Chancellor Merkel stuck to her guns about the need for fiscal discipline and emphasized that countries could not spend their way out of crisis. Germany is naturally nervous that it will be called upon to foot the bill for any new profligacy. It views itself as having been prudent in managing its economy — maintaining a strong industrial base and economic competitiveness, which have proved more durable in creating jobs, exports and strong finances than buying growth on the never-never or through financial or social media gimmicks.

What was British Prime Minister David Cameron thinking of? Britain has essentially tried to continue to enjoy its cake after having eaten it, by benefitting from the euro common currency area while staying outside and therefore not being subject to its strict disciplines. Cameron and British euro-skeptics are undoubtedly right that there is no stomach anywhere in the continent for a European fiscal policy dominated by Berlin. And Merkel is answerable to a hardheaded German electorate, not to an airy European ideal.

It is never a good idea for an outsider to lecture members of a club from which he benefits, however clear his vision is. Yet Cameron has recently resorted to haranguing euro members that it is high time for them to get their act together. A wise and farsighted leader will try to construct a policy to bring others together in answering their common problems. Cameron's attitude has been the opposite.

Sadly, Merkel has shown a singular lack of imagination and a refusal to contemplate policies that would bring opportunities out of the crisis. Germany fears being left as paymaster, but Germany has also benefited greatly from Europe's weakness.

Not only Greece but potentially the whole euro experiment is in slow-motion collapse. European Union leaders still swear that they are only working on Plan A — keeping Greece within the euro — when Plan A is proving untenable. Greeks will never vote for austerity that leaves them more miserable, more jobless and more heavily indebted than ever.

By the time the Greeks get to vote again next month, Plan A may have collapsed under its own contradictions of capital flight and the refusal of Athens to countenance more painful austerity, while the rest of Europe refuses to underwrite any more debt for Greece. By now the euro leaders should be working on plans C to Z.

This is not just a Greek tragedy, but is potentially a global one. Yet where was the world's second largest economy at the gathering of the supposed global leaders? Such is the quality of "world leadership" that Russia has a place at the G-8, but not China. As a mark of his own leadership, President-redux Vladimir Putin snubbed the G-8 by sending his prime minister to the Camp David get-together.

Ironically, leading American CEOs also seem to have more faith in China than in their own leaders. Asked which global institutions they thought most competent in tackling the economic crisis, 70 leading CEOs (90 percent) voted for themselves, meaning "multinational corporations." In third place (after central banks) with a 64 percent vote came China's Communist Party — way ahead of the U.S. president (33 percent) or the U.S. Congress (5 percent).

As for Facebook, has Zuckerberg performed a great conjuring trick, especially in maintaining 51 percent control of the company? Barry Ritholtz points out in The Big Picture blog that both the company and the stock face big issues. The valuation of Facebook is extremely rich: about 28 times sales and 100 times earnings. By contrast, Apple's valuation is three times sales and 10 times earnings.

Facebook does a poor job monetizing users, getting a mere $5 against $30 for Google and $144 for Netflix. And Facebook has virtually zero penetration in China and little prospect of making waves there soon.

There is also the legitimate question of what kind of model Facebook is for modern capitalism or what it contributes to the real economy with its inane system of "likes" and glorification of gossip and trivia. Such is the state of Western capitalism.

Kevin Rafferty is editor in chief of PlainWords Media.

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