Guiding Light of The Month

One must be always vigilant, attentive to the least call, so as not to be asleep or inert when Thou givest the signal for action, whether with the mind, the feelings or the body. - The Mother

“Evam pravartitam chakram……” and the credit crisis

In the 3rd Chapter of the Bhagvad Gita (Karma Yoga, verses 14 to 16), Sri Krishna explains the working of the cosmic wheel of action. The idea of cyclicity and balance is conveyed in these verses in such a pithy and elegant manner that it can sometimes escape true appreciation by its sheer obviousness. Perhaps it is topical to mention here something I read a while ago….”A work of genius is something that seems obvious after someone has stated it”. This, at least has been the case with me. I have “learnt” of cycles of all sorts since my school days (the carbon cycle, oxygen cycle, nitrogen cycle, Carnot cycle), but I never quite appreciated the fundamental idea behind cyclicity in nature until I was explained these verses. The point hit home even more emphatically when the credit crisis struck.

The time we are living through right now has been described by many as the worst crisis since the Great Depression. Confidence, trust and sentiment have all but evapourated. Once-venerable institutions have now gone out of existence, consumer confidence is at multi-year lows, banks have stopped trusting each other and those lucky enough to have excess cash prefer hoarding it to lending it out. Asset prices have fluctuated wildly over the past few weeks but have headed mostly downwards. The idea gaining favour, as a last resort, is for Governments to spend their way out of this crisis either directly through expansionary fiscal policy or indirectly by supporting asset prices.

But behind all this chaos there seems to be a force that is relentlessly working towards a definitive goal. What we are experiencing, through the meltdown, is active demand destruction. Demand is classically defined as the willingness and the ability to buy a good or a service. Both the willingness and the ability are present in varying degrees in all of us. They have historically grown or reduced in relatively moderate measure. The willingness aspect has always received a push from our egoistical nature but has not always found proportional support from the ability aspect and this mismatch kept demand at sustainable levels. The credit boom of the last six years shook that balance.

The loose monetary policies adopted by central banks all around the world in the aftermath of the dot-com crash of 2001-02 ensured that the global financial system was flush with cash. As growth began to pick up, driven in large measure by China and other emerging market economies, there was a pressing need to make this excess cash “work”. The hungry rush for yield started in right earnest and herein lay the genesis of the sub prime crisis where loans were made out to individuals, sometimes even without elementary due diligence done on the individual, (the so-called “ninja loans”) who didn’t have the ability to service those loans. Billions of dollars of such loans were made in the last five years. But the problem did not stop there. These loans were then packaged into pools which were then sliced and diced (through securitization) into tranches (French for “slices”) and spiced (through leverage) and were thus made tradable by entities all over the world, from the usual suspects (hedge funds) to large pension funds, to wealthy artists in Europe, to retirees in Singapore, to Norwegian town councillors. Financial engineering had, through some genuinely brilliant structuring and some very questionable assumptions (the ability to fund these liabilities at low rates, in particular) fuelled the “ability” to fund a purchase to levels not seen before in human economic history. The indirect consequence of this was a rampage on the earth’s resources as the boom in housing fed voraciously into demand for natural resources. As this happened, and as near-term profits and an inflated wealth effect took charge, the fact that a lot these resources were non-renewable was thrown to the winds. We behaved like we had an infinite supply of these resources to gorge upon. Not much thought was spared for future generations. Greed had cast its vice-like grip on us. The balance of life had been disturbed. The cosmic wheel of action that sustains all of us had come unhinged.

In “The Mother”, Sri Aurobindo writes on Mahakali’s powers “….she is there for swiftness, for the immediately effective process, the rapid and direct stroke, the frontal assault that carries everything before it.” He goes on to say, in reply to a question on Mahakali’s power, “It is felt as something swift, sudden, decisive and imperative. When it intervenes, it has a kind of divine or supramental sanction behind it and is like a fiat against which there is no appeal”. One cannot but be struck by what Sri Aurobindo says and juxtapose it with the rapidity and intensity with which the credit crisis has taken hold of the world, to correct our excesses. Demand has fallen dramatically, across the board, to levels that are seen as more sustainable. Efforts at developing “alternative”, renewable and “green” energy has taken on a new-found urgency. Complexity in financial trading is being shunned (a lot of the instruments that were built on sub-prime loans and whose acronyms had a nasty habit of starting with the letter “C”, have since disappeared) and a realization that human material progress should be achieved through more sustainable means is quietly gaining ground. In most people’s view the process has some more way to run. Mahakali, it seems, has yet more work to do in the coming months. All this is not to say that human innovation in conducting finance and economics will permanently grind to a halt and that we would revert to a primitive way of doing business. Many man-years of creative work have gone into the development of the complex financial instruments that had quite unintended consequences. And they all dealt with a problem that we as human beings would always look for a solution to, namely, credit risk. Newer, simpler and more trustworthy instruments would emerge. Development would, hopefully, happen at a more sustainable pace. We would, hopefully, stop exploiting the earth and the resources that she so generously offers us. We would offer genuine hope to our future generations. We would accept Mahakali’s actions as a means for our own evolution.

We, quite simply, have no choice. The alternative is that sambhavami yuge, yuge might be a visitation we would have to contend with more and more frequently.

NOTES:

evam pravartitam chakram, na’nuvartayati’ha yah,
aghayur indriyaramo, mogham partha sa jivati.
(Verse 16).

“ He who does not follow here the wheel thus set revolving, who is of sinful life, rejoicing in the senses, he lives in vain, O son of Pritha. “ (Swami Chinmayananda)

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