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Taking Stock

A cold dose of reality from a stimulus cynic Add to ...

Satyajit Das has developed a keen sense of the value of government stimulus efforts from looking at the school across the street from his office in Sydney, Australia.

Armed with stimulus cash, a large construction company has been encamped there for the past year. So far, it has put up a lovely green metal fence to replace an ugly old aluminum one and has erected a sign with the school's name in handsome gold embossed letters. The work has kept a few construction workers employed, but the capital was not exactly deployed in the most productive of ways. Governments are trying to create demand, but that has never been something they have been particularly good at, says Mr. Das, a prominent risk consultant and a former banker and derivatives trader.

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"Think about how idiotic it is," he says, his quiet voice rising in frustration. Governments essentially redistribute money they have either borrowed or obtained through taxation. "So how can this create demand? It's absurd."

I like to check in with Mr. Das for an occasional reality check when the global markets become more fearful of risk or the air is filled with brave talk by policy makers or financial leaders vowing to clean up some mess or other, while assuring the public it will never happen again. He has little faith in the ability of politicians, bankers or regulators to fix the systemic financial or economic problems he has been warning about for years.

Satyajit Das

Asked about the Obama administration's latest $50-billion (U.S.) spending plan that dares not call itself a stimulus, Mr. Das laughs.

"All this stimulus stuff has got nothing to do with economics. It's all about political survival," he says.

"Can you imagine going to the electorate and saying: 'For the next 20 years, you're going to have zero to 2-per-cent growth; unemployment's going to be stuck at a high level; your living standard is going to go down over time and the world's going to be an uglier place. Your children aren't going to be able to afford houses, their job quality is going to go down and down. Which political party is going to run on that particular platform?"

Although governments and central banks have limited tools at their disposal, the public routinely overestimates their ability to influence events, he says.

"Policy makers may not be able to address the deep-rooted problems in current economic models," he wrote in one of his heavily researched reports. "Revitalized Keynesian economics may not be able to arrest long-term declines, as governments find themselves unable to finance themselves to boost demand in an attempt to maintain growth. It is not clear how, if at all, printing money or financial games can create real ongoing growth and wealth."

Mr. Das is best known as a globe-trotting consultant to serious money who knows more about the arcane world of derivatives than just about anyone alive willing to talk about it. His technical reference work on the subject runs four volumes and more than 4,200 pages.

His more personal and accessible Traders Guns & Money, first published in 2006, sounded a clear alarm about the dangers that the exploding and opaque derivatives market posed to the financial system and economic stability. At the time, Mr. Das and the handful of other worriers were dismissed as cranks trying to spoil the debt-fuelled party that was underpinning remarkable growth around the world.

When his book came out, Mr. Das gave several talks to international investors about the coming credit crash. "People decided that either I had lost my marbles finally or I'd been smoking something awful," he told me at the time.

In the revised edition now on the shelves, Mr. Das adds a sobering reminder that the main problems - including dismally poor regulation, excessive debt and a concentration of power in a handful of financial players - are nowhere near to being solved. In fact, if anything, the biggest surviving global powerhouses have increased their stranglehold on lucrative derivatives and other parts of the market.

"You have to hand it to them," he says. "They really look after their interests well. What they have been particularly clever in doing is to make sure that the banks that survive the crisis are going to be much more powerful."

When I last asked Mr. Das to peer into his clouded crystal ball in December, he warned that the end of the financial crisis would not signal a sustained economic recovery. Indeed, he predicted a period of prolonged stagnation amid widening global imbalances, worsening sovereign and other credit woes, and the risk of new asset bubbles. Washington, he confidently predicted, would continue throwing buckets of borrowed money at the faltering U.S. economy.

He hasn't seen anything to change his mind.

Follow on Twitter: @bmilnerglobe

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