Awaiting an Anti-Establishment Economic Reset: Buckle Up!

I’m still reeling from the ghastly, even gory revelations around the criminal investigations of Mrs Hillary Clinton & her surrogates, and her “Likely” indictment. Donald Trump’s election is highly probable now: his opponent is being revealed as a compromised candidate with baggage that no country would want to carry at its very helm. [Update: The very next day of writing this article, in a typical commentator’s curse, foot-in-mouth fashion, it broke that the FBI Director, James Comey, has exonerated Hillary Clinton. And although this episode may be over, there are reports that she may still be involved in an investigation of the Clinton Foundation. Nevertheless, the Bullish Bear still holds up the argument that evidence of rampant corruption should demolish hopes of a Clinton presidency in an honestly cast ballot on 8th of November, 2016.]

Zero Hedge: “Statistically, the market has an 86.4% success rate in forecasting the election”

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For those not very familiar with American politics, Mr Trump stands in the anti-establishment corner of the ring, while Mrs Clinton stands in the establishment corner. This really is BREXIT-II, only a lot bigger! Mr Trump,  a populist, nationalist representative is being opposed by democrats, republicans, rich elites, Wall Street and the mainstream media. While Mrs Clinton, in a flagging, scandal hit campaign, is running out of ammunition and running into trouble. Deep, deep trouble.

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It honestly feels as if pitchfork villagers and stone throwers, in the form of one-page news aggregators (Drudge), old-fashioned pub-brawling loudmouths (Alex Jones) and computer geeks with no outside life (Julian Assange of WikiLeaks) are attempting to bring down the giant David. With a little help from Sherlock Holmes (In the form of sleuths, FBI, NYPD), I might add.

Trump’s economic plan is mixed

Mr Trump’s economic plan seems to lean towards the traditional republican/ conservative ideals, which can be summed up as: cut regulations, cut taxes & protect domestic industry.

It is a blend of common sense (Renegotiate trade deals, exit TPP, reduce expansionist militarism, reduce illegal immigration, increase skilled immigration, veteran care), protectionism (Tariffs, branding the Chinese “Currency manipulators”), fiscal boost (Defense spending) and free market (Tax cuts, healthcare, school choice, reduce regulations generally). But at the frontend is an “very massive recession” and at the backend is the danger of sustainably and significantly increasing leverage, tempered by his warning of the need to restructure national debt. This is my evaluation. For other evaluations, critical: Business Insider, CNN, Moody’s, TIME, Wall Street Journal, balanced: CATO Institute, and complimentary: Breitbart, National Review.

Big changes expected

Structural change are expected “bigly” as an establishment-run White House has been extremely susceptible to corporate lobbying & cronyism, as is being revealed through WikiLeaks, FBI and other investigations on a daily basis. And whilst the short-term impact could be very sharp and widespread, the long-term advantages of an establishment-free administration are many, and indeed necessary to stop the carnage in the Middle East, rebuild & heal the global economy.

These are historic, seismic developments, and a new regime can bring changes in all directions of biblical proportion.

To be sure, it being all of four days before the voting day, the Bullish Bear is merely speculating that these sweeping structural changes Can be carried out, which has a question mark to it: Mr Trump’s Republican Party is fighting a close race to retain control of the House of Representatives and the Senate. But we can pontificate over political developments later. Let’s see what structural changes lie in store for American and world industry based on economic policy of The Donald.

 

Industry-by-industry look at possible ramifications of a Trump administration <On a scale of -5 to +5, read as: Short-term impact, Structural impact>

Agriculture/ Seed-tech <0, +4>

Trump is a wildcard in this area, and has fired a brief innuendo against “evil Monsanto” in the past. What this means for Bayer-Monsanto or the Monsanto Protection Act, we cannot know. But Mr Trump has been quoted decrying centralized regulation of the agricultural industry saying, “The agriculture industry should be free to seek its best solutions through the market system.” He has targeted “The FDA food police,” calling for the elimination of food-safety regulations, which is a positive development.

Lesser clarity is available on the issue of labeling requirements for GMO foods, which is a very important issue, as 64 countries around the world require labeling of GMOs.

Further reading: Should GMO labeling be required of all foods? (Mic Network Inc) >>

However, there is more clarity on the front of the Environmental Protection Agency, EPA, for which he has picked a known climate skeptic, Myron Ebell. As a climate skeptic himself, Mr Trump wants to transition the agency to one with a drastically different agenda. The Bullish Bear welcomes this as perhaps his most clearly radical and polarizing reform.

Cable TV industry <0, +2>

Fueled by intense bias against Mr Trump, it will not be surprising that he would consider a TV station startup. As an opinion piece in MarketWatch noted, “Blatant bias against Trump may hasten the end of mainstream media.”

It was reported by the Financial Times of London last month that Jared Kushner, Mr Trump’s son-in-law, approached dealmakers informally with a view to setup a Trump television network after the presidential elections.
Look for a new momentum and spotlight on Mrs Clinton’s “Alt-right media”: Breitbart, WND, Drudge Report, and the over-the-top raging bull-horn,  Infowars.com.

Healthcare <-2, +4>

Mr Trump has vowed to repeal the Affordable Care Act (ACA), popularly known as Obamacare. The Act has gained notoriety of late as premiums are soaring and medical practitioners are discontent. Mr Trump’s healthcare plan is to break up healthcare insurance monopolies, allowing vendors to compete and thus lowering prices for consumers. He wants to allow tax deduction for insurance premium payments.

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Mr Trump’s election could mean a negative impact on healthcare stocks, which have corrected ahead of broader indices of late, following rising premiums and the pulling out of some large insurance companies. Many healthcare companies such as HCA and Universal Health Services had benefited tremendously from Obamacare.

Related to this area, Mr Trump plans to allow eligible veterans to gain access to private healthcare after the unraveling of massive corruption at the Department of Veteran Affairs hospitals. The plan incorporates what seems to be a fair short-term remedial measure, but lacks clarity on means of funding.

Manufacturing <+2, -1>

Mr Trump is mostly rhetoric on the topic of manufacturing, claiming that he would bring back the jobs which were drained from the United States due to “Terrible” trade deals such as NAFTA, trying his best to mirror his counterpart from 23 years ago, Ross Perot. He wants American Companies to relocate their manufacturing bases at home, and has offered little by way of concrete steps except that corporate tax rates will be cut  to 15% from existing rate of 33%, which has to be granted as a significant step. Are litigation challenges likely for Companies such as Ford who have built plants outside United States? I think not so, but his rhetoric can have a negative impact on the business-friendliness of investment conditions.

Gun manufacturers <0, +4>

As The UK Independent reported, fear of Mrs Clinton has sent gun sales and manufacturer profits soaring. So, the appointment of National Rifle Association-endorsed Donald Trump to the White House may be a short-term negative for Companies such as Sturm Ruger, Cabelas and Smith & Wesson and Visa Outdoor, unless accompanied by civil agitation from allegedly George Soros-backed arsonist groups. In the long-run, the gun manufacturing industry, hammered with regulations, will benefit from a less intrusive administration. Lesser hostility towards 3D-printed guns can dent the prices of guns. However, this being a technological shift, will be a healthy & organic development.

Weapons manufacturer industry <-3, -5>

The military-industrial complex, as President Dwight D. Eisenhower warned, has potential for the “disastrous rise of misplaced power.” An arguably relatively less-hawkish Trump administration will force the weapons manufacturer industry to scale down. There is potential for litigation challenges as there have been many allegations from the anti-establishment camp, that Mr Barrack Hussein Obama has been arming Al-Qaeda/ ISIS! There is also spooky evidence of images of hundreds of new-looking Toyota pickups and land cruisers  with ISIS. How did that happen?!

Recommended podcast: Syria, Russia, and the American candidates: Scott Horton gives us the scoop (The Tom Woods Show) >>

Gold mining <0, +3>

Despite extremely accommodative interest rates, United States’ roughly half-a-trillion dollar a year trade deficits continue. With the promise of further accommodation in fiscal policy (Lower taxes, in particular), a significant increase in America’s enormous debt burden could be the catalyst to devalue the dollar, and revalue Gold.

A sharp, short-term impact from a debt-interest rate reset favors traditional hard asset-backed commodities, prime of them being precious metals, which has suffered a setback between 2013 and 2015.

Note: In the structural impact score of +3, a hawkish Chairman after Janet Yellen’s term ends in February 2018 is factored in, else a score of +5 would have been appropriate!

Further reading: Clinton or Trump will be good for Gold (Peter Schiff) >>

Energy. Particularly, Coal <0, +5>

Mr Trump is focused on domestic production of oil and gas, and wants to “rescind all job-destroying Obama executive actions,” “eliminate all barriers to responsible energy production” and “unleashing” untapped oil and natural gas reserves. Again, rhetorically positive, surrounded by the right talent pool, but whether this can actually be realized remains to be seen. I forecast that there can be sharp movement in Oil prices, but this will be due to a secondary impact: a devaluation in the Dollar and a deficit crisis could be the trigger first.

Where Mr Trump’s policies will have an energy-related impact is for Coal-based energy producers, leaving solar & wind energy producers in a much tougher fight for market share. Mr Trump has vowed to bring “Coal jobs back,” in an industry hamstrung by overt regulations.

Much as this is a political overtone & a vote-winner, the Bullish Bear is in complete agreement; the end of anti-Coal regulations is a must: Coal is a plentiful, movable, low-cost energy resource, increasingly cleanly produced, and in the face of soaring energy prices in the West, will be a much-needed relief to industrial and residential consumption (Various advantages of Coal can be sourced here). In the developing world, these arguments become only stronger. And a historical fact to counter all environment-related concerns is that, since the 1920s, weather-related deaths have dropped by a 98%! Let that sink in a bit.

Book recommendation: Alex Epstein’s The Moral Case for Fossil Fuels >>

Infrastructure <0, +2>

Both candidates have promised infrastructure spending, but the anti-establishment plan of Donald Trump is twice as aggressive as Mrs Clinton’s.

Donald Trump has unveiled plans to spend $1 Trillion over the next ten years, but here’s the good part, with very limited government participation. The plan was developed by Trump economic advisors Peter Navarro and Wilbur Ross.

As with many other pieces of his plan, there isn’t much clarity and interest rate is a key dependent variable – big infrastructure spending would naturally entail heavy borrowing.

Financial & Allied Services <-4, 0>

Financial Services, including broking, investment banking, the pensions & mutual funds industry could prosper, but only after a sharp downturn. The consulting and legal professions will bounce back too in the post-reset era, but there will very likely be a sharp reset first!

The stock market has had it too easy for too long – easy money and more easy money has meant a dreamy run for stocks and bonds despite the weakest economic recovery ever on record. There has to be a reset!

Further reading: Trump: “The country is headed for a massive recession; it’s a terrible time to invest in stocks” (Zero Hedge) >>

Banking, levered sectors <-5, 0>

This will undoubtedly be the most radical and clear target of the anti-establishment forces. Much debate surrounds a possible reinstatement of Glass-Steagall in this area, but that is pointless exercise.

Further reading: ‘Repeal’ of Glass-Steagall irrelevant to financial crisis (Prof. Thomas E. Woods) >>

Litigationally, a stricter Department of Justice and S.E.C. could unravel the already scandal-hit, tainted industry. Billions of dollars’ worth fines, public ridicule and anger over the past two decades are just the tip of the iceberg: Leading banks have, in fact, had an easy ride after being caught red-handed scamming pensions, rigging financial markets, interfering with politics (E.g. literally writing the laws of the country) and money-laundering to benefit foreign governments, drug cartels & even terrorists… Allegedly (Safe to use this term, I gather)!

And that’s not all. Donald Trump has, on multiple occasions, riled against the Fed for being politically allied with the Democratic Party, and for being too easy with monetary policy. A charge that, of course, pre-dates current Fed Chair Janet Yellen’s term.

A relatively hawkish Federal Reserve could lay bare the weaknesses of national treasury, the banks’ balance sheets, levered industries (E.g. real estate, automotive) & expose the entire economy to another banking sector-led turmoil.

A turmoil, that the Bullish Bear believes, the economy can restructure and recover from, and grow into a much better future, much stronger structurally than before.

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Stinks to High Heaven: Air India Bailed Out by Life Insurance Corporation (LIC) of India

Against a backdrop of rising concerns over NPAs in the banking system, it was reported that Air India was looking at the possibility of availing a new scheme, the Scheme for Sustainable Structuring of Stressed Assets (S4A), to rejig debt to the tune of a minimum of Rs 100 Bn. Since 2012, the airline has been on a life support with a Rs 300 Bn bailout package from the government, spread over ten years. In fact, this may be one of the biggest sums that LIC has ever loaned out till date: this new loan to Air India of Rs 100 Bn (If that number is correct), will grow its loan book by an enormous 9.26%.

Who reported this? A Secret deal? Was it leaked?

Since, at the time of writing, Air India has made available annual reports only until FY 2013-14, all the financial figures and plans of rejig coming out in the newspapers, if true, are very likely being leaked from Air India/ Civil Aviation Ministry itself, and being dealings in material non-public information, this constitutes a situation of non-uniform dissemination of sensitive information, and possible violation of securities law.

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Indeed, the public sector bank index was up by a chunky 1.5% today, being the first day since the story broke, with two of the three stocks mentioned in the story (Bank of India, Bank of Baroda) up over a per cent and the third stock (Punjab National Bank) within 3% of its 52-week high.

Best of socialism at its worst?

There are many facets to this development that stink to high heaven. As Firstpost pointed out – Why the bailout when it was already turning around? It has also been queried before on multiple occasions when LIC was bailing out public sector Companies and investing aggressively in public sector disinvestments, who has the authority to approve this and why isn’t there a public outcry? And all this for a saving of Rs 3 Bn (A 3% saving on Rs 100 Bn), which Air India could save anyway by paying its fuel bills on time, as has been reported here by the Business Standard.

Hypocrisy unlimited

Arun Jaitley: “LIC is not a body which invests only to bailout the government in disinvestment. In issues by private companies, LIC also participates.”

That’s right. The (dis)honorable Finance Minister had agreed, last year, that LIC bails out & bails out repeatedly. And that LIC, with the public’s insurance money, routinely bails out private Companies too!

The government speaks highly of transparency and accountability, yet hijacks the public treasury to bail out desperate banks and monopolies, placing an incremental debt burden on the public.

Here’s another quote from ex- Finance Minister, Yashwant Sinha, a senior leader of the current ruling party, while he was in opposition in March 2012, around the time LIC bailed out ONGC’s disinvestment auction with an unnecessarily high-priced bid:

“LIC is a captive source of funds for the government. They have misused the status of LIC to misappropriate policyholders’ money and brought it to the government’s coffers through the ONGC disinvestment.”

Now that his party is engaged in the same treasonous act, in his own words, a “daylight robbery”, I’m sure he will stand up for the public and do everything in his power to stop this transaction.

Fat chance!

A case of honest kleptocracy

But the Bullish Bear wouldn’t write this if there wasn’t a silver lining to this all. There is an honest side to this, y’kno.

This bailout has proved that the government can openly rob the public of its money, via the LIC, to bail out bankrupt Companies.

Such instances of naked cronyism can at least serve to warn the public that their savings and insurance are at risk. The Life Insurance Corporation of India is not a safe house, nor are any of these banks offering 4-7% return on savings, making loans to extremely indebted Companies while maintaining tier-I ratios of just 10%.

Related reading: Debt-ridden Government makes more claims on LIC (NDTV Profit) >>

This amounts to a rather more transparent & direct socialistic involuntary bailout. Which is bad no doubt, but incrementally better than an indirect socialistic involuntary bailout! As Canadian billionaire and philanthropist Eric Sprott warned, “Whenever you think of the word bank, you should think risk.”

For a brief education on bailouts funded with public money, it can’t get any better than this short video segment, in which Peter Schiff, an Austrian economist and a guru & mentor to yours truly, lambasts a pitch for a government sponsored bailout of American car manufacturers by Lansing, Michigan Mayor Virg Bernero on live television! “If you think these Companies are such good investments, you put your own money into it!”

In conclusion

As mentioned previously, the Bullish Bear is an ardent fan of free markets and open competition. Yet, I have sympathy with Air India’s Chairman & Managing Director, Ashwani Lohani. Coming from the head of a public sector enterprise, these are astonishing words, admitting that a public sector entity does not really care about the delivery of its services. Although he does shy away from writing the public sector off completely, the Bullish Bear believes that he is headed in the right direction!

“Often my airline is questioned on its inability to match the private sector on various operating parameters, and this is unfortunately always done without due appreciation of the fundamental reality that there is no level-playing field… A course correction is the need of the hour, for contrary to what many may think, the public sector has still not lost its relevance in entirety… Unless and until we all, and that includes the mighty government machinery, start believing in the supremacy of deliverance over everything else, such dilemmas would always continue.”

Leeching Human Enterprise: Indian Government’s Booty Swells with Spectrum Auctions while Companies, Banks and Investors Muddle Along

“If it moves, privatize it. If it doesn’t move, privatize it.” – Dr Walter Block

Public ownership of any good or service is fraught with inefficiency and lack of accountability. The Keynesian explanation in the case of, say a manufactured toy, is that a monopoly (i.e. in the classical sense,  government ownership) always produces less of a good or service at a higher cost. But Keynesians rebuke strongly any idea of non-public ownership of “public goods”, such as radio spectrum. Coming from a libertarian point of view, the Bullish Bear professes private ownership even for a public good or service, say military defense, and strongly refutes the need for government ownership. And how come the government came to own radiowaves – this valuable resource – in the first place? It wrote itself a title. Or probably did not bother to do even that!

Globally, low spectrum utilization has been observed and documented. A study in 2003 found that only 19% of frequency space in Washington, DC was used in peak times. Clearly, radiowaves are more abundant and hence less valuable than apparent at first. But we can hardly rely on the public sector to resolve this issue – the Indian Spectrum Management Committee (GOT-IT, 1999) had found that the armed forces had “squatted” on the radio frequencies they occupied while using very little of them (in the words of Ashok Desai, whose critical insights we rely on very much, and whose work we highlight later on).

The 2016 spectrum auction, which lasted for a workweek, enabled the government to sell 965 MHz of spectrum for a total sum of Rs 657.9 Bn or $9.85 Bn. This is equivalent to over 2.5 months of revenue of the largest private sector Company in India, Reliance Industries! Yet, this was an underwhelming yield for the government, because spectrum supply was plentiful, there was less need for renewals and also because the government shot itself in the foot with sky-high reserve prices for the most lucrative segments of spectrum, despite financially stresses of participants.

However, in this blogpost, the Bullish Bear will dwell more on the historic development of the telecom industry’s auctions and take a look at the harsh impact of the government’s severe interventions into what should have been the free market operation of this industry.

 

Competitive nature of the industry shaped by part-liberalization in the 1990s, giving relief from public sector stranglehold

The first glimpses of liberalization in the mid-1990s led to private sector participation being allowed in basic services, and growth in wireline services picked up. The Indian Telecommunication industry tried to embrace a more modern image with the National Telecom Policy of 1999, allowing private sector players to break through the monopoly of DoT little-by-little.

The short history of India’s Telecommunication Industry is, as laid out in this brilliant publication by Mr Ashok Desai, a tale of how entrepreneurs climbed their way out of the government’s impossibly high license fees by getting foreign partners and public sector banks themselves involved in funding telecom operations!

In the period before the liberalization began that we can get a glimpse of how state monopoly was playing a balancing act between hiding its laziness on the one hand, thus keeping at bay any deregulations and new entrants and yet, on the other hand, showing a substantial-enough pipeline of pending orders & risking revealing its laziness, thus staking a claim on additional funds from the government. We can post this revealing table below, in which we can see that despite substantial backlog of orders worth 25% of installed lines in 1982, growth in installed lines barely broke out into the teens in 1992! All this while, the waiting list was kept hovering at around 4 years!

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Indeed, telephones were classified as a luxury item and given low priority in India’s socialistic five year plans. “The telephone system began to expand rapidly only in the late 1980s, when the ITI-Alcatel factory delivered switches in large enough volumes,” Mr Desai sighs.

 

How come the government owns the air above us?

Socialist India gave monopoly power to the Department of Post and Telegraphs, until 1985, when Mahanagar Telephone Nigam Limited (MTNL) and Videsh Sanchar Nigam Limited (VSNL) were created as public sector undertakings under the Department of Telecommunications (DoT). It is through this entity, the DoT, that the law still bestows an exclusive privilege on the Government to provide telecommunications services. The DoT issues various notifications imposing onerous obligations and restrictions on players in the industry.

 

Spectrum value is artificially high as the public ownership is creating artificial scarcity

“Is the radio spectrum a unique resource that belongs to the public, or can it be privately owned like any other good or service? Most people assume that public ownership is axiomatic—a starting point rather than the historical consequence of special interests pretending to misunderstand economics. This is wholly incorrect… Full-scale privatization of this resource is essential.” – B. K. Marcus, Mises Daily

It is worth our time to pause and evaluate this situation. At the moment, the government is holding back all the spectrum and renewing licenses to operate on it via the auction method. Some spectrum is in the low frequency ranges (Which have better ranging abilities), whereas some are in the high frequency ranges (Which can carry higher bit rates). But the government’s reclusive actions are creating artificial scarcity, particularly for the spectrum being used currently – as the government will obviously not auction spectrum that is Not in use currently in the telecom industry. Thus, not only is existing spectrum valued artificially highly, but there exists a systemic latency to discourage switching to higher spectra. Thus, players, particularly the incumbents, who have large amounts of capital and resources at their command, are less willing than they would otherwise be, to trial newer technologies at higher bit rates, thus retarding the speed of technological development.

Clearly, the government is meddling in the formation of lower prices at the consumer level both directly (through high taxes and license fees) and indirectly (through deceleration of technological innovation by encouraging extant spectrum usage).

 

Government’s Telecom booty: High spectrum fees accounts for all of the debt accumulated in recent years

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An analysis of the government’s revenue from the telecom industry in the form of corporate taxes, licenses fees, spectrum usage charges and spectrum auction revenue suggests that the government is running its own parallel Company alongside: about the size of Idea Cellular, the #3 telecom company in India by market share. For every Rs 100 of honest revenue earned by the top-4 listed Companies, the government “earns” Rs 36, Rs 17.5 of which comes from License Fee (LF) and Spectrum Usage Charges (SUC), Rs 12.5 from spectrum auctions and Rs 5.5 from corporate taxes.

And it doesn’t stop there. The Bullish Bear estimates that the incremental indebtedness brought to bear upon the Companies brings the government an additional 0.5% through dividends from publicly owned banks (We have to assume a share of 50% to PSU banks, as break up of this data is not provided by the Companies nor by the banks). This equates to a cool Rs 4.4 Bn in FY16.

According to these estimates and adjusting for inflation, the Indian government has amassed nearly Rs 2,300 per man, woman & child in India since 2010, compared to the monthly income per capita for an average Indian of Rs 7,774. Were it not for spectrum auctions raking in Rs 85,000 crore since 2010 ($12.9 Bn at today’s exchange rate), the telecom industry, the top-4 listed players of which have accumulated total debt of Rs 1.26 Tn (57% of which have accumulated since 2010), would be almost certainly debt-free by now.

 

End result: Investors disinterested and Companies financially stressed

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For investors, the golden period seems to have come to an end with the industry in a mature phase and the companies in serious financial stress.

Telecom companies, even including tower Companies, which are much more profitable (for now), have underperformed almost all prominent sectoral indices over the last three years. Despite exponential growth in data, overall growth seems to be slowing and it remains to be seen how the $20 Bn new entrant, Reliance Jio, impacts the structure of the industry.

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From the perspective of corporations, by logical and empirical evidence, we have seen how onerous public sector ownership and regulations have hampered the development of the telecom industry. India’s Telecommunication regulatory bodies: DoT, TRAI and COAI have become mightily powerful and can potentially become broad-based regulators and censors as well, if we were to look at the example of the United States: Marcus educates us as to how the regulator there, the FCC, has become “the largest censorship body in the world.”

But if we were to ask “Cui bono?” Not only has the government benefited, but the regulated industry itself being cartelized, its members have benefited as well. They pull together when in need to erect artificial barriers to entry (say a minimum paid-in capital or unbundling free internet messengers) and push together when defending from higher tariffs.

In summary, the government, the banks, the regulators and bureaucrats, foreign & domestic entrepreneurs are all in the gravy train, and the investors and public treasury have to protect their invested capital (in telecom companies and in the banks) & bear the risks (of investments failing). Investors blame the Companies, the Companies blame regulations and high interest rates, the regulators want revenue to shore up government revenue and the government cannot do without revenue, can it? All this while, the elephant in the living room, namely the unethical public ownership of radio spectrum, lives happily ever after!