What did we say last year? We remember our visit to India. And we remember commenting on the Indian stock market – when the Sensex Index was under 15,000. We hope we said it was going up...because that’s what it did. The Sensex Index touched 20,000 last week, a new record high.

What next?

We met with a group of a dozen analysts. All but two or three thought next year would be another growth year for Indian stocks.

Looking in the paper or out the window, we find the growth story everywhere:

New apartment buildings are going up all over the place. Automobiles fill up the roads. Salaries are rising. And GDP growth is over 9% per year; only China is growing faster.

“India is a great story,” said a colleague yesterday. “The economy is growing very rapidly. Of course, if you spend a few more days here you will begin to wonder how it grows at all. Nothing works quite as it is supposed to, so we spend a lot of time trying to cope with everyday inconveniences. But the basic story is very solid. The economy is growing in spite of the government. And it’s growing fast. And now we have the ingredients for growth – we have money, skills, people; this growth story should continue, unless the government finds a way to stop it.

“You know, those terrorists who were responsible for 9/11 did their basic training here. They broke into our congress many years ago. They were going to kill as many of our politicians as they could. Instead, they botched the job. But the funny thing was the most ordinary people were disappointed that they didn’t succeed!

“But since they abandoned the worst of the Stalin-era regulations and the Soviet-style central planning, Indians have been allowed to make money again. And that’s what they are doing...”

We visited the analysts on Saturday morning. In the United States or Europe, it would have been hard to get together a group of financial professionals on Saturday. But the Indians are still hungry...

...and strange.

On TV, a man was breaking up watermelons with his head. The show was in a local language, but he seemed to be aiming at a record. He head-butted one big watermelon after another, taking barely two seconds on each one. Then, when he had smashed a couple of dozen of them, he ran out of steam. His head went down...and bounced back up. He tried a second time...and a third time...and finally gave up; he was out of steam.

The streets of Mumbai are crowded – unbelievably crowded. Crowded with locals and crowded with Chinese and Japanese businessmen, doing deals.

“When I was growing up – in the ’70s – Bombay was a paradise. Or, at least it seemed like it to me. There were only 2 million people. Now, there are 11 million – in exactly the same space. Bombay is a narrow peninsula, so there’s no room to expand. They’ve built up the open areas...giving away the land to people with political connections. And now, the price of space in Bombay is as high as Manhattan. It takes a little while for the builders to catch up, but they’re building millions of square feet of new living space, so prices are sure to collapse. They do every 10 years or so.

“If there is one thing you can count on it is that developers, bankers and farmers will over-do it. They all go bust every 10 years or so.”

What is hurting the banking industry now is subprime lending – that is, passing out money to subprime mortgage borrowers, subprime corporate borrowers and subprime speculators.

But don’t worry. We live in an age of Zoo Capitalism and the keepers are supposed to make sure the animals don’t get hurt.

So it was that Henry Paulson came up with an idea, the ‘teaser freezer’ plan. It is being sold to the public as a way to protect homeowners. But it has another purpose, says a reporter from the San Francisco Gate, to help save the banks from their own bad judgment.

“The ticking time bomb in the U.S. banking system is not resetting subprime mortgage rates,” says an article at SF Gate. “The real problem is the contractual ability of investors in mortgage bonds to require banks to buy back the loans at face value if there was fraud in the origination process.

“And, to be sure, fraud is everywhere. It’s in the loan application documents, and it’s in the appraisals. There are e-mails and memos floating around showing that many people in banks, investment banks and appraisal companies – all the way up to senior management – knew about it.

“The catastrophic consequences of bond investors forcing originators to buy back loans at face value are beyond the current media discussion. The loans at issue dwarf the capital available at the largest U.S. banks combined, and investor lawsuits would raise stunning liability sufficient to cause even the largest U.S. banks to fail, resulting in massive taxpayer-funded bailouts of Fannie and Freddie, and even FDIC.

“The problem isn’t just subprime loans. It is the entire mortgage market. As home prices fall, defaults will rise sharply - period. And so will the patience of mortgage bondholders. Different classes of mortgage bonds from various risk pools are owned by different central banks, funds, pensions and investors all over the world. Even your pension or 401(k) might have some of these bonds in it.

“Ultimately, the people in these secret Paulson meetings were probably less worried about saving the mortgage market than with saving themselves. Some might be looking at prison time. As chief of Goldman Sachs, Paulson was involved, to degrees as yet unrevealed, in the mortgage securitization process during the halcyon days of mortgage fraud from 2004 to 2006.

“Paulson became the U.S. Treasury Secretary on July 10, 2006, after the extent of the debacle was coming into focus for those in the know. Goldman Sachs achieved recent accolades in the markets for having bet heavily against the housing market, while Citigroup, Morgan Stanley, Bear Sterns, Merrill Lynch and others got hammered for failing to time the end of the credit bubble.

“Goldman Sachs is the only major investment bank in the United States that has emerged as yet unscathed from this debacle. The success of its strategy must have resulted from fairly substantial bets against housing, mortgage banking and related industries, which also means that Goldman Sachs saw this coming at the same time they were bundling and selling these loans.

“It is truly amazing that right now everyone in the country is deferring to Paulson and the heads of Countrywide, JPMorgan, Bank of America and others as the best group to work out a solution to this problem. No one is talking about the fact that these people created the problem and profited to the tune of hundreds of billions of dollars from it.”

Hmmm...does this sound like another government official that we know? If our dear readers will recall, Dave, over at the Desidooru Saloon reported a similar story – about the Vice President of the United States.

Apparently, Kiplinger’s magazine had done some digging around in the financial disclosure forms that Cheney and his wife filled out in 2006 and found some pretty interesting stuff.

Kiplinger’s reports: “Vice President Dick Cheney’s financial advisers are apparently betting on a rise in inflation and interest rates and on a decline in the value of the dollar against foreign currencies.”

“Let’s examine just that first sentence in light of recent events,” says Dave at the DR blog. “The Vice President’s own investment portfolio is structured in a way to benefit from the rampant inflation and precipitous drop in the dollar brought about in part by his own stated economic philosophy that ‘deficits don’t matter.’”

Looks like there’s a new “Tricky Dick” in town.

Despite the noise in the markets right now with Countrywide (CFC) taking it on the nose, the crumbling big banks like Citigroup (C), Fannie Mae (FNM) and Freddie Mac (FRE) tanking, and the billion-dollar losses of housing-related funds at Bear Stearns (BSC) – a little Santa Monica hedge fund spat out 1,000% returns in less than a year.

Not too shabby, eh?

This is now being called the ‘Santa Monica Technique’: betting against companies or assets that ought to go down and then profiting handsomely when they do, eventually, plummet.

We’ve been thinking more about this New Era capitalism. In the old capitalism, owners were stingy. The idea was to exploit labor, not to be exploited by it. But that has changed too. The capitalists seem to have lost their heads; they think their new Zoo-Capitalism is all upside. And since it is all upside, there is no reason to worry about the downside. Control costs? Heck, they’re all going to get rich; why bother to be a skinflint? They also have an outsize faith in money and financial incentives. So, they figure if they pay managers, or money managers, excessively, somehow they will get outsize returns. Give the corporate managers big stock options, they believe, and these hacks will make big profits. Likewise, give the hedge fund managers a big percentage of the gains and they will make big gains.

As a logical matter, it seems absurd. If a manager can’t deliver profits at a salary of $1 million a year, how can he do so if you pay him $2 million? Why would he be holding back? And why would competent managers need to be paid so much more than they were before the New Era arrived? Every generation must have a number of successful managers; if salaries were only $1 million a year, rather than $10 million per year, what would they do, become crane operators?

And what about the hedge fund managers and other financial professionals? Even if their salaries were only half as high, they wouldn’t likely give it up to become short order cooks.

The whole idea of the New Capitalism is a humbug. You can’t set aside common sense and standards of prudence just because some yahoo tells you the new free market will make you rich. The old free market can make you rich, but not if you ignore the old rules that go with it.

Bill Bonner is the President of Agora Publishing. For more on Bill Bonner, visit The Daily Reckoning.