V Anantha Nageswaran
TN Ninan’s weekend rumination on Manmohan Singh’s purported successes on the external front is disappointing for two reasons: it does not make any useful point and it is misleading. The ongoing global financial and economic crisis is neither about global financial regulation nor its architecture.
In all fairness—whether or not Dr Singh was and is a great economist is beside the point—his tenure this time around, even after the Communists left the alliance, has not exactly been inspiring. He might not have been able to carry the day with his proposals. But he could have, at least, articulated the change, the vision and the blueprint that India needs, thus helping whoever comes after him (or himself) when conditions turn more propitious. The only thing we know is that he missed the Communists in his coalition.
Finance Minister P Chidambaram tells us that India would be pressing for global oversight. Simply, the problem is not one of lack of global regulation. We may not agree on what needs to be done for there are many things to be fixed. But pursuing global regulation is a colossal waste of brains, effort and precious time. The crisis was and is about each country’s regulators not using the regulatory powers that they already possess and even voluntarily abdicating the ones that they had. The US Securities and Exchange Commission, for instance, allowed five broker-dealers to increase their leverage ratio to 30 or 40:1 from 12:1 in 2004.
It is about the United States funding its war in Iraq by allowing China and others to keep their currencies cheap so that they would buy all the US assets and fund the current account deficit (of which fiscal deficit is an important component).
It is about the credit-rating agencies selling their souls (as their own employees admitted in testimonies to the Congress) when they were in a position to see how many synthetic (multi-layered, to boot) securitised products and how many genuine securitised products were being manufactured by Wall Street.
It is about almost the entire world going after growth based on debt—everywhere from Hungary, Poland, Kazakhstan, Dubai and India to Vietnam. No government told its people that one couldn’t compress long-term growth into half a decade no matter how big the potential is.
No leader—in India (especially)—told the people that when India was falling short of power generation and steel production targets 8% to 9% growth was both inferior and unsustainable.
Even now, when Gordon Brown talks of a “global college of supervisors”, it is an ivory-tower, academic and impractical suggestion. It simply reflects that the person making the suggestion wants to appear a visionary although it is an utter non-starter and practically not germane to the problem at hand.
Neither he nor the Bank of England articulated a case for minding not just inflation but also a whole lot of other indicators (now the entire world’s central banks are producing financial stability reports and showing charts, which, if seen earlier, would have warned them of what was coming).
Now, Dr Singh is supposedly going to articulate three things in Washington, DC: “greater inclusivity, protecting developing countries’ growth prospects and avoiding protectionist tendencies”.
These are good things in and of themselves. They are the global economic equivalent of “motherhood” and “apple pie”. Very few people talk ill of these and very few would object to greater inclusion of developing world in global forums, or for that matter, inclusive growth within countries and avoiding protectionism. But how exactly would these things prevent a similar crisis from arising?
There are many who raised their voices and warned that all was not well with the world, when Japanese housewives borrowed yen and bought Australia and New Zealand dollars. Why, even now, they are buying South African Rand bonds with yen loans! Is the Bank of Japan or the Japanese government warning them of the risks? Instead, they are cutting the interest rate from 0.5% to 0.3%, making it easier for the housewife to close the bank deposit and speculate again. Is this the lesson from the crisis? Does the Indian prime minister have anything to say on this?
Speaking of Japan, has Dr Singh thought of how global ageing affects thrift and leverage habits of the households? Has he thought of how that creates and fans asset price bubbles all over the world, in conjunction with financial de-regulation, globalisation and technological improvements (global trading platforms, connectivity speeds)?
It would be nice hear him articulate these things for that would show his grasp of how the world of modern finance and capital flows work.
Crises and busts that follow booms can be prevented only if those who are enjoying the fruits of the boom times catch themselves saying “this time it is different” and immediately stopping dead in their tracks and reversing.
Credit Suisse (India) has just released a report that is thirteen pages long. It could have been compressed into a single page. The point that they are making is that the leverage that Indian corporate promoters took on through their unlisted vehicles appeared conservative when measured against net worth at the peak. But such leverage built in no cushion against net worth erosion that has taken place. Now, the leverage ratios are too high.
De-leveraging has to be undertaken and that means lower investment spending and lower growth. Does the Indian government have the wherewithal to offset that with fiscal spending and, as importantly, ensure that it is money well spent?
It takes two to create leverage—borrower and lender. So, who lent and why and on what assumptions? What were the risks and stress-scenarios they considered? What did those analyses show and did they accommodate them or ignore them?
Yes, governments cannot legislate or regulate human behaviour beyond a point. Micro-management has limits and could be counterproductive.
But, to not use the regulations that have been effective and worse, to even nullify them and work against them, using the powers that one has, are unacceptable and aggravate the very crisis that they now claim to be addressing. Well, that is what India did.
So when Dr Singh did not warn us of the dangers and worse, was silent when his own government was adding to those dangers, how can we be sure that he has the answers to get us out of it?
These are the author’s personal views