More to ‘No confidence’ or ‘No competence’ debates than hugs and winks

It is instructive that the only two ‘No Confidence’ motions in the Indian Lower House of Parliament in the new millennium were against the NDA governments – in 2003 and in 2018. There was lot of theatre but far less substance, one can see. Rhetoric in place of rigour.

As the Congress President continues to hammer away at his theme of the Modi government, it is important to remind ourselves who the real ‘Suit boot ki Sarcar’ was. Pl. read this blog post from 18th March 2018. It is data driven.

It also appears that the French Government has backed the claim of the Defence Minister that there was indeed a confidentality agreement signed between the Governments of India and France in 2008 when UPA was in office! Homework, gentlemen, please!

AS for the real issues concerning farmers, as I checked into my room at the Della Resorts in Lonavala on Saturday (here to give a speech at the SEBI offsite later in the day), I turned on the TV and watched a fairly civilised discussion in CNBC TV 18 on the farmers’ situation featuring three people inculding a former Agriculture Secretary Siraj Husain, a farmer’s representative (did not catch his name) and a former journalist who has been covering the farming sector. Very civilised debate. Towards the end, Mr. Siraj Husain referred to the piece by Mr. Ajay Jakhar (may be, he was the farmers’ representative on the panel) in ‘Indian Express’. I immediately searched for it and located it. Two sentences towards the end of the article make it an eminently worthwhile read.

The time has finally come for the PM to declare: “I am confident Indian farmers can feed the nation, I annul the Essential Commodities Act”.

A brilliant idea. True demonstration of commitment to farmers and elimination of urban bias in policymaking. I will personally agree with this and support it.

Between inflation management and enhancing farmer’s incomes, for now and at least for a few years, it is better to err in faovur of the latter. Put the inflation target at 5% and the range as 4% to 7%. These can be revisted, re-examined and revised if necesssary, once in 3 years.

The impact on the urban poor can be attenuated if the resulting fiscal space – from having to waive loans at exchequer cost – is used to target urban poor distress pockets. Who knows, it may not happen, if rural prosperity reverse feeds into demand for goods produced in urban centres and results in a rise in urban employment (casual, informal
and formal) and incomes.

The system lacks the skill to diagnose its own incompetence.

That is an indictment worth reflecting upon. Where is the accountability for non-performance? Well, where are the criteria and where are the appraisal systems? Indeed, who defines the expectations for senior bureaucrats and how? Pity such things do not discussed in the ‘No Confidence debates’.

Lately, I have always found revisiting articles from a few years ago to be very useful. It gives us a far better grip on the rigour and logic of the arguments made. If they still made sense, then the author/writer has done well.

An article by Mr. Ajay Vir Jakhar written in July 2014 falls in that category. It is on the Minimum Export Price (MEP) slapped on potatoes. The idea of bureaucrats deciding what the MEP should be is risible to me. It is utter nonsense.

Only recently, the Government of India decided to abolish MEP for onions. I hope it endures. In January, the Ministry of Commerce, under Mr. Suresh Prabhu, made a plea to the Government to abolish MEP altogether. It has not been heeded yet.

Now, fast forward to January 2018 when Mr. Ajay Vir Jakhar wrote one more article on how much the Government of India policies on potatoes were badly mashed up:

Logically, a farmer allowed to make money in one year, would be better prepared to bear the losses on the farm in the next. If not, the farmer gets into a perpetual debt cycle and is compelled to seek “financial sops”. Consequently, most farmer organisations are content to limiting themselves to what the farmer understands — “farm loan waiver” and venture no further into the policymaking quagmire….

… The solutions to the farm crises aren’t limited to budget allocations but rooted in a system where interventions to control food inflation are not harmonised with crop-price compensation. As far as the farmer livelihoods are concerned, state governments and the Ministry of Agriculture & Farmer Welfare are becoming less relevant, as decisions of the Ministry of Food, Public Distribution & Consumer Affairs are demolishing the prime minister’s grand plan for doubling farmer incomes.

Frankly, to some extent, avoiding such big anti-farmer blunders (knee-jerk invoking of ECA and MEP) is not all that difficult. They constitute low-hanging fruits with big multiplier effects for farmers. Potatoes and onions have become such sacred cows that farmers’ lives and fortunes are so easily tossed aside. It is going to be politically very costly too.

Successive governments in India have  done the input parts to farmers reasonably well – free pricing of power, water, susbidised fertiliser and no agricultural income tax. It has not done much work in relieving stress in production – monsoon vagaries. Irrigation potential remains high and actual irrigation cover has stagnated. Farmer education through agricultural extension workers used to be a big thing but I am not sure it is pursed with the same vigour as it used to be in the days of the ‘Green Revolution’.

It is in the front-end, the marketing end, where governments have failed through utter lack of sensitivity to and understanding of farmer issues, crop-price cycles as he put it. Allowing markets to work for farmers, not interfering with market signals and expending some political capital in tackling intermediaries and their commissions that gnaw away at the final price for farmers are the things to be done at the  front end.

Simultaneously, India’s inflation target has to be tweaked. Urban media will squeal when prices rise. Most have no perspective or comprehension of issues, of costs-benefits and of feedback loops. Let them protest and holler. The government has to focus and prioritise.  Perhaps, it is all too late for 2019. As Ajay Jakhar writes,

Farmers could change fortunes in the Rajasthan and Madhya Pradesh assembly elections, allowing the Opposition to bask in the farmers’ misery.

I think the PM has to worry deeply about how badly they have let themselves down by letting down farmers by not tackling the institutional memory, history and inertia in the in the bureaucracy and the entrenched urban bias in policymaking.

(p.s: Came across this interesting article about Mr. Siraj Hussain’s wife and her brother too. Nice stuff)


That is the word

Tucker stopped short of advocating the BoE be brought back under Treasury control. But beneath the bonhomie with governor Mark Carney and his old BoE colleagues, was there a hint of critique? Late on, Tucker pointed to the front row, where Carney and three deputies (Ben Broadbent, Sir Jon Cunliffe and Sir Dave Ramsden) sat next to chief cashier Victoria Cleland, and joked: “I’ve just noticed: this is the politburo.” The front row, Soviet-style, did not smile. [Link]

I am reading ‘Unelected Power’.

An important lesson from Dr. Y.V. Reddy

Among many lessons that I learnt is one from Governor Narasimham who
was my boss. One day he showed me a draft letter that he was writing to Robert
McNamara. He asked my frank comments. I promptly did. He walked across to
my room and told me. “I wanted you to be frank; but not brutal”.

In substantive terms I learnt that for good negotiations, we should start with
what we agree. That makes a pleasant beginning and positive start. Then, we
discuss only what can be negotiated. If we cannot negotiate something, we take it
to the end. Most of the time, the negotiators have to help each other in public
policy matters, to please their bosses. [Link]


Dodd-Frank and Matt Taibbi

Matt Taibbi will, forever, be remembered for the label, ‘Vampire Squid’ that he came up with, for Goldman Sachs. No matter what else he writes.  In passing, I should mention that Pratap Bhanu Mehta will be remembered for writing, ‘While we were silent’ in 2013 no matter how many times we disagree with what he writes.

Matt Taibbi’s take on the two major political parties in the United States features flawed logic. In fact, it contradicts his earlier piece on how Democrats helped pass the Bill that diluted the Dodd-Frank Act. More on that later.

The reality is that one can smell Republicans (the political party in the USA)/Conservatives from a distance: they want status quo to continue. No disturbances or perturbations (a jargon that economists love to use) to the staus quo. ‘Do not interfere’ is their message to the government – on social and on economic affairs.

Democrats, on the other hand, were supposed to be the party of the underdogs. Instead, they favoured Wall Street interests. They repealed Glass-Steagall and they helped pass Commodities Futures Modernisation Act that kept many financial products out of regulatory purview. They became a party of elites, by stealth. That is fradulent. In fact, he should go back and re-read his own piece, titled, ‘Obama’s Big sellout’ written in December 2009 or early 2010. It is no longer available in the ‘Rolling Stone’ site. But, I found an extract here.

Hence, calling Republicans a party of ‘open con’ does not cut it. It was and is open, all right. It is no con game. We know their agenda.

He then wrote a piece about “The Economic Growth, Regulatory Relief and Consumer Protection Act (Pub.L. 115–174, S. 2155), signed into United States federal law by President Donald Trump on May 24, 2018.”. It amended the Dodd-Frank Act or the Financial Stability Act, 2010.

He was right on some of the factual details. The word, ‘may’ has been changed to ‘shall’ in one place. True. Some limits have been increased from 50bn. to 100 bn. to 250 bn. US dollars, etc. But, he did omit some key aspects that lead us to a different interpretation.

The amendments do include the following:

(b) Rule Of Construction.—Nothing in subsection (a) shall be construed to limit—

(1) the authority of the Board of Governors of the Federal Reserve System, in prescribing prudential standards under section 165 of the Financial Stability Act of 2010 (12 U.S.C. 5365) or any other law, to tailor or differentiate among companies on an individual basis or by category, taking into consideration their capital structure, riskiness, complexity, financial activities (including financial activities of their subsidiaries), size, and any other risk-related factors that the Board of Governors deems appropriate; or

(2) the supervisory, regulatory, or enforcement authority of an appropriate Federal banking agency to further the safe and sound operation of an institution under the supervision of the appropriate Federal banking agency. [Link]

There is also a provision for ‘globally systemically important bank holding companies’:

(f) Global Systemically Important Bank Holding Companies.—Any bank holding company, regardless of asset size, that has been identified as a global systemically important BHC under section 217.402 of title 12, Code of Federal Regulations, shall be considered a bank holding company with total consolidated assets equal to or greater than $250,000,000,000 with respect to the application of standards or requirements under. [Link]

In plain English, S.2155 does not prevent the Federal Reserve from exercising its authority with respect to Bank Holding Companies where it deems necessary. The real issue is whether the Federal Reserve is keen. See here and here.

Amendments to the Dodd-Frank Act will not cause the next crash. That train has already left the station. If at all they do cause banks to take on more risks, it will be because theri capital requirements have not been raised enough and because the Federal Reserve has allowed monetary policy to remain too loose and interest rates to remain too low for too long.

Ultimately, it is all about appropriate pricing of capital and pricing it too cheaply and way below fair, risk-adjusted level is the biggest gift that the Federal Reserve continues to shower on the financial industry.

In another article, Taibbi makes the case for a Financial Transactions Tax in the United States. I endorse that, wholheartedly. He is right. But, he is pushing the envelope on facts when he writes that the European Union has already ’embraced’ it. That simply is not true. I wish it were true. It isn’t.

Read what he writes here and decide for yourself:

A financial transactions tax might help incentivize Wall Street to once again emphasize true long-term investment, as opposed to spending all day moving piles of money around. As with Medicare-for-all, it might take a while for Americans to accept an idea already embraced in Europe. [Link]

It is still in the works. Lo and behold, Brexit is supposed to have gummed it up, because it will be difficult to enforce in the UK that won’t be part of the European Union and hence financial transctions would migrate there. That is the logic for the dealy. So, FTT in Europe is still coming.

The lesson is that it has become impossible to read anyone and take what they write at face value, without doing some fact-checking oneself. Well, if you are reading this, remember that it applies to this blogger too!

So, caveat emptor!

Ten years after the crisis and ten years of crises

Martin Wolf reviews Adam Tooze’s ‘crashed’ in FT. You can read it here. I posted the following comment on the review:

I will not put the blame on the savings glut of China for the US crisis in 2006-08. That was Bernanke’s subterfuge. It was American monetary policy and regualtory laxity. Add capture by finance and hubris (‘Great Moderation’) that went global to the mix.

China’s savings glut was the topping that America encouraged. American firms set up shop there and exported to the United States. China earned export revenues and recycled them. Americna corporations made huge profits because they located production in China. Wall Street earned huge fees intermediating the capital flows. China’s savings glut helped, at the margin, keep interest rates low but the Fed, under Greenspan and then under Bernanke, with their policy transprency and predictability removed risks and uncertainty for market participants. To me, that is the key issue.

Whether, post-crisis, the political Right managed to translate a crisis of financial excess into a fiscal issue is an interesting argument. I am unpersuaded. The Left was right to initiate regulation on Finance. But, it was piecemeal and half-hearted because much of the advisers to Obama were drawn from the Clinton era who were close to or were from Wall Street. Second, Democrats left the monetary policy framework untouched. They bailed out banks but not the borrowers. None of note went to jail. What ever happened to the Financial Crisis Inquiry Commission Report by Senator Carl Levin?

So, shifting the blame for the disaffection to the political Right’s evil conspiracy’ to make financial sector excess into one of the Left’s political excess falls well short of the intellectual rigour and cogency needed to understand the popular protests and backlash that have brought Brexit, Trump and other huge political shifts in continental Europe.

Quite simply, the swamp was left untouched by Democrats. They did not clean up after 2008 – a big opportunity lost. Trump had not drained the swamp either. But, Democrats have no moral right to question him on that and neither are Trump’s voluble critics because they did not hold the Democrat President to account for his failure to clean up and still do not.

Paul Tucker is on to something better with his observations on policy by and for the ‘Davos man’. Indeed, early in his book, ‘Unelected power’, he alludes to the transfer of policymaking power to international institutions and ‘elites’ who were employed by them, away from democratically elected governments, from the 1990s. It makes sense.

Recent political shifts on either side of the Atlantic and developments such as Brexit  are not merely a consequence of the crisis that is only about a decade old. That they are a result of deep-seated and systematic- benevolently motivated or mala fide – takeover of decision-making from democratically elected governments by elites without democratic legitimacy and accountability is a hypothesis that holds much promise for further analysis and examination. The policy implications that flow from that line of thinking are straightforward. That also explains why neither elites nor their cheerleaders in the media look in that direction.

In sum, the crisis was a consequence of the overreach and hubris of the elites. To date, they have neither admitted to the folly of their ways nor have they changed their ways. Of course, that follows naturally from the first.

Their cheerleaders  – such as the journalists of this newspaper – are trying to turn our gaze and rage towards others who are merely consequences of the elite follies.

So, the world waits for a ‘better’ encore than 2008 to see if elites will finally be humbled and consigned to the dustbins of history along with their policies. We can then begin afresh.

The twin hats of Andrew Haldane

My good friend Amol Agrawal (what an amazing and inveterate blogger, he is!) had a blog post on a recent speech by Andrew Haldane of the Bank of England (BoE) on the low  or non-existent productivity growth in the United Kingdom. I left the following comment on his blog post. It is slightly updated here.

I can understand you being excited about a speech by Andrew Haldane. He still does not fail to impress and provoke thinking. But, look carefully. What is institutional infrastructure for diffusion? What is the agency or agencies to be created? In the private or in the public sector? Who would fnance it? How would it be assessed? What would it take to judge that it has done a good job (or not) of diffusing innovation? I guess that the speech is silent on these. Otherwise, you might have blogged on it. I confess that I am yet to go through the speech.

But, there is another more important point to make with respect to Mr. Haldane. He failed to connect the dots of his own speeches, research and what went on before 2008. He produced such insightful research on banks and finance before 2012 that it is a great pity that he did not carry those insights wit him on to his new job. He behaved rather differently and disappointingly after he became the Chief Economist of BoE from being the Director in charge of Financial Stability.

He continued to insist on interest rates being kept too low for too long. To what effect? To what consequences? In fact, the lack fo productivity diffusion is an indictment of the low interest rate policy. Where is the incentive to do the hard work on productivity improvements and undertake investments that enhance them when easy money can be made speculating on high-end properties in London suburbs which is what low interest rates facilitate?

He knows of the BoE research that showed very clearly that banks create money. [Prof. Richard Werner at the University of Southampton has done further excellent empirical work on it. He calls the last century of economics teaching and learning wasted effort! Check out his papers.]

He knows again from BoE Research that most middle-class and lower middle-class Englanders have only interest-bearing deposit accounts as their financial assets. Low interest rates hurt them. Low interest rates help those who buy financial assets and real estate assets with debt. They borrow cheaply and big and the discounted value of future cash flows on equities is inflated by the low funding cost. Of course, it is not just the short end of the interest rate curve that remained low for long but even the entire yield curve with BoE Asset purchases.

To what end? How much his research helped him or influenced him to make public policy decisions and choices that enhanced public welfare?

In short, much as I admired and still admire his reserach, his hard work, his evidence based conclusions, etc., he scores rather poorly as a public policy exponent and technocrat.

Please do read Paul Tucker’s ‘Unelected power’. It is dense. I have only done four chapters. Not easy. But, worth it.

Singapore shows the way

Macroprudential regulations are of limited effectiveness without interest rates lending support. In other words, monetary policy and macroprudential policy cannot work at crosspurposes. Some central bankers might argue that interest rates can be low and macroprudential policies can be deployed to ensure that credit at such low interest rates flows to the productive sectors of the economy and for productive purposes. Sounds elegant and feasible in theory except that I am yet to come across any practical success for a central bank with such an approach.

That is why the hankering after macroprudential by western central bankers and their economists is understandable. They think that they can have their ‘low interest rate’ cake and eat it too. It does not work. Jeremy Stein had said it eloquently in a speech in 2013.

In the case of Singapore, it is different. It is a small, open economy and it is an interest rate taker. It operates monetary policy through exchange rates. Macroprudential policies can work in isolation. Singapore deployed it to good effect in 2013. Real estate prices cooled and transactions tumbled for the next three years. Since the end of 2016, the real estate market began to make a slow comeback.

The amount of pamphlets and invitations to sell or buy one’s apartment complex en-b bloc that get pushed into one’s postbox is proof enough that things were beginning to get out of hand again.

The Singapore government and the Monetary Authority of Singapore decided to intervene again. On July 5, they announced increases in stamp duty and reduction in loan-to-value ratios, etc. Bankers and real estate developers and agents were dismayed. That means that that was the right thing to do.

I write about it in my MINT column today.

Singapore deserves three cheers for this move.