U.S. Flow of funds and other stuff

On Thursday, the U.S. Federal Reserve released its quarterly flow of funds data. Quite a few trumpeted the USD2 trillion recovery in household networth forgetting that it is still about 11 trillion below the peak. More interesting is the outright contraction in household and business debt levels. Of course, business debt has just come down in the second quarter whereas household debt has been falling for the last four quarters. Never in the last (nearly) six decades has household debt contracted.

Business debt did towards the turn of the 1990s.  Business debt contraction has happened despite record bond issuance this year. Total Corporate Debt raised in the U.S. this year until last Friday exceeds the total raised in the boom year of 2007. But, bond issuance is not feasible for SMEs. So, a real cleavage is developing in the American society, I guess. Plus, when government borrowing crowds out private sector borrowing by such a long distance, it is hard to see animal spirits returning to the underlying economy.  The stock market level is a marvel, really.

FT Alphaville has two posts with excerpts from David Rosenberg (now with Gluskin Sheff in Canada and formerly with Merrill Lynch in the US as their North America Chief Economist) on the levitation of the US stock market (that applies to most stock markets and other so-called risky assets, actually). The facts cited (compiled by him) are hard-hitting. Investors beware.

Separately, this post in defence of Barclays’ Protium Deal left me shaking my head. Is it a private sector solution when you move things from your right hand to your left hand? The question is at what price and why now, if the recovery is for real?

On the 17th September, C. Rammanohar Reddy had an interesting Op-Ed. on the approach of the Government of India to World Bank for a a loan to recapitalise public sector banks. He has concluded that it would come with conditionalities for financial sector liberalisation.  Perhaps, perhaps not. It is good to sound the bugle. The government needs to be transparent. In my view, the chances of that happening are low. Conditionalities on IMF/World Bank loans have come down these days.  Of course, I have to admit that I found myself shaking my head at the uncritical references to financial liberalisation in this IMF working paper. Habits die hard.

Second, the Government of India does not have the resources to do so, with its huge deficit. Tapping into central bank reserves is not the answer. The government has to borrow from the central bank.

However, terming Raghuram Rajan committee recommendations ‘market fundamentalist’ is a bit rich. He is not a fundamentalist although he would believe, like most other people, that on balance well-functioning, well-regulated and competitive markets do a better job than governments in creating prosperity. Any one who has read his book, ‘Saving capitalism from capitalists’ would not call him a fundamentalist.

Good friend Sushant had sent me the IE interview of Dr. Y. V. Reddy on the first anniversary of the collapse of Lehman Brothers. I, for one, do not hold the Federal Reserve or the U.S. government guilty of having erred on that. It is easy to be wise in hindsight on these matters. Some, of course, see a conspiracy to aid Goldman Sachs’s competitive position. We have no proof except conjectures – somewhat reasonable – but still conjectures.

In any case, I think Dr. Reddy correctly notes that “if Lehman did not occur, some other thing would have happened. Lehman was a symptom of a disease”.

What is interesting is that the preface to the interview refers to Dr. Reddy as the man who was hailed as having saved India from the full impact of the financial crisis because of the policies he followed.  But, one week ago, Shekhar Gupta had a gratuitous dig at the RBI while commenting on Indo-China relations.  SG was treading on slippery slope (to put it gently) when he compared China’s fiscal policy and aggressive (reckless?) bank lending responses to the crisis to what he termed as the ‘guarding the bureaucratic turf’ response of the Indian central bank.

I am not sure if he had a chat with P. Vaidyanathan Iyer before he wrote that paragraph. He may have a valid case against the control mindset at the RBI on other areas. But, forestalling the financial crisis was clearly a success story. RBI does have some lessons to teach other central banks and, finally, it is way too soon to write the final judgement on either the efficacy or the sustainability of China’s crisis response. For starters, he can read these remarks by the chairman of the China Banking Regulatory Commission.

As Op-eds. go, I found this one by Kishore Mahbubani, dean of the LKY School of Public Policy in Singapore, rather interesting, particuarly for its  last paragraph.

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