BRIC – hot or not?

It did not strike me but it should have served as a warning sign when I read this 2-pager on Jim O’ Neill in the FT in the flight from Zurich to Dubai on January 16th. The possibility of the magazine cover curse on either Jim O’ Neill or his ‘creation’ – the BRIC acronym – did not enter my head.

This BBC report should banish any thought of ‘magazine cover curse’.

Once, “the United States could export its recession around the world,” says Stephen King, the group chief economist of HSBC bank.

This crisis is different. Emerging economies, especially China and India, managed to avoid the worst of the contagion.

It’s “not perfect decoupling,” says Mr King, but over the long-term the crisis has sown the seeds for a move towards a “China-centric world rather than a US centric world”.

Stuart Gulliver, executive director at HSBC, sees a new economic bloc emerging that would sideline the US and Western Europe – stretching from China, Asia Pacific, the Middle East and Africa to Latin America.

As a bloc, these countries have “a lot of investable capital, huge commodity wealth, huge production capital and huge demand”.

It’s an area of emerging countries with so much domestic demand that a crisis in the West may cause it to stutter, but not to grind to a halt, argues Mr Gulliver.

Mr King points to the last three months of 2009, when China’s economy (and its exports) rebounded, even when US consumer demand did not.

The crisis has tipped the power balance.

But, reading this interview by Niall Ferguson with India’s Economic Times reminded me that that the thought of ‘magazine cover curse’ would have been legitimate.  My friend Sushant had sent me key extracts – the aspects that dealt with the rise of China, India and the possible futures that the world could have.

I now read the full interview. He does make me some compelling points on the legacy of the British empire. I like his point about thinking of the counterfactual.

I am impressed by this reply:

You’ve compared the potential of China and India . How do you see the future of the world panning out in terms of the China-India equation and where the two countries are headed?

First of all there is no such thing as the future of the world. There are futures. We all try and choose the one that we find the most attractive and we get the future that we somehow collectively will. One future is that of a familiar one where China’s GDP catches up with that of the US in 2027 and India’s with the US in 2050. The world rebalances and the East takes its rightful position as the dominant economic power. We thus go back to 1700. That’s a future that I would call a Goldman Sachs future.

There’s another future in which China’s attempts to have economic growth without political reform and breaks down. There’s another in which rivalry between India and China or between China and America produce conflicts. There’s another one in which the consequences of the financial crisis include a breakdown of the global economy due to tariff protection, currency wars and so forth. And those futures don’t strike me as significantly less plausible. In fact being a pessimist at heart I find them slightly more plausible than this happy story of Asian capture.

When you go back 100 years it would have been impossible, in let’s say 1910, to forecast that Japan’s GDP would overtake that of Britain at some point in the course of the 20th century. That’s what I take away from my historical studies . Projecting linear trends forward and saying that’s the future is a mug’s game. History is too full of twists and non-linear relationships [Emphasis mine] and we’ll be surprised just as people have been surprised by China’s growth. I remember going back to look at the Economist surveys through the 1990s to 2007. What really struck me was that they had missed the China story until it was right under them. Now it seems obvious to us. I read an Economist survey from as recently as mid-1990 s asking what is China going to export – tinned mushrooms? You know the future is very hard to predict.

Thinking of horizons much shorter than a century, the question is whether there is genuine de-coupling and whether one could safely predict that, after the re cent sell-off in the stock markets around the world, should one go back to buying Asia – China and Indian stocks – or should one practice caution?

This TIME magazine article leans in favour of India, again, from a long-term perspective. They make a valid point on this one:

Most important, India managed to achieve its substantial growth without putting its banking sector at risk. In fact, India’s banks have remained quite conservative through the downturn, especially compared with Chinese lenders. Growth of credit, for example, was actually lower in 2009 than in 2008. As a result, economists see continued strength in India’s banks.

But, who is to say that India’s fiscal profligacy is better or would be less problematic than China’s banking loans and potential non-performing loans? For example, continued nominal GDP growth well in excess of domestic interest rates could result in a much larger rise in banking assets than the rise in bad loans, in China.

My question is not rhetorical. I am really curious to know the answers that would help me make my investment choices.

This report filed from Davos by Chris Giles for FT has a rather astute observation from Raghuram Rajan:

Kenneth Rogoff told the Financial Times that, although aggressive policies should keep growth reasonably strong in 2010, “over the medium term, global consumption growth is likely to be slow for several years as the US consumer deleverages and the Asian consumer only gradually notches up her game”.

His view was shared by another former chief economist of the International Monetary Fund, Raghuram Rajan of Chicago University, who predicted imbalances would re-emerge, “because the structural forces that created them have not disappeared”. He also told delegates that there was a reason emerging markets could not start to consume more quickly: “Historically, emerging markets have never managed demand well.” [Emphasis mine]

So, it is not going to be that easy to bet on the so-called de-coupling, yet. It would still be a case of hope over reason, at least for now, notwithstanding the BBC report above and this story in ‘Economist’. Of course, Niall Ferguson said that predicting future was never easy. That should have been obvious long ago. Most of us do it not because we are good at it but because that earns our daily rice and roti.

A missive to the apostles of the private sector

Chairman Bernanke was confirmed for a second term as Chairman of the Federal Reserve with a vote of 70-30 in the Senate. It does not matter that, in standard democratic parlance, this was a comfortable victory. In the context of the post, 30 dissenting votes could be 30 too many. Chairman Bernanke’s speech at the American Economic Association was criticised for its failure to acknowledge the role of monetary policy in creating the housing bubble. I went through the speech transcript and his charts. He was not arrogantly indifferent to the role of the Fed in stoking the housing bubble. He was earnestly trying to defend himself and the Fed.

Interestingly enough, in chart 4, where he tries to show that Fed monetary policy was not too loose between 2002-2006 with his own reconstructed federal funds rate given by the Taylor’s rule – using real times forecasts for inflation, it was clear that the Fed policy was loose (if not ‘too loose’) during the period under discussion. In 2007, it was too tight. The Fed had actually engaged in compensating errors. Policy was too restrictive in 2007 as a compensation for being too loose in the previous five years. Was it a mistaken show of bravado or hawkishness?

Where he erred in that speech was his failure to acknowledge the role that Fed communication played in giving a sense of (needless or false) certainty to the market participants on the path of future rates. Second was the continued reassurance that Fed officials – himself and former Chairman Greenspan – provided to market participants on the housing bubble. They ignored warning signs and kept reassuring every one else that the US economy could not have a national housing bubble.

Another error of omission in the speech was his failure to set an example to the banking industry by admitting to errors. That would have made some in the banking industry reflect on their own failure to acknowledge errors of omission and commission.

For those interested, Mr. Bernanke’s speech at the AEA is here.

That brings me to another point. There are some people who find it convenient to blame only the Fed and the government and completely absolve (or keep quiet) on the role of the so-called private sector. They are among the perceptive observers of the world capital markets. Perhaps, it makes them feel comfortable to blame the public sector and not the private sector for that might be construed as an ‘attack’ on the so-called ‘free markets’. One example is here. Several others that I have read are ‘clients only’ documents.

A refreshing exception is, of course, Christopher Wood of CLSA, based in Hong Kong. He wrote in a special ‘flash’ edition of his well-known ‘Greed & Fear’ (clients only access) thus:

GREED & fear used to write editorials calling for repeal of the 1933 Glass-Steagall Act when working for The Economist in New York in the late 1980s. But at the time a naïve GREED & fear had assumed that repeal of Glass-Steagall would occur in the context of capital markets where at least a certain modicum of market discipline would be allowed to prevail. GREED & fear never expected that investment banks with no depositors would be bailed out in such obscene fashion as happened in the recent past (save for Lehman Brothers) with bond investors taking no hair cut whatsoever.

The simple point is that there was never any case for repeal of Glass-Steagall, or indeed for financial deregulation in general, if the political process was not prepared to contemplate punishing commercial failure in the context of the financial services sector.

But, were banks innocent babes in the wood  – lost for direction? Professor Raghuram Rajan is very clear  that they were and they are not:

It is hard to have much sympathy for the bankers, who have brought the public’s ire on themselves through incompetence and then through an outrageous haste to pay themselves. [More here]

They bought mortgage lenders and encouraged them to lend aggressively. They securitized those loans and encouraged them to lend even more to feed the securitization pipeline, they lobbied regulators to relax leverage constraints to offset the drag of a flat yield curve from 2005 onwards. They had no idea of risk management. They bought and sold Credit default swaps well in excess of the value of the underlying credit, they were supposedly trying to protect. Some finally said that they did not understand all that was going on. If so, why did they permit it?

These apostles of the private sector should read this short note on lobbying by financial firms.

Now, when the Obama administration tries to put an end to proprietary trading, the defendants of the so-called ‘virtuous private sector’ versus the ‘villainous public sector’ are up in arms against the government intervention. One is amazed at short memories. Without the government, where would these private sector banks be, today? Who incurred all these losses and brought the world to the brink? Governments?

Veteran Jeremy Grantham, in his latest missive, has this to say on the proposed ban on proprietary trading by deposit-taking institutions:

But since we bring it up, of course prop trading was indeed the rot at the heart of our financial problems (see last quarter’s Letter). Watching traders take home their $28 million bonus sent a powerful message to lowly salesmen and packagers of asset-backed securities, for example, to get out there and really take some risk. This rot spread to the very top, and pretty soon chairmen of boards were exhorting CEOs to leverage up and look more like some much more profitable rival that resembled a hedge fund rather than an investment bank. Thus encouraged – or intimidated – some CEOs just kept on dancing right off the cliff. Let’s learn from our near disaster.

Viral Acharya and Matthew Richardson write a sensible piece in the FT:

The main focus of financial reform should be to address such systemic risk. Separating commercial banking and other forms of financial intermediation from proprietary trading is a step in the right direction, since it limits systemic risk without affecting the financial sector’s ability to perform its core functions. [More here]

Prof. Raghuram Rajan takes a different route and simply calls for an end to deposit insurance for banks above a particular size. He is focusing on the issue of size and the conceptual problems associated with defining bank size. He did not dwell on the proposed ban on proprietary trading although the following sentence shows that he does not think highly of it:

Why not phase out deposit insurance as domestic deposits grow beyond a certain size? That would be far more effective in reducing risk than size or activity limits, and far easier to implement.

I would not even wait until the institution grows beyond a certain size. Simply do not provide deposit insurance to those institutions that want to do business beyond plain-vanilla banking, regardless of their size. Depositors would automatically demand a risk-premium for depositing their savings in such institutions or avoid such institutions. Either way, risk-taking by  such institutions would then be based less on deposit-insurance-subsidized source of funding and more on funds sourced from the market.

There is no better way to end this post than the article by David Stockman, the former Director of the  Office of Management & Budget under Reagan in New York Times recently. It is a masterpiece.  Some samples:

… by fixing short-term interest rates at near zero, the Fed planted its heavy boot squarely in the face of depositors, as it shrank the banks’ cost of production — their interest expense on depositor funds — to the vanishing point.

The resulting ultrasteep yield curve for banks is heralded, by a certain breed of Wall Street tout, as a financial miracle cure. Soon, it is claimed, a prodigious upwelling of profitability will repair bank balance sheets and bury toxic waste from the last bubble’s collapse. But will it?

In supplying the banks with free deposit money (effectively, zero-interest loans), the savers of America are taking a $250 billion annual haircut in lost interest income. And the banks, after reaping this ill-deserved windfall, are pleased to pronounce themselves solvent, ignoring the bad loans still on their books. This kind of Robin Hood redistribution in reverse is not sustainable. It requires permanently flooding world markets with cheap dollars — a recipe for the next bubble and financial crisis.

Moreover, rescuing the banks yet again, this time with a steeply sloped yield curve (that is, cheap short-term money and more expensive long-term rates), is not even a proper monetary policy action. It is a vast and capricious reallocation of national income, which would be hooted down in the halls of Congress, were it properly brought to a vote. ….

…… To argue, as some conservatives surely will, that a policy-directed shrinking of big banking is an inappropriate interference in the marketplace is to miss a crucial point: the big Wall Street banks are wards of the state, not private enterprises. During recent quarters, for instance, the preponderant share of Goldman Sachs’ revenues came from trading in bonds, currencies and commodities.

But these profits were not evidence of Mr. Market doing God’s work, greasing the wheels of commerce and trade by facilitating productive financial transactions. In fact, they represented the fruits of hyperactive gambling in the Fed’s monetary casino — a place where the inside players obtain their chips at no cost from the Fed-controlled money markets, and are warned well in advance, by obscure wording changes in the Fed’s policy statements, about any pending shift in the gambling odds. [More here]

Update:  These two news reports in BBC, in their different ways, offer hope for encouragement. One is because banks are ‘tone-deaf’, they are going to invite the kind of oversight that they deserve to get and, second, it is encouraging to see that policymakers are neither deaf nor blind. Let us wait to see their actions.

The real villain in the AIG bail-out

The main problem with this story is that this does not confront the question of what would have happened to the financial system globally had Goldman Sachs been allowed to take its loses on the CDS it had bought from AIG, if all that they are trying to prove is that the AIG bailout was a bailout of Goldman Sachs. The global financial system would have melted donw had Goldman gone down. Such was and is GS’ reputation and that is the truth. If Paulson openly came out and says that he bailed out Goldman because he wanted to avoid a systemic meltdown globally, he would be saying the truth.

Of course, why AIGFP posted a collateral when other monoline insurers did not and why AIGFP was not regulated are ex-post arguments. They were true even before the crisis broke out. Before the crisis, no one bothered.

The real story is what they say: the AAA rating that the senior tranches of the CDOs got duped/dulled/lulled AIGFP to issue countless CDS (more than the value of the underlying CDOs in the first place) to all banks and to agree to post cash collaterals.

Neither the CDS sellers (AIG) nor the banks believed – when they first entered into these transactions – that anything remotely resembling 2008 meltdown would happen.

That, in turn, was due to far too many loans, far too many bad loans, far too many securitized instruments on thse dodgy loans and far too easy top credit-ratings. The credit-rating agencies were the only ones that had a macro overview of what was going on, in the whole industry since all came to them for ratings.

They should have seen the total volume of CDOs (and CDO*2) that they were being called upon to rate, in relation to the pool of underlying mortgages and the rising proportion of sub-prime mortgages in relation to total mortgages and the rising proportion of sub-prime mortgages in the CDO mortgage pools.

The real scam, therefore, is why are these rating agencies still around and why this industry is not being thrown open to more and why do they still enjoy quasi-statutory status?

Greece and Grand Slam vs. Google

In the investment/analyst community, China has been in the news since Jim Chanos – famous for shorting Enron. It was quoted widely since he said that China was Dubai * 1000. You can see his comments here and here. I too think that was somewhat wild although one could understand the ‘sound byte’ angle to that comparison. As some one pointed out, China can print money and Dubai cannot. The blurring of lines between personal, public and private interests is the common element although one should think that it would be sharper and more widely prevalent in the monarchies of the Gulf region. Jim Rogers – a famous China bull – refuted him. See here.

Tom Friedman joined this debate. He said that China was not the next Enron, pointing to Mr. Chanos’ success with Enron. You can read his NYT Op-ed piece here. His main argument was this:

But it also has a political class focused on addressing its real problems, as well as a mountain of savings with which to do so (unlike us).

Soon after he wrote that, came the Google announcement. In case you missed their original announcement, it is here. Friedman was embarrassed. He wrote a clarification in which he split China into two parts: ‘command China’ and a ‘networked China’. He conceded that if Command China dominated ‘Networked China’, he would short the Communist Party of China! That was some finessing and the finer point (if any) was lost on many readers, including Yours Truly. See his column here.

Abe Greenwald takes issues with Mr. Friedman’s flip-flop. But, he fails to rebut him convincingly on the key issue that – rightly or wrongly – Mr. Friedman identifies as the key differentiator in favour of China – a political class focused on addressing its real problems. See his comments here.

I sided with Tom Friedman in a sense, on their economic competence in my MINT column last week. See the full column here. I had also alluded to their insecurity and obsession with control as the key risks that could trip or trick them into committing errors. An insecure (and fearful of losing control) mind plays games, you see. That too was on display in their reaction to Google’s threat as the Chinese finally lost their cool and saw the US government hand in Google’s decision. See how the Chinese media reacted. Usually, they are seen as HMV.

In the final analysis, I do not think we are anywhere closer to the truth with respect to divining China’s true economic health than we were, before these articles appeared. Therefore, I would stick to my view that their economic management remains on track to take their economy slowly (without major convulsions) towards a domestic orientation.

But, make no mistake. This move by the Greek government (through its advisers) to seek Chinese funding of its debt gives China a huge advantage over Europe and the rest of the World too. This is a classic understatement:

Chinese thinking is that Brussels could not let Greece fail, because the implications for the euro’s credibility are too dire. If that line of argument prevails in Beijing, then China may well be a buyer of Greek bonds. In the process, the Chinese may well be buying invaluable political capital in Brussels as well. [More here]

Just one argument would make it clearer: if China’s investment in Greek debt allowed the country to avoid a default and a potentially destabilizing crisis in the Eurozone, how would the Eurozone would be able to influence Chinese monetary or exchange rate policy when US dollar weakness results in excessive EUR appreciation? In addition, China has another reason to ensure that the EUR does not implode. One is that is a EUR implosion would rob China of an alternative currency to the US dollar to diversify its reserves. Collapse of the EUR against the US dollar would indirectly cause a significant appreciation of the Chinese currency against EUR, further stymieing China’s export prospects.

All told, I think this move is the soccer equivalent of China 10 – EU 0 (or) RoW 0.

Look at this news-item in FT: ‘China scientists lead world in research growth’. It was front-page news in FT Asia Edition on Monday and, on Wednesday, it was about Greece queuing up to China for money. India would do rather well to take note of the three factors cited as the key for China’s success in scientific research:

According to James Wilsdon, science policy director at the Royal Society in London, three main factors are driving Chinese research. First is the government’s enormous investment, with funding increases far above the rate of inflation, at all levels of the system from schools to postgraduate research. Second is the organised flow of knowledge from basic science to commercial applications. Third is the efficient and flexible way in which China is tapping the expertise of its extensive scientific diaspora in North America and Europe, tempting back mid-career scientists with deals that allow them to spend part of the year working in the west and part in China.

Together with this news and this news, one has to concede that after the Google saga, China still holds the aces. In fact, it has emerged stronger.

UPA’s self-goals

Two weeks away from Indian newspapers – I only managed to catch headlines on the IPL auctions. I thought Pakistan players did not automatically get selected. Seeing all the discussion on the role of government, I – as did most people – could not help thinking that it was a wonderful way to lose goodwill among a vast section of the intelligent civilian population all over the world. If Pakistan had to operate a PR agency, perhaps, its best recruits would be had among Indian government?

One has to agree with Surjit Bhalla on everything that he writes, down to his comments on this government, on UPA – I & II and on the Congress party. T. N. Ninan takes the fight to the Pakistani military and intelligence. Not a bad comeback to make but he too does not spare the decision to drop all Pakistan players.

When I met some journalists from MINT in December,  I asked them as to why they had gone soft on UPA-II. I thought the newspaper was quite a vocal critic of UPA-I’s fiscal policies, anti and non-reform stance, etc. For the most part, they were right.

Looks like they have been responding to my poser, lately. First came this news item on the absence of work for and neglect of junior ministers by senior cabinet members of the UPA government. It is a great shame. There is plenty of scope to run a cabinet on corporate lines – MbOs, periodic reviews and appraisal, all done transparently in the public arena. Indian Cabinets are run as old age shelter homes for the most part. We can say they are also youth hostels?

Then, there was this edit on the anti-reformers in education. What our successive governments have done to education is either a scandal or a crime or both.

This editorial in ‘Business Standard’ too on the topic of deemed universities is good for the observations made by PM Dr. MMS. The edit is too soft on Mr. Arjun Singh. Political correctness whn it comes to a NDA Minister – Dr. MM Joshi – and a ‘Left-Secular’ Minister still reigns. Pity. Mr. Singh had done incalculable harm. It was all fine for the PM to have diagnosed the ills correctly:

The last words on this policy challenge were in fact uttered by the PM when he told the Harvard Alumni Association in India, in March 2006, that: “Private initiative can and must supplement public investment, which is vitally necessary in the sphere of education. However, we must make a distinction between public investment, public support and governmental facilitation, on the one hand and over-regulation, on the other hand. Paradoxically, our educational system faces the conflicting threats of anarchic growth in quantitative terms and moribund stagnation in qualitative terms. We need a balance between populism and over-regulation; between unbridled marketisation and excessive bureaucratisation.” [Full edit here]

The call to shut down the agriculture ministry could not have come a day sooner. Mr. Pawar’s tenure both in the earlier regime and now  has been uninspiring, to say the least.

Acorn points to this edit too in MINT which says that complaints by Indian manufacturers about China’s cheap imports is an easier choice than doing something about it. One has to agree with their concluding paragraph which Acorn too highlights:

And if India wants its domestic manufacturing to compete at comparable costs, it should stop trying to block outside firms, and ask how it can better internal conditions. But that would mean a concerted policy that improves financing conditions, not to mention land acquisition clarifications and better regulations. Protectionism is just so much easier, no?

One has to conclude this post with Surjit Bhalla’s last paragraph:

The sad truth might be simple: This government is possessed with hubris; in simple English, unlimited arrogance. The decimation of the BJP, the extinction of the Communists, have seemingly left Indians with the option of no one but the Congress. Hence, it can do what it wants. If there is a food shortage, don’t release the piled-up stock of reserves which was created to counter just such an emergency. No matter if there is food inflation, the people will still vote you in. If the Mumbai politicians object, give in to their extraordinary demands and threats. Have no logic in the policy on visas. If someone even dares to question anything that the Congress party and its leaders have done over the last 60 years, then censor them, even if it is a guarded comment by one of your ministers. And remember, there was no such person as Narasimha Rao, even though it was under his leadership that the country changed, and the policies of the government changed. [More here]

ISEAS Regional Outlook Forum

Sunanda Datta-Ray’s Op-Ed in BS focuses on the recent Regional Outlook Forum (ROF) hosted by the Institute of Southeast Asian Studies (ISEAS). It is an annual event and it is useful to get a perspective on some of the Southeast Asian economies. Usually, the proceedings are non-controversial.

The ‘private Indian’ that he refers to in his piece is Yours Truly. I ‘confronted’ Mr. Sakakibara with his silence on the exclusion of India from key regional groupings when India is included in all the comments on Asia’s glorious history and future. He gave a good and fair answer, actually. He called for ASEAN + 3 to become ASEAN + 4, with India. We need to pursue this assiduously.

Dr. Y. V. Reddy who spoke, was brilliant as always, more for what he leaves unsaid and what he points to, directly or indirectly, ratherh than what he says directly. He observed that while economic momentum might have shifted eastward, intellectual dominance of the financial sector and global macroeconomics rests with the West. I think he meant that this remains an ‘unfinished task’. Perhaps, it has not even begun yet. IMF and World Bank, to start with, are still under Western stewardships.  Not all papers presented at the conference have been uploaded on the ISEAS site, yet.

The highlight of the event was the luncheon speech by the former Malaysian Finance Minister. The link to the speech is here. Indians should be able to relate to a lot of what he says about what ails Malaysian politics. It was a frank and well-written and well-delivered speech. Another speaker who belongs to the opposition camp also was quite negative on the prospects of the country, near-term.

Any contrarian investors for Malyasia?

On MFIs – Newly ‘MINT’ ed

Hitting the first ball for six is a rarity in cricket matches. Guessing the Raaga correct based on the first sounds from the singer is equally pleasing. So is getting the message out in the first sentence of an article. MINT’ editorial on Microfinance manages that:

One puzzling paradox of microfinance is that lending to the poor has been more successful than helping the poor save more.

It is a good editorial. In a recent conversation, a former central banker told me that microfinance is all about interest rate arbitrage – it is about profitable money-lending.

Yes, that is all there is to it – borrow at 11% from the bank and lend at 24% to 30%. Perhaps (only, perhaps) banks could do it themselves? Or, at least, they could charge more interest on the loans they make to MFIs if the profits are big enough to be IPO-ed out? Another friend told me that the MFIs that are going for IPOs should be writing Call Options to the borrowers for they are the ones who have allowed these ‘super-normal’ profits for the MFIs.

The central banker also added that financial inclusion meant not only credit but also savings and transactions. That is why the MINT editorial is good. It focuses on the right issue. Giving credit and selling them goats, buffaloe and tailoring machines is not a formula for poverty alleviation, let alone poverty elimination. Life skills and employable skills are necessary for them to break out of the vicious circle of poverty.

One of my friends who is doing her Ph.D thesis on microfinance (an empirical dissertation) is documenting systematic increase in multiple loans from multiple MFIs. I shall wait for her thesis to be completed and accepted before I publish extracts from it.  My own piece on the industry appeared in MINT, not-so-long-ago.

Of course, in fairness, one has to mention this initiative by the industry to self-regulate multiple loans. Mr. Mahajan is a good man and he understands the dangers of recent trends in the industry. It is good that the MF industry has him and his decades of experience to bring them back from greedy capitalism to enlightened capitalism.

The MINT edit is right to praise RBI for its focus on financial inclusion. For instance, I found this speech by Dr. Subba Rao a very good one. He says one banking cannot be boring in India and focuses on financial inclusion as one of the reasons why it  cannot be boring. The ful speech is well woth a read, for the comprehension the man has and the comprehension it brings to us.

While looking for this speech link, I noticed that he had given another speech, exclusively on financial inclusion this time, on Dec. 9th. I have not gone through it, yet.

In the end, the key point is not that this industry is useless for India’s development. On the contrary, it is very important. That is why it is important that they get their roles, responsibilities and actions right. I think we have a lot of good, corrective voices that are needed to keep both public policy and private behaviour in line with the objectives. On that score, no need for concern. That is what this editorial underscores.

Google eclipses PBoC

If the People’s Bank of China surprised many with its early tightening move – it raised reserve requirements on banks by 0.5% –  Google managed to kick it off front pages with its decision to reconsider all operations in China. You can see the whole thing here.

This is not very surprising. In the final analysis, we need to understand that there is no middle road. Enlightened authoritarian governments exist in our imagination. The basic human impluse from which authoritarinism arises needs to be understood. It stems from insecurity. Very rarely, human beings and institutions (or governments) evolve out of it. Bless those who manage to do so. Others reach their logical end.

That is why all talk of this being Asia’s century is still talk. At best, it could be the century of transition. The other real possibility is that this is a ‘vacuum’ century.  Of course, for a contrasting view, you can check out Tom Friedman’s piece in NYT (reproduced in Economic Times in India) who questions Eric Chanos’ decision to short China. It is hard to dismiss either of them.

I guess success would accrue to either of the two depending on who correctly judged the key ingredient for long-term success and sustainability of China and the strength or weakness of that ingredient in China.

China’s tightening move is not surprising. In fact, what was surprising was that many commentators said that India was overheating and needed to tighten. True, India has an inflation problem but it is a supply problem but not a moentary policy problem. Moreover, India had already withdrawn some of th emergency liquidity measures. India needs to tighten its fiscal policy. China needed to tighten monetary policy (no matter what it means in China).

Focusing on inflation after seeing a crisis not caused by inflation but by credit bubbles was an incredible display of human beings’ persistence with habitual errors. As Dan Ariely would say, ‘Predictably Irrational’. That is why the mistaken focus on India’s need to tighten first ahead of China. China’s credit bubble was ignored.

People’s Bank of China (PBoC) was not taken in by this logic. All credit to them for moving swiftly. More remains to be done in China. Consensus growth estimates for China for 2010 and 2011 fail to recognise speed limits.  2010 would be a good reminder of those limits.

After a long time, I visited Michael Pettis’ blog on China. He writes long pieces. His latest blog post is no exception. The post discusses currencies. Europeans find themselves boxed in dollar weakness and Chinese intransigence, as do many others. There are no easy answers and Michael Pettis does not pretend to know the answers.

There is a link to an interesting Federal Reserve paper that clearly shows that Chinese exports have benefited from the mercantilist exchange rate policy. Now, that might sound obvious to many but that does not necessarily mean that there is no resistance to that link. ‘Economist’ , for instance, has for a long time refused to accept the link between China’s burgeoning trade surplus and the cheap currency.

Michael Pettis cites James Kynge. What he cites does not reflect that well on James Kynge’ scholarship or grasp of the situation. That is rather surprising considering how perceptive his book, ‘China shakes the world’ (2006) was.

I think this particular post of Michael Pettis is well worth a read.

Is the US ‘recovery’ sputtering?

I have rarely used these pages to comment on contemporary data since I do that in my day-job. But, I have to flag a few things: my jaw dropped when I saw that, in just four months, the number of long-term unemployed in the US rose by a million from 5+ million to 6+ million (that is, those who have been out of a job for six months or more). Then, came the news that confidence among small businesses has fallen. The number of job openings in the US economy that was rising since bottoming out in July dropped by a whopping 156,000 in November and is within a whisker of its July lows. The number of job openings in the US agains the total number of (officially counted) unemployed is 0.157 as of November. That is, for every six unemployed, there is one job opening.

In the meantime, a friend sent me the following mail:
Dear Ananth,

Earlier I had alluded to the cash flow problems in the state of Illinois, specifically the fact that doctors are refusing to treat
state employees because they aren’t getting paid. Now comes this shocking story:

Two passages are especially noteworthy:

“Since the fiscal year began July 1, it has received only $51 million, or about 7 percent of this year’s state appropriation of $743 million.” It = University of Illinois

“In an e-mail to university employees Tuesday morning, Ikenberry said that if the backlog in state payments continues to mount, the university will be unable to meet payroll and risk not completing the academic year.” Ikenberry = UI President

Can you imagine a flagship university like UI shutting down because the state is basically reneging on its commitments? Just how badly off are the states for THIS to happen, I wonder.

That this would be  less dramatic year in financial markets is consensus view. It has got the maximum chance of being proven wrong.