Great readings

Sourced from many other blogs. Difficult to remember and acknowledge them individually when one reads many of them on the train-ride to work:

There’s a real reluctance to crystallise losses (Emphasis mine and that is a behavioural issue too for institution and individual investors) as many of the banks just don’t want to take a hit. As the situation in Greece deteriorated, many banks just held on, hoping they could sell off their exposures at a later date,” said Roberto Henriques, head of financial institutions credit research at JP Morgan. [Full article here]

Thanks to a friend, read this sensible piece on the US budget deficit reduction efforts by Tom Coburn, a Republican senator:

What is really happening behind closed doors in Washington would both sicken and inspire the American people. Some in both parties continue to play political games. Yet, many elected officials on both sides are willing to make hard choices. More than 40 senators have come together to discuss the crisis; dozens have privately expressed their willingness to take bipartisan action. But, right now, the possibility of a win-win agreement for America is being turned into a lose-lose stalemate because too many self-serving politicians, special-interest groups and political consultants in Washington are invested in the status quo. [More here]

Clive Crook in the FT cites Tom Coburn:

“I would downgrade us in a minute. I would, knowing what I know.” [More here]

I wonder which view is more current – his Op-Ed. or this one or can both co-exist?

Easwar Prasad’s piece – on the selection of the new IMF Chief – is feisty, bold and recognises realpolitik. The most disappointing thing for me is not that Europe has ditched its promise but this FT European editor Wolfgang Muenchau was quick off the blocks to write a Op-Ed making the case for European to succeed another European – last Monday itself. That was disgusting and disappointing to me.

Easwar Prasad’s piece is the best of the lot.   There are many among my friends who argue that India should identify itself closely with US interests and seek opportunities to do so. Yours Truly has been and remains a sceptic of that. The big powers – China and the US and the marginal one Europe – bat for their interests. We should do so too. There are no other overarching principles. US’ and China’s actions, inimical to India, differ only in degrees. Yes, I am aware of 1962, stapled visas, nuclear deal vote and much else. To all of you who throw these at me, the only answer I have is that you should go read, ‘Deception’ by Adrian Levy and Catherine Scott-Clark.  

What does it have to do with the current issue? Emerging markets should coalesce around one candidate and Indians should not balk at supporting a Chinese or a Singapore candidate if a consensus emerges around them while, at the same time, striking bargains behind the scenes on issues of importance to India, behind the scenes.   The monopoly of the West on institutions of power and thought has to be broken first. Developing nations can fight for their spoils later.

However, if it is clearly agreed that the candidature of Christine Lagarde is only for the unfinished term of the Presidency of Dominique Strauss-Kahn, that might be acceptable.

Jean Pierre-Lehmann’s letter is delightful.

If proof were needed…

… that the world of finance has again gone crazy, thanks in no small measure to the policy of record low interest rates and money printing, you have it now:

LinkedIn soared more than 90% to about $86.60 as it began trading on the New York Stock Exchange, giving the professional-networking site a market value of roughly $9 billion.

The offering of 7.84 million shares has surprised many across Silicon Valley and Wall Street, who say that investors are being taken in by an Internet bubble. The company made $15.4 million in 2010. [More here]

That gives you a P/E multiple on trailing 2010 earnings at 584.4 times.

Update: More on the insanity of LinkedIn valuations here and here.

IMF Chief: time for a change

I was surprised to see how quick off the gates was Wolfgang Muenchau of FT in coming out to bat for another European head for the IMF. I was disappointed too that he said that. Some of these commentators would call for economic openness, transparency and a balanced world but when the opportunity arises, other priorities somehow are more pressing than these. Mohamed El-Erian wrote a good piece calling for the feudal process of selecting the head of the IMF to end. His call was enhanced by his personal declaration of non-interest in the job. He was in the fray the last time around. He is from Egypt.

I am glad to report that Arvind Subramanian takes the battle to Wolfgang Muenchau. He is right to ask the question whether Wolfgang argued for an Asian head of IMF when Asian countries went to the IMF for assistance in 1997-98. I personally think that this is a good opportunity for the Western nations to walk their talk and for the developing world to close ranks behind a good candidate from their own flock, for now. TGS would be happy to see one of the four heading the IMF: Tharman Shanmugarathnam, Trevor Manuel, Montek Singh Ahluwalia or Arminio Fraga.

That it would also undermine the case for the continued American leadership of the World Bank is a bonus.

Spectre of hard-landing

Suddenly,  the skeletons seem to be tumbling down. Adrian Mowat of JP Morgan used the phrase ‘hard-landing’ and China in th same sentence. I am not going to claim that this blogger was his inspiration! But, I shall let that possibility circulate 🙂

James Kynge who publishes FT China Confidential every fortnight (available for subscribers only) talks of political tensions in China, in the latest FT China Confidential edition (19th May). The People’s Bank of China (PBoC) and the National Development Reform Commission (NDRC) are at loggerheads over the tools to deploy in the fight against inflation. There is looming power shortage due to officially repressed prices for coal and electricity. So, they are sold unofficially at exorbitant prices. The official Consumer Price index then becomes meaningless. The true cost of  capital for small and medium enterprises in China is 11% and god knows the true price of coal and electricity. No wonder FT China Confidential of urban middle class households showed inflation rate to be 17%.

See this article (in Mandarin) for a discussion on the issue of loans made by banks against ‘land reserves’ (ht Paul Cavey of Macquarie Securities). Some selected sentences:

Our journalists’ investigation reveals that various localities – such as Beijing, Shenzhen, Hangzhou, and Shanghai – have witnessed a significant reduction of land sales proceeds. Shanghai’s land sale revenue has fallen by 32% YoY, and Shenzhen is enduring a “zero land supply” year.

By putting pressure on land reserve loans, the withering of the land market has dealt a sobering blow to local governments.

China Construction Bank’s (CCB) management revealed that real estate loans increased by Rmb45bn in 2009, and 1/3rd of the increase were land reserve loans. The Industrial and Commercial Bank of China (ICBC) also attributed the rising share of real estate loans to increases of land reserve loans in 2009 (from 10.6% at end-2008 to 11% at end-2009).

In 2010, when listed banks claimed that the share of real estate loans had decreased, local land reserve centers were still among their largest clients.

In 2010, loans made to China Minsheng Bank’s 10 largest clients were worth a total of Rmb36.7bn, or 3.47% of the bank’s total loan stock. Land reserve centers in Beijing, Shanghai, Chongqing, and Xi’an were amongst China Minsheng Bank’s 10 largest clients.

The land reserve loan “bomb” must be defused.

In the case of India, the street has been becoming more realistic about growth prospects in India. Morgan Stanley, last I heard, had reduced India’s growth forecast for 2011-12 from 8.7% to 7.7%.  Story link here. Of course, in a more recent interview with Business Standard, Morgan Stanley’s Chetan Ahya denies that the US quantitative easing is part of the inflation problem faced by developing nations via higher commodity prices.

TGS strongly disagrees much as he agrees that the problem of inflation in China and India is predominantly home-grown and they could have attenuated the US impact. But, that is political economy and not economics.

See this piece in Business Line which frames the answer as the question. The Indian growth story has derailed. Earlier, Sanjaya Baru wrote that the new growth-inflation mix is more like 8-6 and not 9-5 as assumed in the 2011-12 budget. But, even 8% growth rate for the current fiscal and next appears a stretch. Abheek Barua, chief economist of the HDFC Bank, had written that India should be prepared to accept lower economic growth at least for the next two years, without committing himself to numbers. That time-frame is realistic provided the problems are recognised and solutions devised. It could be longer too, otherwise.

Part of the problem why we have an unhealthy combination of falling growth momentum and persistently high inflation is well explained by this piece  written by Rajiv Lall for MINT.  The subsidy regime of the present government exemplifed by the National Rural Employment Guarantee Programme has increased currency in circulation while taking liquidity out of the banking system. Government spending via good infrastructure projects would have done the opposite: kept liquidity in the banking system, raised growth potential and thus kept inflation in check through that and by restricting currency in circulation.  This situation was well anticipated by the Business Standard editorial that appeared in Feb. 2009. Just take note of the size of India’s fiscal stimulus response to the global crisis.

Essentially, the UPA government’s fiscal policy has played an important role in the unfavourable growth-inflation trade-off that India faces in 2011-12 and possibly in 2012-13.

As for the medium-term growth prospects in India, clearly, unless there is a recognition that India is going through its own version of gilded age (in contrast to what Professor Arvind Panagariya writes here), medium-term revival of growth cannot be taken for granted. Michael Walton shows three excellent charts that capture the prevalence and the recent rise of oligarchic capitalism in India. See pages 15 and 41.

Although this Op-ed. by Michael Walton is about a year old, his message is quite clear. India does need and can have a welfare State for that helps to achieve high productivity capitalism (e.g., Sweden) provided the State is both effective and accountable.  Read the stuff about how the Chilean finance minister braved unpopularity when he held back spending in copper-fuelled boom years. That is how the electorate and the public are in most countries on most occasions (endless examples can be given) and that is why there is need for enlightened leadership that imposes long-term choices. Libertarinism is elegant in blog posts, op-eds. and academic papers.

Such a politician is yet to be found in India. Rahul Gandhi is right to champion the causes of farmers in India. But, the issues are the absence of public investment in the farm sector, the ban on export of farm produce, the mandatory procurement at below market prices by the government and the absence of reliable, quality power and water supplies.

TGS is not particularly thrilled that he had warned of these many times before. Two of them, more recently, here and here.

This brings me to the final point of this long post. Much as both these Asian giants have themselves to blame for the situation that they find themselves in, the United States must be noting their current predicament with quiet satisfaction. To the extent it can help the process of unravelling of the economic growth stories of China and India along, it would not mind doing so. At the margin, this consideration would be a factor in the decision on extending quantitative easing and maintaining very low (negative) real rates in the US. That woud keep the prices of commodities boiling and inflation pressures high in these two countries.

They can respond constructively and reform. They can unravel and/or choose to take the confrontation path – economically and otherwise. Your pick. I know what I would pick.

Voices of hope

People vs. Goldman Sachs. Roger Lowenstein pre-judges the outcome. Carl Levin ‘disagrees with him.

The President of the Federal Reserve Bank of Kansas City Thomas Hoenig sees the Federal Reserve sowing the seeds of the next crisis:

Name a service, name a commodity that trades well at zero. Nothing trades efficiently at zero. Why would credit? [More here]

JP Morgan’s Adrian Mowat says that the risk of hard-landing is increasing. Interestingly, I had mentioned the same possibiity in my ‘Baretalk’ column in MINT the day before.

Bubbles in the making or already made – Vancouver property prices and Brazil Consumer Credit (ht Paul Kedrosky)

Rodrik’s advice for Mr. Hazare

So the choice between democratic discretion at home and external restraint is not always a choice between good and bad policies. Even when the domestic political process works poorly, there is no guarantee that global institutions will work any better. Often, the choice is between yielding to domestic rent-seekers or to foreign ones. In the former case, at least the rents stay at home! [More here]

All you need to do is to replace ‘global’ with ‘extra-constitutional’ – not just in the above quote but throughout the article and the article applies for the situation we face in India with the Anna Hazare movement against corruption.

Gulzar’s Urbanomics blog sees Dani Rodrik’s post through another prism  – equally relevant, of course.

Barry Eichengreen makes it sound so damn easy to implement a Brady Plan for Greece (and Ireland, Portugal and Spain?). Of course, he wants to let banks show the debt at face value! If it is all so easy, then why is Europe not doing it especially since one Jean Claude Trichet knows a lot about it?  I think I am missing something here or Barry is missing something.

This is bad news, if the Governor of the Bank of Japan fears about asset bubbles in easing monetary policy in Japan. If there is one country within the G-7 that deserves to run a loose monetary policy, it is Japan and yet, he is cautious:

If a central bank starts to underwrite government bonds, there may be no problems at first, but it would lead to a limitless expansion of currency issuance, spur sharp inflation and yield a big blow to people’s lives and economic activities,” as has happened in the past, Shirakawa said in an April 7 press conference.

The BOJ chief has consistently warned against keeping interest rates too low for too long and planting the seeds for asset bubbles. He reiterated the point in a May 5 speech in Helsinki, saying that the 1980s bubble was brought on in part by “monetary accommodation.”

Any one looking for a classic example of the fallacy of treating economics as a rigid and uncompromising science would have got it in the above paragraphs.

No backbone; no need for muscles

Well, results for the five States that went to polls in India in April – Tamil Nadu, Kerala, West Bengal, Pondicherry and Assam – were announced yesterday. Now, the hope is that we can get on with governance. Now, if only it were so simple. That is the hope that ‘Business Standard’ expresses here.

I cannot see how the UPA gets muscles to implement reforms from these election results. It can only come from the defeat of its ally ,DMK. If it was the Communist allies who blocked reforms in UPA’s first innings, then was it DMK now? Then, are they really allies? Why has the UPA stuck with them if this is what allies are for? What about Mamata Banerjee who has scored a thumping victory in West Bengal, by default? Will she not block reforms? Why is the UPA sticking with her? The answer is that the alliances are about conveniences rather than convictions. Hence, to hope that the election results add muscle to UPA to pursue reforms assumes that UPA has the intent to pursue reforms. The UPA has no backbone on reforms; so it does not need muscles. If you had not read this piece on Dr. MMS by Madhu Kishwar, you can make amends now.

Pratap Bhanu Mehta strikes a tone of optimism:

If any party becomes complacent or arrogant, or too clever by half, the Indian voter will show them who has the last word.

The voters do their best to send unambiguous messages. Voter turnout was very high in these elections. But, voters are hamstrung by the sheer lack of choice. It is either Tweedledum or Tweedledee.

That is why his conditional hope that elections tame hubris. I doubt it does. Our politicians do not allow election results to come in the way of hubris. They have a compact and they know that rarely will an Opposition politician go after them, legally or otherwise. They are in it together. So, nothing happens to tame their hubris nor does their hubris find avenues elsewhere – in academics, in literature, in theatre or in the legal profession, etc. Politics is their first and last resort and hubris is as much a consequence of power as a cause of it. They cannot afford to be humble.

The clear and correct verdict of the voters gives an opportunity for Shekhar Gupta of Indian Express to go hammer and tongs at PLU and EP (People Like Us and Eminent Personalities) who have flocked to Anna Hazare. At one level, he is right to do so. After all, some of the camp followers of Anna Hazare have displayed neither humility nor intelligence.

But, those of us who are sceptical of the power of the Anna Hazare Movement to eliminate or reduce incidence of corruption in public life must recognise one risk: we are playing into the hands of politicians who might not want to see anything done. Some of us might be quite comfortable doing that but others might be doing so without being aware of this consequence.

The alternative is to make PLU and EPs not swear off the path of public life but to take part in it. That is another mistake Mr. Anna Hazare made. He made light of India’s democracy. Nonetheless, it is encouraging to see the large voter turnout in these recently concluded elections.

Finally, T. N. Ninan is not excited about the election results and correctly so. At the moment, nothing prevents us from hoping that the elected politicians would absorb the right lessons from the defeat of their rivals. But, history tells us that it is not a reasonable hope.