The tale of the table

The full Excel file with all the data can be downloaded from the website of Professor Emmanuel Saez at the Univ. of Berkeley. So, when you read how the networth of US Households has improved in the second quarter (Flow of Funds Accounts released by the Federal Reserve recently), read and interpret it in the light of the work by Emmanuel Saez.

The bottom 99% have been QEed.

Links that tell their own tale

JP Morgan is discussing 11 billion dollar settlement.

JP Morgan offers $3 billion to end mortgage probes. Somewhere, herein, do not fail to notice that they paid $410 million to the Energy Department, without admitting wrongdoing, that they manipulated the electricity market in California and the Midwest. These are lessons that they must have learnt (or practised together?) at the feet of Enron. I am still reading Jeff Madrick’s ‘Age of Greed’.

JP Morgan in talks to settle mortgage probes.

JP Morgan’s legal hurdles expected to multiply.

We do not know yet about the probe into the rigging of aluminum prices.

There is no personal accountability at the top of the heap.

[Parenthetically, must mention this piece of information that I came across just now while reading ‘The Age of Greed’ – when credit rating agencies finally warned that they would downgrade the debt of Enron Corporation to junk in 2002, Robert Rubin, the former Treasury Secretary, called the Treasury Department to intervene to make them postpone their downgrade. He did not succeed. He did so because Citigroup and JP Morgan held a lot of Enron debt]


TPI stands for Transparency, Predictability and Innovation – buzzwords imposed on central banks by the financial types. They do not hold themselves to these standards.  That is why most derivative transactions remain OTC and their assets are marked to their own models. No scrutiny.

Central banks were created to be lenders of last resort. A free market can set interest rates by itself. One does not need a central bank. Monetary policy and setting of interest rates by central banks, as my good friend Srinivas  Thiruvadanthai used to say, is central planning.  Their main job is to bail out bankers from their excesses. That is inherently subjective and political. Whom to bail out, on what terms, when and by how much are subjective decisions and hence one cannot have and T&P on these matters.

The sum and substance of the above paragraph is that the role of being the ‘lender of last resort’ is a discrete role and cannot be entirely automated by transparent and predictable rules.

As for the conduct of monetary policy, the idea of giving the power to a Committee to set interest rates is for them to use their discretion. Otherwise, it could be automated. That is what nominal anchors like Gold Standard did. In fact, it would be far better for central bankers not to have discretion on monetary policy but to be bound by a nominal anchor like ‘The Gold Standard’ (TGS – there is the reason why this blog chose that name).

Readers should read papers by Michael Bordo on TGS (not the blog) before responding here.

Financial types, unsurprisingly and as usual, want to have it both ways. They create a central bank so that they could manipulate it by vesting it with discretion but they do not want it to assume too much of power for itself by tying it to transparent and predictable rules on policy-making. How convenient!

Keynes was more intellectually honest and consistent, at least. He wanted discretion and autonomy for policymakers. So, he opposed gold standard and he opposed free capital flows too.

The financial types want discretion but bound by rules that enable them to ignore risk and pile on too much of it on their balance-sheets and on their clients’ balance-sheets and they want free capital flows so that smaller nations and their banks can be at their mercy.

Listen to what Stan Druckenmiller says about policy transparency in this interview. He says a lot more and all of it is worth listening. He delivered an annual average return of 30% to his clients for two decades from 1986. His portion starts from minute 8.

On the eve of the meeting of Dr. Manmohan Singh with President Obama, the Senate Banking Committee held a hearing on 25th September at 2:30 PM (local time) on … guess the topic:

The hearing will examine U.S.-India economic relations, which will be at the forefront of Prime Minister Singh’s visit. More specifically, the hearing will focus on regulatory and statutory barriers to foreign direct investment in the banking and insurance industry, prospects for liberalization of market access for the financial services industry, and opportunities to increase bilateral investment between the U.S. and India. [Emphasis added]

It is not enough that they allowed their economy to be destroyed and damaged by the financial types. They want the joy to be spread to all. You need to go to to figure out who said and what in that hearing.

The economic and social welfare implications of monetary policy transparency are not clear to me. What is clear is that financial market types want it. That makes it clear to me that its economic and social implications must be undesirable. That is why I wrote this MINT piece.

RR’s first rate hike

I held back from commenting on the monetary policy decision of the RBI last Friday under the governorship of Raghuram Rajan on this blog because I wanted my clients to read it first. That done on Monday, I could have posted it here on Tuesday. But, just got too busy. Now, leaving for a week-long visit to India tomorrow. Back on next Saturday only. Hence, this post. It is a comment that was sent out last Friday, after the policy meeting, to clients.


The Reserve Bank of India (RBI) showed, yet again, why it is a better monetary policy institution than the Federal Reserve Board. Meeting on September 17-18, the Federal Reserve Board, after preparing the market strenuously for more than three months let go off the opportunity to make even a token and symbolic exit from its unconventional monetary policy. In contrast, meeting on September 20, the RBI surprised the market with a rate hike, pushing up the repo rate to 7.5%. We did not anticipate the rate hike. However, in our TV interview on the morning of 20 September, we had warned against complacency and said that some partial rollback of the extraordinary liquidity tightening measures put in place in mid-July was warranted and nothing more. The new governor of the RBI did not only confine himself to a partial rollback of the rate hikes made in July but also raised the policy rate by 25 basis points. It was a good move.

Throughout 2009-11, emerging economies basked in the glory of capital inflows as loose monetary policy and quantitative easing in the West precipitated an exodus of capital to emerging economies seeking higher return. Emerging economies did not make use of the benign conditions to introduce long-term structural reforms nor did they undertake counter-cyclical policies. In most major emerging economies, credit growth accelerated, current accounts swung into deficit and currencies appreciated in real terms substantially, due to higher rates of inflation. Hence, when the Federal Reserve just as much as hinted at a reduction in its monthly asset purchases, the frailties in emerging economies stood exposed this summer.

After the Federal Reserve blinked and postponed any tapering, investors stormed back into emerging markets. Sensex, the Indian stock market index, rose nearly 4% and came within a whisker of its all-time high on 19 September. That was ridiculous, considering the strains that are still surfacing, in corporate and bank balance-sheets. Hence, the RBI not only had to avoid the temptation of being complacent about India’s inflation problem since the Fed tapering threat had abated temporarily but also had to quietly nudge the market off its frothy state, without stating so explicitly. The RBI did that. The Sensex Index gave up nearly 60% of its previous day gains on September 20.

Of course, the RBI action was not about stock prices. It underscored its vigilance against inflation and against possible re-emergence of pressures on the currency once tapering in the US finally gets underway. After all, India’s wholesale price inflation rate had crept back above 6% in August, the consumer price inflation rate is above 9% and the core consumer inflation rate is above 8%. The new RBI governor underlined the importance of ensuring that household financial savings rose. That is dependent on savers getting reasonable real returns from their bank deposits. RBI took a small step towards reducing the negative real return. As for making real returns positive, the bulk of the responsibility lies with the government whose populist and wasteful fiscal spending has kept inflation pressures on the boil for the last several years in the economy.

In the final analysis, Raghuram Rajan, the new RBI Governor, has done his credibility and that of the institution that he heads, no harm at all with his policy decisions taken on 20 September. These decisions underpin the Indian rupee.

Impact investing and its measurement – second guest post by Vineet Rai

Vineet Rai is a close friend and founder of Aavishkaar Venture Management Services ( that manages several socical impact funds. He has also set up several other institutions like Intellecap, Intellecash and Intellegrow that serve related dimensions of social and impact investing. I played a not-so-small role in the setting up of the first Aavishkaar Micro Venture Capital Fund. At some level, that was the seed that has grown into this big tree under Vineet’s dynamic and passionate leadership. At another level, considering Vineet’s earlier jobs with GIAN (Grassroots Innovations Augmentation Network in Gujarat in the 1990s), he might well have achieved what he has (and what he will, in future) now, with or without the Aavishkaar Micro Venture Capital Fund 1.

This blog has carried one of his guest posts earlier this month. Here is the second one. This blog is very pleased to host him.


The Brooking Blum Roundtable (held in early to mid-August 2013) was a discussion around Private Equity, Impact Investing and Development.  This was a gathering of 40 speakers from across the globe and included Madeline Albright , Former Secretary of Foreign Affairs, USA, Strobe Talbott, Her Deputy of State,  Richard Blum, Cofounder TPG and Trustee of ASPEN and Brooking Blum, Kemal Dervis, Ex-Secretary-General of UNDP,  Mary Robinson, Ex-President of Ireland and currently UN Special Envoy to Great Lakes Region, Elizabeth Littlefield, the President of OPIC,  Rajeev Shah, Administrator of USAID and some ordinary mortals that included people like me.

Some of us were given an opportunity to lead specific sessions and I was asked to speak on Private Equity and Development, I made the below points. Below are my six points for you to read and reflect.  Public responses are welcome rather than the private one and would encourage a discussion around these points.

My first point is to emphasize on some obvious statements “All Investments create impact” and “Impact Investing is distinct from commercial investing”.   Based on current definitions and the broad positioning around impact investing, its look scarily similar to commercial investing.  Both use entrepreneurial initiative to build institution that generate returns and create impact.  The current definition of Impact investing that attributes “intentionality” as the defining metric to segregate them is inadequate, subjective and weak.

My second point is that drawing the distinction between commercial investing and Impact investing based on outcome metric of return and impact is flawed.  The key distinction actually lies on the input side and not on the outcome side.  My definition of Impact Investor thus is “Investor who can innovatively rework the risk – return paradigm, merge a frugal investing thesis and manage to invest in hitherto commercially un-investible sectors, geographies or enterprise and generate reasonable returns and impact”.  To achieve the above would require fund manager to scout, invest and mentor large number of geographically dispersed entrepreneurs in challenging environment and underdeveloped ecosystems  forcing him to innovate the fund economics, his expenses, and the exit models as also to live up to outcome measures on returns and impact.

My third point is that Impact Investing is geographically and developmentally contextual.  In the underdeveloped world, the distinction between Impact investing and commercial investing may not be that stark. In developing and transitioning economies, impact investing might focus more on challenging geographies or issues of exclusion to bring people within the national mainstream while commercial investing would focus on tried and tested risk mitigated areas. The developed world may need Impact Investing to address challenges emerging out of dysfunctional markets. The key point is for effective impact investing local understanding is critical and patience is a virtue that cannot be ignored.

My fourth point is linked to impact measurement.  We need to look beyond the current practice of summing up the impact of underlying enterprises as the measure of impact for funds.  The  metric should include kind of “risk” investor took,   kind of geographies they invested in, the fund economics and its sustainability, innovations they supported on ownership, business models and exits.

My fifth point is related to the role of philanthropy in Impact Investing.  Philanthropic capital has a catalytic role to play in building and supporting the ecosystem needed to let Impact investing thrive.  However, it may be important for philanthropic institutions to make sure that in trying to build a sustainable world they are not investing in and creating unsustainable impact funds.

My final point is that Impact Investing has to go a long way to prove any correlation with issues concerning poverty alleviation beyond anecdotal references.  It is important that we collectively pause and think about the risks and consequences of over hyping this emerging innovation.

Innately dovish

Just managed to browse through comments in FT and ‘Economist’ on Fed non-taper.

The FT Edit disappointed. ‘Economist’ writes a better edit but botches up its story in the end. Inequality will not come down if QE remains for long. QE caused it to widen in the first place!

I did not bother to read in full the convoluted defence of the Fed non-taper by Free Exchange.

Buttonwood is critical of the Fed non-decision and has some good arguments to back up his criticism.

John Authers partially redeems himself in the end while the first half of his article leads to repeated shaking of the head, left to right and back. He forgets to mention the 4-page Federal Reserve Bank of San Francisco Economic Letter that seemed to provide intellectual cover to the Fed to taper.

Gilian Tett wrote, as expected, a lovely piece. Perhaps, because she uses the same analogy of the druggie (financial markets) and the drug-dealer (the Fed) that this blogger is fond of and has used, repeatedly.

Gavyn Davies takes the cake with two observations:

A journalist asked Mr Bernanke in the press conference whether he would ever see any clear grounds for stepping away from QE, and he answered rather hesitantly that this required a substantial improvement in the outlook for the labour market. There was no hint that fears of a financial bubble would induce him to act any sooner than that criterion implied. [Emphasis mine]

The bottom line is that the period in which the markets can expect the Fed to be aggressively easy has once more been lengthened as a result of this decision. Yet again, we discover that it is dangerous to bet against the innate dovishness of the Fed and its current chairman. [Link]