Populists-nationalists: their inevitability and their usefulness

After I published this piece on America tearing itself apart in Medium.com this morning, a friend flagged this G-30 lecture by Raghuram Rajan last month.

I thought that the flow was somehow not there in the speech. I can understand that at one level. He is trying to understand the world. It is work in progress for him and for all of us. It is not a facile topic.

Issues he flags are very well documented, by now. For example, I had blogged extensively on the Chairman’s letter of M&T Bank. Not many could have explained the situation better.

On answers, Raghu is very thin. But, that is not his fault. Societies always figure out what not to do. But, what to do is the tricky question. That takes much longer to evolve and involves luck and extreme circumstances.

In a sense, that is what populists-nationalists offer: ‘Extreme Circumstances’. Yes, they would fail to solve the problem. One cannot redistribute without growing the pie.

Populists-nationalists will probably not grow the pie. Of course, it is a different matter that the globalists grew the pie but also grew debt much more than that. So, perhaps, one could argue that they have a worse record!

But, that said, I do agree that eventually populists-nationalists would fail. They would neither succeed in re-distributing nor in growing the pie for THREE reasons: One is what I said earlier. There are no easy answers. Second, they have to face the constant backlash from those who feel threatened and who are losing their privileges. Taking the country and the world back from them is not going to be easy at all. Status quo and incumbency have their advantages.

Third and perhaps most importantly, sometimes it is impossible to undo and ‘restore’. [Even Microsoft Windows 10 does not do that properly despite users having the theoretical option of doing so.] There is no second chance. Once something is lost, it stays lost.

However, they (populists-nationalists) do serve one useful purpose. They serve as a rallying cause. A lightning rod. Humans and nations always need the ‘other’ – an Opposition/opposing force – to survive and focus minds. The ‘others’ impart a sense of urgency to the problems that have festered for long and they help focus minds on the problem.

Once we know that their answers are not the right answers, the rest of us are compelled to come up with solutions that are better than what they offer. Of course, it would involve sacrifices – sacrifices of the privileges that elites have gotten accustomed to and grown to take for granted.  But, they will have come to the conclusion by then that they are better off making those sacrifices for the sake of preserving the chance to remain in the game and re-gaining those privileges again.

That is the very useful purpose that populists-nationalists serve.  That is why I had argued that populists-nationalists were not only inevitable but that they would well be necessary for the world to arrive at its answers, eventually. For now, we are a long way off from this seemingly happy ending.

Lessons in economic ideology from office room allocation in U. Chicago

This is coming from Luigi Zingales who wanted to save capitalism from capitalists!

When I visited Stanford Business School many years ago , I was surprised to see that all of the offices in its new building were identical — a result that had cost money , thanks to the structure of the building . Why should socialism prevail with respect to offices ? I was told that the dean , who had to assign the offices , wanted to avoid the headache of having to decide who would get the best ones.

At the time , I thought these concerns were exaggerated , until Chicago Booth also constructed a new building for itself but decided to differentiate offices . To minimize lobbying , the dean announced that each faculty member would be randomly assigned a number within categories — presumably assistant , associate , full , and chair professor ( though this was not explicit ) , and would choose an office sequentially . But when the selection order was announced , the most famous faculty members were first , suggesting that the process had not in fact been random . The school erupted . Emotions took over . One faculty member shouted “ I hate you ! ” at another who had received a better office , ruining their relationship for quite some time .

We might underestimate the cost of all this commotion because it was not easily measurable . But if you do factor in the time wasted in office – allocation simulations , along with the cost of tense relationships for years to come , you see that Stanford’s choice was the more efficient one. This point has been recognized by a few economists.

Source: Zingales, Luigi. A Capitalism for the People: Recapturing the Lost Genius of American Prosperity (p. 205). Basic Books. Kindle Edition.

I shared this with my friend Gulzar Natarajan. We then had a couple of back and forth on it. He was wondering whether Communism and Socialism were ostracized because they were also tainted by association with totalitarian repression that some of the Communist leaders practiced.

At the same time, he noted that capitalism had adapted by embracing certain aspects of socialism:

“adaptability of capitalism to emergent threats – the welfare state, regulatory institutions, social democracy itself.”

This is what I wrote in response:

Several valid questions and interesting speculations in your email. Who knows the answers? In all these matters, all of us are like the blind men guessing the elephant. We are also influenced by the context and the times in the weights we assign to competing arguments.

I have always believed that a competitive market economy is about as egalitarian as one can get, in terms of opportunities. That is about the best one can hope to achieve in a society. Equality of outcomes, of course, takes away the incentives.

The best a government should aim for is a combination of competitive market economy with social safety and affirmative actions in the early phase of lives for the population – for health and education. Easier said than done.

In the concluding chapters, in ‘Faultlines’, Raghuram Rajan spends some time on these questions. They were practical and useful.

As for the current state of the world, humans are doomed to go through the cycles – swings between extremes with very brief (if lucky) interludes of stable equilibriums. Those of us who are lucky to find ourselves born and grow into adulthood in such stable equilibrium periods think that this steady state of affairs prevails permanently. We fail to grasp and remember our history lessons well.

In fact, that is the other lesson from this office room allocation episode. No matter how much of economics or anthropology or sociology these Professors have learnt, they had to fight for their office rooms with bitter name calling! We have too many flaws to create/achieve anything positive and stable on an enduring basis.

That enduring feature of humanity is what brings out and accentuates the drawbacks in these systems – capitalism or socialism or market economy.

We are capable of bringing out the worst in ourselves and in all things that we touch!

I am re-reading Yuval Harari’s Homo Sapiens. I read it too quickly the first time around. Sapiens are deadly!

The iron laws of public policy are…

… that the road to hell is paved with good intentions and that the law of unintended consequences always applies.

Read this:

April 20, 2005, President George W. Bush signed into law the Bankruptcy Abuse Prevention and Consumer Protection Act, which reformed the rules overseeing bankruptcy , especially personal bankruptcy.

At its inception , the nation had to borrow heavily from England , and thus the protection of debtors was in the national interest.

The debate over the 2005 reform was completely dominated by the credit lobby and organized by the National Consumer Bankruptcy Coalition . In the words of one legal scholar : “ Never before in our history has such a well – organized , well – orchestrated , and well – financed campaign been run to change the balance of power between creditors and debtors.”

In the pre-bankruptcy – reform world , distressed homeowners would have filed for personal bankruptcy , which would have allowed them to discharge their credit – card debt , making it easier to hold on to their houses. Under the new law , this option was no longer open . According to calculations based on a recent study, the 2005 reform increased the number of people defaulting on their mortgages by almost half a million; and when a mortgage holder defaults and the house is auctioned off , on average it loses 27 percent in value.  If we apply this loss to the average price of a house sold in 2005 ( $ 290,000 ), we can estimate that the financial industry lost $ 39 billion as a result of bankruptcy reform.

Source: Zingales, Luigi. A Capitalism for the People: Recapturing the Lost Genius of American Prosperity (p. 68). Basic Books. Kindle Edition.

The Euro over the Gold Standard

I just chanced upon this piece two days ago. It is meant to be a provocative piece and not a defence of Gold Standard. If one could tolerate Euro and its institutional setting, why not tolerate a Gold Standard? That is the question he poses and answers and the question does not answer why Euro could be tolerated or should be tolerated. That argument is not made, looking at costs and benefits.

Telling someone to tolerate random shocks arising out of fluctuations in gold supply and production because they are tolerating random shocks or are forced to tolerate random shocks from member country situations in the Eurozone and the consequent monetary policy responses is not particularly helpful.

In the days of trillions of dollars of capital flows dwarfing trade flows, it makes no sense to motivate an argument based on trade considerations alone. Yes, floating exchange rates do not offer any protection against spillovers and sudden starts and stops of capital flows. But, that does not prove that fixed exchange rates are better. The logic is flawed.

Floating exchange rates may not help. But, fixed exchange rates most certainly don’t. See the difference? Gold Standard is most certainly an extreme version of fixing. To actualise it and make it work for the real economy, one needs to confront the demon of financial flows and, more generally, financialisation.

An example would help clarify things. A this very mature stage of the economic cycle and an even more advanced stage of the market cycle, the SEC has approved a passive ETF on NASDAQ leveraged four times for public distribution. Under these circumstances, no regime would work – fixed or floating or the Gold Standard.

That Matthew Klein is not serious about the Gold Standard is evident from his recourse to the ‘snake oil economics’ of Martin Sandbu. I stopped wasting time on reading that gentleman’s writings more than a year ago. One cannot resort to debt write-downs, as one would do a morning walk every day to stay fit and healthy. Nor is wage flexibility a solution these days, except in blogs. It never probably was a solution except for Britain in the Gold Standard era. That was a different period and the difference was not just about the Gold Standard.

Second, he disappoints with his standard, run-of-the-mill baseless assertion that Draghi saved the Euro and that Trichet almost buried it. Economists who know about policy lags, the impossibility of counterfactuals and the unintended consequences of policy decisions would not make such glib assertions. First, had Trichet used up all the monetary policy bullets, Draghi may not have had many bullets left to fire. Two, we do not know how history would play out and whether Draghi would be reviled or revered. It is still very early days. The lagged effects of ‘whatever it takes’ have not yet played out.

Further, Mr. Klein is surprisingly sloppy with facts. The monetary policy response to German reunification happened in the 1990s before the Euro and ECB were reality. That was the German Bundesbank. They were tight and that led to the two European Exchange Rate Mechanism (ERM) crises including the famous ejection of the pound sterling from the ERM. Indeed, only then, did the Euro project come alive from 1993 onwards.

But for the Bundesbank’s tight monetary policy battling German money supply increase and the temporarily higher inflation, the ERM fissures wold not have been exposed, speculators would not have targeted it, the European currencies would not have come out of their sub-optimal policy straitjacket and economic growth in continental Europe and the UK would not have resumed from around 1994 or 1995.

ECB in fact loosened monetary policy in 2001-02, notwithstanding that the Euro had just plumbed new lows in October 2000. European real short rates were below normal and below average up to 2004 or so. In fact, those were engineered for Germany that was hurting from the collapse of the technology bubble. Therefore, monetary conditions were too loose for Spain, Italy and Greece. Their real estate booms ensued and turned into bubbles later.

With those facts and chronology addressed, let us revert to his arguments on the Gold Standard.

My blog is named, ‘The Gold Standard’. One can appreciate my predilections here. But, even then, I would concede that the enabling conditions simply do not exist for considering the Gold Standard. What the world needs is something far less radical than that but still a very radical departure from the current central bank orthodoxy.

The world abandoned fixed exchange rates (Bretton Woods/Official Global Dollar Standard) in 1973. I has experimented with floating exchange rates and discretionary central banking. The data point in favour of ‘discretionary central banking’ (alternatively, against rule-based central banking) was one – the Great Depression. Now, forty-four years later, the costs have begun to exceed benefits vastly – in many ways – economic, political and social.

Discretionary central banking with unrestrained ability to create reserves providing the basis for unfettered money creation by commercial banks does not make for a stable system at all. Nor is it social welfare enhancing. The blind and empirically unverified faith in the transmission from asset prices to the real economy and the indifference to the distributional consequences of such a faith/belief need to be abandoned.

The onus lies with the Federal Reserve, the intellectual leader in global central banking and the Wall Street alumni who govern other central banks.

The world has walked too far down the path of discretionary monetary and financial recklessness to return to the Gold Standard. Some simple changes, as suggested above, would do for now.

(p.s: Matthew Klein has put up a brilliant post rebutting the arguments of Steve Rattner on U.S. tax cuts. Very well worth a read)

Thou shall fix banks

There is some excitement that the Government of India has acted to address the issue of non-performing assets (bad loans) in the Indian banking system.

I think I have decent material (be warned of link fest) to blog on the Government Ordinance to amend the Banking Regulation Act to insert Sections 35 AA and Sections 35 AB of the Banking Regulation Act.

(1) Here is the PIB announcement:

The promulgation of Banking Regulation (Amendment) Ordinance, 2017 will lead to effective resolution of stressed assets, particularly in consortium or multiple banking arrangements

The Ordinance enables the Union Government to authorize the Reserve Bank of India (RBI) to direct banking companies to resolve specific stressed assets

The promulgation of the Banking Regulation (Amendment) Ordinance, 2017 inserting two new Sections (viz. 35AA and 35AB) after Section 35A of the Banking Regulation Act, 1949 enables the Union Government to authorize the Reserve Bank of India (RBI) to direct banking companies to resolve specific stressed assets by initiating insolvency resolution process, where required. The RBI has also been empowered to issue other directions for resolution, and appoint or approve for appointment, authorities or committees to advise banking companies for stressed asset resolution.

This action of the Union Government will have a direct impact on effective resolution of stressed assets, particularly in consortium or multiple banking arrangements, as the RBI will be empowered to intervene in specific cases of resolution of non-performing assets, to bring them to a definite conclusion.

The Government is committed to expeditious resolution of stressed assets in the banking system. The recent enactment of Insolvency and Bankruptcy Code (IBC), 2016 has opened up new possibilities for time bound resolution of stressed assets. The SARFAESI and Debt Recovery Acts have been amended to facilitate recoveries. A comprehensive approach is being adopted for effective implementation of various schemes for timely resolution of stressed assets. [Link – subject to change]

(2) Deep Advisory Services posts the exact Ordinance notification. There are three typos at least. Please catch them. I hope they were not in the original of the Ordinance itself and that these are errors made by the person who posted it. Otherwise, it is an embarrassment.

The Banking Regulation (Amendment) Ordinance, 2017

Extract of the Notification:

New Delhi, the 4th May, 2017

An Ordinance further to amend the Banking Regulation Act, 1949.

WHEREAS the stressed assets in the banking system have reached unacceptably high levels and urgent measures are required for their resolution;

AND WHEREAS the  Insolvency and Bankruptcy Code, 2016 has been enacted to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximisation of value of assets to promote entrepreneurship, availability of credit and balance the interest of all the stakeholders;

AND WHEREAS the provisions of Insolvency and Bankruptcy Code, 2016 can be effectively used for the resolution of stressed assets by empowering the banking regulator to issue directors [Oops!] in specific cases;

AND WHEREAS  Parliament is not in session and the President is satisfied that circumstances exist which render it necessary for him to take immediate action;

NOW, THEREFORE, in exercise of the powers conferred by clause (l) of article 123 of the Constitution , the President is pleased to promulgate the following Ordinance:-

(1) This Ordinance may be called the Banking Regulation (Amendment) Ordinance, 2017.

(2) It shall come into force at once.

In the Banking Regulation Act, 1949, after section 35A, the following sections shall be inserted, namely:-

‘35AA. The Central Government may by order authorise the Reserve Bank to issue directors [Oops!!] to any banking company or banking companies to initiate insolvency resolution process in respect of a default, under the provisions of the Insolvency and Bankruptcy Code, 2016.

Explanation. – For the purposes of this section, “default” has the same meaning assigned to it in clause (12) of section 3 of the Insolvency and Bankruptcy Code, 2016.

35AB. (1) Without prejudice to the provisions of section 35A, the Reserve Bank may, from time to time, issue directors [Oops!!!] to the banking companies for resolution of stressed assets.

(2) The Reserve Bank may specify one or more authorities or committees with such members as the Reserve Bank may appoint or approve for appointment to advise banking companies on resolution of stressed assets.’


President. [Link]

It turns out that, indeed, the mistakes were made by the person who posted it. He could have ‘copied and pasted’ from the original. The original gazette notification of the full Ordinance can be found here and it is free of errors. This notification is filed under the Ministry of Law and Justice.

(3) Here is the notification in the Gazette of India. This notification is actually about the Finance Ministry invoking the powers granted the government by Section 35AA of the Banking Regulation Act as per the Ordinance to confer powers on the RBI to direct banking companies…… No typo here.

(4) MINT had this article on the three ways in which the proposed Ordinance was going to make a difference. Not very illuminating. Perhaps, there is more to it than what meets the eye in the innocuously worded Section 35 AB (2) above.

These committees may propose hair cuts? Binding on banks? Will investigative agencies refrain from reading mala fide intentions into such settlements?

(5) On the last question above, this MINT article has a useful pointer:

“There was a proposed amendment to Prevention of Corruption Act introduced in Parliament. Standing committee has already considered it and submitted its report,” said Jaitley.

There you go.  That might be the key.

(6) The article cited in (5) above also raises some other questions:

“So now the government can direct RBI to have a bank sit down and resolve a specific stressed asset. But what next?” asked Anurag Das, managing partner of Rain Tree Capital, a Singapore-based investment manager specializing in distressed and special situations. “The key to a fair price is attracting enough participants. So how do we get real participants to assess and bid in the IBC timeline?”

A regulator deciding in which case insolvency should be filed poses many challenges, said Sumant Batra, insolvency expert and managing partner of law firm Kesar Dass B. & Associates.

“A lender or borrower are in best position to decide whether to commence insolvency or not. RBI will need to appoint experts to scrutinize each case as it cannot be an administrative decision. The best way to encourage banks to resolve stressed assets under the bankruptcy code is to offer them some incentives to file (for) insolvency,” said Batra.

I suppose Mr. Batra’s comment on experts is taken care of by Section 35 AB (2). The question is whether banks agree on the price and proceed to write down the asset, take a hit on profits and the Government of India (GoI) will receive lower dividends and/or inject capital or close down or merge the banks.

All of these remain unaddressed by the Ordinance. May be, the government has a roadmap for all these crucial questions. Or, not.

(7) These comments in a FE article do not help me understand in what way the RBI was disempowered in the past and in what specific way, it is now empowered to deal with the problem:

Though the RBI had powers under the Section 35 A of the Banking Resolution Act 1949, to issue guidelines for the banking companies, but they had not been specific. Section 35 AA and Section 35 AB introduced today in the Act, allows the government to authorise RBI to take specific measures to solve issues.

The situation now is that 50 big cases can be taken up together in a time-bound manner in a particular time frame. Committees which will be set up by the RBI will also help banks to know exactly what to do to resolve the NPA issues. [Link]

May be, the difference lies in ‘guidelines’ vs. ‘directions’ that RBI can now issue to banks. But, was the RBI not empowered earlier to form ‘oversight’ committees to help banks solve the issues of pricing, hair cuts, takeover, restructuring and reorganisation of assets? Were there explicit provisions in law that forbade either the commercial banks or the RBI from doing so, before?

Not rhetorical but inquisitive questions.

(8) This story in the Financial Express merely repeats the RBI notification on the Joint Lenders’ Forum. The useful thing though is that it clarifies that RBI had reduced the threshold for the JLF to move on the matter of NPA resolution. It was 75%. Now, it is lower. Find the RBI notification here.

To facilitate timely decision making, it has been decided that, henceforth, the decisions agreed upon by a minimum of 60 percent (75% before) of creditors by value and 50 percent (60% before) of creditors by number in the JLF would be considered as the basis for deciding the CAP, and will be binding on all lenders, subject to the exit (by substitution) option available in the Framework.

(9) This ‘Edited Excerpts’ of the interview of ET NOW with Abizer Diwanji of Ernst & Young India is not very helpful because there is a disconnect from his answer to Q1 and the second question.

For example, he says:

There is a reasonable justice that comes through from the vigilance providers to make sure that people are not unnecessarily penalised. To take away the moral hazard and put into the RBI’s basket, I do not think is going to help.

But to actually enable banks to take bold decisions will certainly help. So one has to see what the legislation comes up with. If there is only an amendment in 35A, I think that would not go down very well. But if there are amendments to coming to the bankruptcy code, policies which say that there are legitimate consequences that can come about and get PSU banks to move towards the bankruptcy code, I think that legislation would help.

That was my initial reaction. I thought the Ordinance passed the buck to RBI and I was not sure that RBI did not have powers earlier to do some of the things that it is now being specifically empowered to do. I had made this point earlier. May be, the devil is in the details, as I had indicated above (‘guideline’ vs. ‘direction’).

(10) As a layman (not a lawyer, that is), I find Section 35 A of the Banking Regulation Act 1949 sweeping enough:

35A. Power of the Reserve Bank to give directions

(1) Where the Reserve Bank is satisfied that-

(a) in the [public interest]; or
[(aa) in the interest of banking policy; or]

(b) to prevent the affairs of any banking company being conducted in a manner detrimental to the interests of the depositors or in a manner prejudicial to the interests of the banking company; or

(c) to secure the proper management of any banking company generally, it is necessary to issue directions to banking companies generally or to any banking company in particular, it may, from time to time, issue such directions as it deems fit, and the banking companies or the banking company, as the case may be, shall be bound to comply with such directions.

 (2) The Reserve Bank may, on representation made to it or on its own motion, modify or cancel any direction issued under sub-section (1), and in so modifying or cancelling any direction may impose such conditions as it thinks fit, subject to which the modification or cancellation shall have effect. [Link]

The Section 35A and some provisions in it have been inserted in 1956, 1960 and 1968 respectively.  They seem broad enough for RBI to act. IF it has not acted on these, I doubt if it was lack of legal empowerment. May be, it was waiting for the political signal.

In other words, the utility of the Ordinance lies in the political signalling rather than incremental empowerment of RBI, the Banking Regulator.

If so, cliched as it might be, the proof of the pudding of political will to tackle the issue will come in the eating, when certain assets of certain borrowers are auctioned off, equity rights stripped, management changed and bankruptcy initiated – if they happen, that is.

(11) Well, may be, that is a trifle too cynical or narrow or both. As this article in Business Standard points out, the Ordinance is part of the new ‘NPA Framework’. Of course, there is no document that is available for us to examine the elements of this new ‘NPA Framework’. This article provides us glimpses.

Specifically, it says,

There is also an associated implication of the ordinance in the manner that the provisions of the Bankruptcy Code have now been linked to the Banking Regulation Act. Prior to the Union government directing the RBI to initiate the NPA resolution process, the government now has to establish the incidence of a default as defined under the Code. So far, the linkage between the Bankruptcy Code and the Banking Regulation Act was not there and could have come in the way of the central bank taking action against any bank for ignoring a default. [Link]

The statement is speculative in nature. My reading of Section 35 A of the Banking Regulation Act tells me that it is comprehensive enough already and RBI (or, for that matter, any one) could have invoked any law of the land, including the new Bankruptcy Legislation 2016 to expedite matters. So, it might be a case of hesitancy on the part of the regulator not knowing the extent of political will. Perhaps, again, this Ordinance and the new NPA framework is a case of mustering political will.

(12) I doubt if the ‘NPA framework’ or the Ordinance addresses the issues raised below in the ‘Business Standard’ article. May be, not all information is in the public domain yet and they may be released in installments. The Ordinance is the first installment of actions, may be.

The operation of the Bankruptcy Code helped the situation only up to a point. The policy as well as regulatory environment was such that asset reconstruction companies (ARCs) were unable to strike deals on buying sticky loans on which they hoped to make reasonable returns. On the other hand, the bank managements were not bold enough to sell the sticky assets to ARCs at such discounts as would make the deal remunerative.

This called for regulatory reforms that, on the one hand, would have allowed ARCs to be floated by private equity firms that could take the risks and, on the other, would have allowed banks to take the financial hit on such loans in return for a more healthy-looking balance sheet. Since such reforms did not take place, let alone being on the cards, nothing much changed as far as ARCs’ capability of making a dent on stressed banking assets were concerned. [Link]

(13) This article provides more details on the NPA framework:

The new framework to deal with Rs 6 lakh crore worth of toxic assets was approved by the Cabinet on Wednesday. It contains a set of fresh guidelines for public auction of assets by public sector banks (PSBs) for the steel and power sectors, which account for a majority of toxic assets.

Sources told Business Standard that when stressed assets were put on the block, banks would reach out to state-owned companies to buy those up. “Large cash-rich public sector companies will be encouraged to buy the assets being auctioned in their sector by the state-owned banks,” an official said.

Clearly, this is meant to address the political fallout of auctioned assets being sold off cheaply to private interests. To what extent is the sales to public sector companies a good thing, economically, is debatable. In fact, if this process results in a higher public sector share of India’s economic output generation, I wonder if it is really a good thing.

(14) ‘Business Standard’ proceeds to give us more glimpses of the contents of the NPA Framework document.

Besides, the board for financial regulation and supervision will be tightened further.

“The NCLT will be strengthened with additional manpower now that we expect many companies whose balance sheets have turned toxic and are beyond revival to undergo proceedings,” the official said.

The framework also envisages amendments to the Prevention of Corruption Act to exempt commercial decisions by PSBs from scrutiny by investigating agencies. Both the amendments are likely in the monsoon session of Parliament.

The government has asked banks to provide data on their top NPA accounts. It has also sought more information from consortium leaders. [Link]

What are the two amendments referred to above? I can see only one.

(15) There is a useful image in the Business Standard article on the NPA numbers.

(16) This article was dated two hours earlier than this article also both of them provide the same information. The second article, I think, merely updates the information on the Presidential assent.

(17) There is also a short interview with Sanjeev Sanyal, Principal Economic Advisor to Government of India who reiterates that Delhi would not interfere with Mumbai (read GoI/PMO/MoF with RBI).


What comes through is that there seems to be an incremental political will to let the process of NPA resolution move on. The government has sought to insulate itself from pulls and pressures from delinquent bank borrowers by empowering the RBI to take necessary actions by issuing directions to banks. The RBI had promptly revised the terms of the Joint Lenders’ Forum.

But, as stated more than once in this post, the Government’s resoluteness on resolving the issue will be tested when specific situations emerge.

The situation on attracting bidders for auctioned assets remains unclear. Pricing has to be right. That would open up a different set of issues. I had mentioned them above. They do not seem to have been clarified yet.

However, the Government seems to be ducking the issue or solving the issue cleverly by letting Public Sector Entities bid for the assets. They may be under pressure to bid for the assets at higher prices. In other words, this is a backdoor re-capitalisation of banks by the government through public sector entities. May be, this is the core of the NPA framework and the rest is a nice obfuscation. That is a cynical but not wholly unreasonable view of the package.

The Cabinet has approved a ‘NPA Framework’, which only ‘Business Standard’ seems to have seen.

The issue of amending the ‘Prevention of Corruption Act’ has been flagged much earlier. The government is acting now, it seems. See my article in ‘Swarajya’ published a year ago. It still remains relevant and a useful benchmark to compare this new ‘NPA Framework’ (whatever we have seen of it through ‘Business Standard’ articles).

Clearly, the opportunity to use the crisis to re-organise or restructure Public Sector Banking itself seems to have been passed up. Or, may be not. But, seeing the ‘escape clause’ of auctioning assets off to public sector undertakings, it is possible to guess that the government would not be keen on diluting or abandoning or radically recasting the Public Sector nature of Banking in India. A wasted opportunity.

Perhaps, a strict-to-fair grading for the package is 1.5 cheers and a fair-to-liberal grade for the package is 2.0 cheers.

Is modern central banking an elaborate waste of time? – part 2

In response to this blog post (frankly, a slightly shorter and more abrupt version of it sent as an email), a friend responded with three comments. I address his comments here.

He wrote the following:

  1. The role of monetary policy may have become even more relevant in managing financial stability.
  2. There is a compelling case that central banks (their autonomy and inflation-fighting mandate) contributed to reining in reckless governments.
  3. None of these refute the case for monetary policy nor is there any strong case that (either research or historical evidence) markets can do the job of calibrating interest rates in response to inflation.

My responses to each of them are as follows:

(1) That is precisely what I had said in the earlier blog post. They – central banks – have a role in banking regulation and in maintaining financial stability. The latter requires different targets and different instruments. Importantly, it requires a big mindset change and also to recognise and get out of ‘capture’ by the financial industry. The blame is squarely with the Federal Reserve and all the revolving door appointees now seen not just in the Federal Reserve but also in ECB and in BoE.

‘Inflation targeting’ was (a) a response to the 1970s high inflation and (b) a war against labour. They succeeded because globalisation, technological advances and commodity prices doused inflation in a big way. The first two took the wind out of the sails of labour bargaining power. Labour arbitrage on a global scale was enabled. There is brilliant and very persuasive correlation between the inflation rates in the US and in the UK and wage growth.

I had used those charts in my piece for ‘Evergreen Gavekal’. Pl. read my piece for EVA Gavekal, if you had not done so.

(2) Absolutely not. They did nothing of the kind.  The proof of the pudding is in the data. In the last thirty-five years since 1980, Government debt/GDP ratio had risen inexorably from 30 to 40% of GDP to more than 105% of GDP. Very powerful failure of central banks role in reining in’ governments – nothing of that sort happened. Nor did the market do so.

(3) The case for central banking is different from the case for inflation targeting. Actually, for discussion sake, I would go further. The world would be fine without central banking. There would be accidents. But, there is no basis a priori basis to argue that they would be worse than what we have been encountering in the last thirty-five years.

Indeed, it is possible to argue the opposite. Central banking is like insurance. It has turned out to be the source of moral hazard. Without them, the risk premium on debt would be much higher both for government and for non-government debt because there would be no backstop. Growth and markets would be more volatile and hence, excesses would be self-correcting.

We need a banking regulator and, as long as, central banking does not address financial stability, front and square, I would argue that they are more harmful than helpful to the real economy.

On the second part of your sentence, I am absolutely convinced that markets have been distorted by central banks’ focus on short-term rates and inflation. Markets have been seduced or drugged not to take the long-term view. Without central banks, markets have no one to backstop them. They would price risk far better than they have done in the last thirty-five years. That is as true of bond markets as they are of equity markets.

As a compromise, I can agree that central banking with rules of the game – domestic and external – rather than ‘discretionary central banking’ will make for a better world than what it is today. All things are cyclical. The time for ‘discretionary central banking’ is up. It has run its course. At the minimum, the cycle of ‘discretionary central banking with inflation targeting mandate’ is over. At the maximum, there is a serious case for contemplating a world without central banks.

This is not a rant nor is it some form of nihilism to propose the abolition of central banking, as it prevails today, particularly in the advanced world. Indeed, this blogger believes that quite a big chunk of the problem can be solved if the Federal Reserve Board in the United States could be fixed. That is possible by finding people to fill positions falling vacant in the next 12 to 24 months who do not share the prevailing Federal Reserve orthodoxy on asset prices transmission to the real economy, on leaning vs. cleaning, on ties to Wall Street and on the relevance of transparency and forward guidance for the real economy.

But, it would be useful to consider an extreme proposal intellectually such as considering doing with central banking altogether for it would make other useful and urgent reform proposals seem less radical.

Just to be doubly sure, radical proposals or thoughts on central banking (and modern financial capitalism) have emerged from William White, Mervyn King, Raghuram Rajan, John Kay, Paul Volcker, et al.