It is said that irony seldom escapes the characters in a drama. This is especially so when it is the financial stage where we all have our ‘entries and exits’. The way the financial crisis has unfurled, quite a few shibboleths of capitalism have been left shattered. The wiser ones describe the working of ‘capitalist greed’ as the ‘privatisation of profits and socialisation of losses’ — something that would rake up a turf war between Adam Smith and Karl Marx.
A significant aspect of the crisis is that we are all wiser after the event. Financial engineering threw up a lot of jargon — CDOs, CDS, securitisation, ABS, MBS etc. We never really figured out how they worked but all of us clapped when the off-balance sheet business multiplied to some $600 trillion, or 11 times the world output. The boom and bust of this business cycle is much like the now popular words of Nelly Furtado — why must all good things come to
There are a few things that stand out from this crisis. One is that this is the first time in the last few decades that all the countries of the world have united for a non-political cause. So have the central banks — including China’s — to reduce interest rates across the board to assure the players that the government cares. The world now shares a common voice with two tones: one, rubbishing capitalism and two, doing everything to keep the world economy going while some
countries like Iceland and Pakistan are slipping towards bankruptcy.
Both small and big institutions can fail without being noticed. But if the malaise is so deep that the
entire edifice crumbles on failure, then one can be moderately sure of a rescue. If the US financial market goes under, so would the European, Japanese and other markets. The US maintained a stiff upper lip when Lehman Brothers crashed, which was out of place because when AIG went down a few days later, the parachute was opened.
Now everybody is suspicious of everybody else. Even lower interest rates have not encouraged banks to lend to one another, as no one is quite sure of the skeletons that may exist in another’s closet. In 2007, after Bear Sterns, it seemed that the worst was over. But along came the Freddie Mac and Fannie Mae sagas, followed by Lehman, Merrill and the rest. It will take time for this suspicion to die.
While India has been tom-tomming the fact that it was insulated from the crisis due to sound policies and practices, the recent scare related to a private bank has shown that no one is totally protected. The regulator assured us that overall bank exposures to Lehman were minimal. But then, Lehman is only the tip of the iceberg and the air of uncertainty now pervades the entire system as various other institutions around the world continue to crumble. How exposed are we to them?
With Goldman Sachs and Morgan Stanley now looking towards becoming regular commercial banks, the financial system appears to have come a full circle. Therefore, from being the hub of action and innovation, banking will go back to its ledgers and tellers.
Progressively, governments across the world will now be taking a stake in commercial banks. This is being done with a dual purpose. The first is to assure the public that their money is safe; the second is to keep a watch on the operations of the banks. This works well for the banks for, after the mess that has been created by them, the government can now be a part of the cleaning-up operations.
The move towards nationalisation and government support makes one nostalgic for the 70s-80s. And to think that those like Moodys, Standard & Poor, IMF and the World Bank have all been clamouring for more privatisation.
(Madan Sabnavis is Chief Economist, National Commodity & Derivatives Exchange)