LAST autumn, when finance minister P Chidambaram was visiting USA with his senior officials, he was apparently invited to lunch by treasury secretary Henry “Hank” Paulson. At the meeting, Paulson reportedly held forth on the benefits of an open financial system and the need for India to loosen its controls. Much as this might sound apocryphal, a news wire also recently carried a dispatch from Beijing, detailing how Paulson harangued the audience at Shanghai Futures Exchange 18 months ago about how “an open, competitive and liberalised financial market” was far more efficient than “governmental intervention”.
* Ban on short selling: Governments across the world, irrespective of their ideological shades or origins, try and influence market outcomes through interventionist policies. Sometimes it works, but its toxic after-effects are felt long after the deed is done. The desire to train markets to deliver what, governments erroneously believe, is beneficial to all market participants is dangerous and essentially short term in nature. These follies include stabs at banning short selling in stock markets. The Indian government has attempted this in the past and the US market regulator is among the latest to succumb to this peculiar affliction.
The Securities and Exchange Commission, followed by regulators in some other countries, has decided to ban short selling in stocks of financial companies, principally to minimise opportunists (read hedge funds) from aggravating the misfortune of defenceless finance companies. However, the move has instead driven out liquidity from the market and, given the shortage of long-only investors, has turned the markets more volatile. Regulators also do not realise that shorts uncover problems long before they are made public and when they’re past any redemption.
* Return to Keynes?: TARP is probably the Fed and treasury’s way of acknowledging that monetary measures can go only a limited distance in solving some of the endemic problems confronting the US banking sector. The Fed has over the past 12 months tried to keep the financial catastrophe at bay by reducing interest rates and by pumping in huge amounts of liquidity. While this did help the banks somewhat initially, it subsequently failed in averting the bankruptcies and the destruction of balance sheets in other financial institutions outside the Fed’s jurisdiction, such as insurance companies and investment banks. Consequently, the fire-fighters cobbled together TARP, probably encouraged and emboldened by the outcome of the past packages put together during the Depression, or the savings and loan bailout.
All these have enormous implications for the Indian economy. The biggest danger is that Indian policymakers might also be tempted to pursue wrong policies, primarily out of a misplaced sense of having always pursued the right policies and a desire to thumb one’s nose at all the free market votaries. There is a bit of schadenfreude at work here also. India has its unique set of problems and the only way to really unleash the productive energies of the economy is to keep reforming the different markets. Investors are already expressing their disappointment about the five years wasted by this government without implementing crucial reforms in either labour, or agricultural or infrastructure sectors.