By Subhash Chopra
India’s banks weathered the 2008 global financial meltdown sparked by the excessive lending spree by the likes of Lehman Brothers better than US and European banks, according to Joseph Stiglitz, the US Nobel Prize winner economist.
Excessive lending in the US housing market and excessive freedom to investment bankers in US and Europe led to the crash under whose impact the Western economies are still reeling. In contrast the Indian banking system did much better because the bankers were kept under a moderately tight leash and restrained from reckless and speculative lending deals.
India’s central bank, RBI (Reserve Bank of India) like its counterparts in China and Brazil, had done much better than the US Federal Reserve or the European Central Bank(ECB) because it had, and continues to have, less independence than its US or European counterparts which had much more independence that lprovided excessive bailouts to banks which indulged in speculative deals and brought the entire system down on its knees.
Greater independence for central banks was neither desirable nor conducive to any better economic performance, rather the reverse. Above all it lacked accountability, said Stiglitz.
The crisis had shown that one of the central principles advocated by Western central bankers -- the desirability of central bank independence -- was "questionable" at best. "In this crisis, countries with less independent central banks -- China, India and Brazil -- did far, far better than countries with more independent central banks -- Europe and the United States. There is no such thing as truly independent institutions. All public institutions are accountable, and the only quetion is to whom."
In the run-up to the financial crisis, the US Federal Reserve was accountable only to Wall Street, he said and singled out New York Fed President William Dudley for some especially harsh criticism. Dudley was "a model of bad governance" because of his inherent conflict of interest: he bailed out the very banks he was supposed to regulate – the very same banks that enabled him to gain his position,.
“ The (granting of ) loans by the Fed and the ECB to banks at low interest rates was, in effect a , a gift worth tens of billions of dollars, a gift from the public, but which circumvented the usual public appropriations process. It is unconscionable that such power over the purse be given to an-elected body,” Stiglitz asserted. America’s central bank, he believed , had been captured by the Wall Street. “It (the Fed) came to reflect the ideology and interests of the financial sector which it was supposed to regulate.” The conflicts of interest – as unravelled in cases like the New York Fed – were “a model of bad governance.” The Fed, he said, had “turned a blind eye to practices that not only exploited the poor, but put into jeopardy the American and global financial system.”
Interestingly, the US Nobel Laureate’s onslaught on the independence of central banks came right after RBI governor D. Subbarao’s address urging more independence for central banks. They were speaking at the C.D.Deshmukh memorial lecture in Mumbai..
The RBI governor also called for greater harmony between fiscal and monetary policy to tackle the challenges of growth and unemployment “The central banks alone cannot fix economies by themselves. Governments need to act too from the fiscal side , and monetary and fiscal policies have to act in harmony.” His remarks came a a tie when he is under pressure from industry and the government to bring down interest rates ahead of his monetary policy announcement later this month.
Continuing his Indian tour, Stiglitz waded into another controversy about the role of FDI (foreign direct investment ) by multinationals like Walmart in India. Speaking at the Azam Premji Foundation in Bangaluru, he cautioned over the belief that FDI was some kind of panacea. There was no shortage of cash or entrepreneurship in India The country should look at what foreign investment can do that Indian entrepreneurs cannot do. Walmart , he warned, could bring greater capacity in bribery as it did in Mexico. “You don’t want to bring that in, you already have enough of it.”
He said that he had studied Walmart’s supply systems in other countries. They had not worked there. FDI with its large buying power could control a large part of the market and drive prices down to bring in cheaper Chinese goods and increase dependence on foreign goods.
Overall Stiglitz was fairly optimistic about India weathering the global slowdown in the coming year when the US and other economies were expected to slow down. “Good thing about India is that it is less dependent on exports.”
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