“Its regrettable and a huge failure of American public policy.”
“We just can’t let companies become too big to fail”
John Snow - George Bush’s former US treasury secretary.
“The bankruptcy of Fannie and Freddie would have meant Armageddon. Would have meant the meltdown of the financial system. Its one of the cases where the market can not look after itself, too bad we end it here (sic) but at this point it was the only option I believe ”
“It was too big to fail no doubt”
Domenico Siniscalco – Former Finance Minister of Italy. Currently employed as a fellow with Merrill Lynch who was advising the US treasury on the Fannie Freddie rescue plan.
“Paulson really had no choice. It wasn’t a matter of if, but when and he did what he had to do. And its not a popular move but its one that had to be taken.”
Timothy Adams - former undersecretary of the US treasury.
The above quotes were made at a conference of former finance ministers from various countries, in Virginia. (Interviews available on NPR podcasts)
There’s a whole new meaning to the phrase Free Fall. In one case it gives you an exhilarating feeling as you have no force acting on you other than gravity, tumbling through space rollercoaster like feeling you’ve left your stomach behind. The other free fall is an exhilarating feeling of falling due to greed and clumsiness but getting taxpayers to catch you. It’s free and the taxpayers get a nauseating feeling in their stomachs that they might as well have left behind.
Across the board in columns and discussions there seems to be one consistent point of that what happened was regrettable, its unfair but there was no choice but to come to the rescue of these falling giants no matter how foolish they have been. The alternative, not doing anything and expecting the invisible hand of the market to work, was far too disastrous. This even from die-hard pro market economists and neo-liberals.
Another rather unlikely outcome of this crisis has been the rediscovery of words like moral hazard and greed into economic discourse. Even NDTV’s show The Big Fight asked the question, is greed responsible? And we had brokers and bankers holding forth on a subject that usually Asaram Bapu and Swami Ramdev would be found sermonizing on.
In fact Moral Hazard is not a phrase from a book on moral science or philosophy, it is in economics text books but is almost always forgotten after graduation.
Moral hazard as John Snow explains in the first quote is when gains lie with one party and the costs with another. It’s become an issue right now because both are showing up on balance sheets. But for the longest time moral hazard has been ignored when it comes to industry. Destroying a lifestyle, environmental degradation and poison in ground water, children dying of respiratory disorders near mines the list is endless, have all been moral hazards. But in those cases the costs don’t show up in balance sheets (they would if regulators did their jobs) so its not even acknowledged as a cost. Basically if a cost doesn’t show up on balance sheets it’s termed an externality in business jargon. That’s a different matter different column.
Right now lets stick with why it was necessary to rescue organizations that were brought down by greed or irresponsible risk management or both.
Basically they were too big to fail. The one line repeated by all. Their failure would have meant a meltdown that would have made several economies collapse. Rescuing them will be unfortunate for many, their failure would be unfortunate for many too.
While shooting at the Reliance Jamnagar Refinery years ago we were often treated to Dhirubhai Ambani’s quotable quotes. One attributed to him was – “If you want to succeed, align your interests with the countries interests.”
The modern day cynic is free to interpret that as align your interests with the govts. interests.
There was the famous case of the Amarnath Hedge Fund going bust a few years ago sinking with it many medium and small investors through their pension funds, before that there was the Amarind (or was it Amarynd) fund too that went down taking with it pension funds and school teacher’s savings and the pension plans of several such. There were no rescues at the time, as the moral hazard clause in market economics wouldn’t allow it. In fact no one other than people who’s money was sunk suffered.
So it’s not only a question of moral hazard, there were no rescues there simple because they weren’t big enough, they had not aligned their interests to the countries interests, they weren’t plugged into the mother-board and become part of the circuitry like a virus or entered the blood stream like a healthy tonic (take your pick depending upon your ideology).
Since Fannie and Freddie there have been more bailouts, AIG being the more recent, more are expected. And as pointed out by all, they are all too big to fail. How big does one have to be to get into the too big to fail league? A minimum balance sheet requirement? Assets held? No ball park figure there, its just a question of aligned interests.
Corporate India had figured this out way back and had aligned interests all over the place. You hardly hear a voice, even the most reasonable ones who say the Tata Nano plant can’t be allowed to fail (even if one has to push it through without considering the externalities). Its too big for Bengal, its failure means Bengal can say good bye to any investment ever, or an SEZ in Maharashtra (which Reliance tried to block the referendum to. They went to the high court trying to prevent a govt. poll asking the villagers if they wanted an SEZ on their land), or lignite mines in Gujarat. Failure would be unfortunate for many. Not resolving resettlement issues would be unfortunate for many too.
At the same conference in Virginia where the above quotes are from, India’s former Finance minister Yashwant Sinha was asked how this affects India. He said it wont really since we have regulators who have been doing their jobs. No one here is too big to fail. Almost suggesting we have figured out the answer to John Snow’s problem of how to ensure companies don’t get too big to fail.
Is that true? Its not just banks that can cause such disasters, industry too can and today more than ever both are inextricably linked. And it may not always show up on your balance sheet till its too late. Perceptions are being created that certain projects are too big to fail. Their failure would lead to a bleak future for generations. Is that true? And even if it is, should it be this way? Should we be creating a too big to fail delinquent?
Do we celebrate Indians listed on Fortunes billionaire lists while reports at home (govt. and non govt.) show the rate at which inequalities have grown over the past few years, because we feel our interests are aligned with theirs? We’re plugged into the same circuit?
If the destinies of millions are aligned with the interests of a few who make decision based purely on balance sheets, for who moral hazard is a fading textbook memory and where greed is being discussed rather seriously as the cause of collapse (or stupidity depending on who you speak to), you have a recipe for disaster.
One so hopes George Bernard Shaw was wrong when he said – “We learn from history, that we learn nothing from history.”
No comments:
Post a Comment