Lessons not learnt from the global financial meltdown

Ten years ago, on September 15, 2008, Lehman Brothers filed for chapter 11 bankruptcy. The mayhem that followed led to the worst global financial crisis after the Great Depression. Like the latter, the 2008 financial crisis has been a matter of much discussion – from Congressional testimonies to saucy Hollywood productions leave alone the academic garbage that it generated.

In India, the banks have been in particularly bad light during the last one year or so. There has been a lot of hue and cry, names have been tossed around and blame exchanged. But, again, this serves no purpose. For the malaise is in the system and the environment in which it operates. As Raghuram Rajan, the then Governor of RBI had pointed out in a note on non-performing assets in the Indian banking system to the parliamentary estimates committee, there are still a lot of vulnerabilities. You may instantly react to say, see that is why the government eased him out ‘we told you’ sort of a thing. But Rajan himself is of the opinion that we need to rise above this easy way out: this government or that government. The malaise is still deeper. He points out a few instances where the regulatory system is built to fail. One is the relation between the government and the public sector banks. The governing boards of these banks are constituted by the government, and the selection is obviously political and not professional. Worse still the buck does not stop with them. Nevertheless, the harm is done. Moreover, Rajan points out, the presence of RBI nominee on public sector boards creates an illusion that the regulator is in control when it is not. In fact his successor Urjit Patel, had once remarked that RBI is helpless in controlling the state owned banks as they are more answerable to the government rather than the central bank.

More often than not, the public sector banks are used by the government in power to work its agenda of populist policies. Ambitious credit targets are set and then the loans are waived to meet political goals. This goes on and on government after government till it takes toll on the banks and the system as a whole. This is to some extent a legacy of the earlier ‘socialist raj’. Remember the ‘loan melas’ ? The worst part is that it gets passed as a pro people policy. That it helps in buying votes, is a different story. That is where the roots of the US ‘mortgage crisis’, lay. The then US governments prodded the credit institutions to lend to the un-lendable. After all the talk of unwinding the Fannie Mae and Freddie Mac post the crisis they are still strong and going.

The deliberately lax regulatory regime that such an attitude should I say such an ideology, creates then breeds the ‘not so socialistic’ crony capitalism in which the properly connected businessmen exploit the system to personal gain. It is not about Vijay Mallya, Nirav Modi or Mehul Choksi; it is not even about Chanda Kochhar and the like. These are only the poster boys and girls. The wrong is rooted in the very system, the very idea of right and wrong that we have adopted. That is the reason that Rajan prescribes an arm’s length distance between the government and the financial system and its professionalization. However much we may shout hoarse about the rogues and cry for their blood we definitely do not want the ‘welfare state’ to be demolished for we are its children. We believe that the blood of some sacrificial lambs is sufficient to wash away our sins. The history from 2008 to 2018 shows it is not we are still damned.

Full article: Lessons not learnt from the global financial meltdown (The Navhind Times)

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