Two weeks ago, I was in Bangalore and met friends who are regular Mint readers. They complained that my columns were pessimistic and added, for good measure, that I was wallowing in the past.
I make no apologies for being realistic about the financial market outlook globally or, for that matter, in India for the near term. In investing, the question to be asked before buying is always about whether prices reflect bad news. In recent times, Bare Talk has made the case for select Asian markets and currencies because prices had dropped so low as to adequately discount the risks that may lie ahead. It is not yet the case with India.
The first step in any durable recovery is to accurately assess and accept reality. If economic growth in India were to be 7-8%, then where is the need for massive fiscal and monetary policy stimulus? Clearly, something is still missing in our public policy discourse. The first step is to acknowledge reality and the second step is to ask ourselves what needs to be done. The third step is to assess the costs and benefits of the remedies before putting them to work.
While the government has been busy formulating sector-specific rescue packages and the central bank has been busy cutting rates and the cash reserve ratio, little thought is going into countering the groundswell of resistance building up to any meaningful economic reform or liberalization. There is a deliberate conflation of economic liberalization with financial liberalization. There are no credible voices on either side of the aisle that speak up against this growing threat of revisionism in India. This is the biggest risk to sustaining India’s economic performance.
The criticism of wallowing in the past fails to consider the possibility that solutions risk repeating the cycle of excesses and busts. At the global level, only recently has there been a grudging recognition of the economic and financial mess that our past behaviour has created. Even then, there is the fond hope that by the middle of 2009, normalcy would start to return. Indeed, 2009 might play out exactly the opposite of what consensus opinion expects, for such hopes fail to show an appreciation of the scale of the excesses created in the five years from 2003 to 2007 and the tangential solutions applied to removing them.
On 2 January, The Wall Street Journal ran an article on the prescience of Raghuram Rajan, former research director of the International Monetary Fund. His advice on the need for incentives of Wall Streeters to change so that punishments for losing money are in line with rewards for earning it is now being apparently heeded. Some banks are moving in that direction. But it is too soon to celebrate, as the abilities of the financial industry to comply with the letter of law rather than apply good behaviour have been honed over decades. Otherwise, we would not be worrying or writing about the mess they have created.
A two-part article in The New York Times by Michael Lewis and David Einhorn confirms the reasons for feeling pessimistic about the global approach and, in particular, the American approach to resolving the problems that they and the rest of the world face. They lament the political influence of Wall Street: “Eighteen months into the most spectacular man-made financial calamity in modern experience”, nothing has been done to change the need (on the part of regulators) “to curry favour with the politically influential and the desire to keep sweet the Wall Street elite”.
In the US, there is some reason for hope. The administration is about to change and a new president might make a clean break with the past. Although there is some reason to feel cautious about the likelihood of profound changes, given the cabinet appointments that the president-elect has made, we can still reserve judgement on the policy direction under the new president.
Given this situation, financial markets are likely to continue to remain firm for the next several weeks, as the inauguration of the new president in the US and his honeymoon period keeps hopes up for a while. After that, the reality will start to sink in that there is no easy or quick way out of the gargantuan mess that all of us in the world created in our respective countries. It was no unique American problem. Then, stocks would start to sputter and head for fresh lows. That would set off another wave of desperate and competitive policy actions. That is when hitherto unseen reactions in the foreign exchange market and the potential end to the long run of global dominance of the US dollar would come into view.
Contrary to our hopes for stability, lot of actions lie ahead in 2009 too, and it is better for us to watch them from the sidelines than be in the thick of it all.
V. Anantha Nageswaran is head, investment research, Bank Julius Baer and Co. Ltd in Singapore. These are his personal views and do not represent those of his employer. Your comments are welcome at firstname.lastname@example.org