Recently, Y.V. Reddy, former governor of the Reserve Bank of India, in an interview to this newspaper, said there was hollowness in banking. Additionally, he said the following:

“…. when there are huge uncertainties and volatilities in global markets, the importance of stimulating productive activity within the economy is important.

“I think it is time for some countries—and I am not restricting to India, it may even be United States—to consider selective credit controls and the credit allocation to sectors. It may appear to be too retrograde, but these are extraordinary times when you have to stimulate (productive sectors)."

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The following day this newspaper wrote an edit taking exception to his remarks noting that this was a slippery slope or a dangerous path to take. After all, the road to hell is paved with good intentions. It could be reasonably argued that the distance from credit controls and credit allocation to Industrial Development and Regulation Acts and Controller of Capital Issues, etc. was not too far. So, Mint clearly distanced itself from this suggestion of Reddy even as it took care to point out that it had supported his monetary policy decisions in 2007-08.

In contrast, Yours Truly had more sympathy for Reddy’s underlying message if not his specific suggestions. Only the previous week, Bare Talk had argued that countries, before considering restrictions on capital flows from overseas, should think of internal capital controls. Implicit in that argument was the suggestion that internal flow of credit and liquidity to speculative investments and sectors ought to be somehow managed or regulated.

In a report (From the Golden to the Grey Age, September) that ought to be prescribed as a must-read for students and practitioners of finance and capital markets, Deutsche Bank strategists Jim Reid and Nick Burns show that the quarter century from 1982 was indeed special for the remarkable length of economic expansions and short recessions, particularly in the US. Consider these facts: In the period since 1854, the US economy was in contraction 31-32% of the time depending on whether one looked at the average or the median length of business cycles. Pre-1982, the figures were 35-36%. Between 1982 and 2007, the time in contraction was only 7%.

US and UK economies became poster-children for free-market economics from the 1980s, at least in popular perception, under US president Ronald Reagan and UK prime minister Margaret Thatcher. So, in the minds of the faithful, correlation was causation. Free market economics delivered moderation in business cycles and lengthy economic expansions. M/s Reid and Burns then pronounce this damning empirical verdict:

As can be seen there was a step change in the US economy’s indebtedness from the early 1980s onwards and then an additional one in the late 1990s/early 2000s. A similar picture is apparent across most of the Western world. Basically from the early 1980s to the onset of the Global Financial Crisis the economy added on more debt every year and business cycles were extended as a result. …. This debt accumulation undoubtedly helped smooth the business cycle and contributed to the period being known as the “Great Moderation".

Thus, the invisible, all-knowing, omnipotent and discounted-present value- optimising market forces have created a colossal debt burden just as the Western societies are entering into demographic sunset. Besides this macro contribution, the financial sector has also engaged in many further acts of omission and commission many of which were and are criminal in nature.

They were clearly aided and abetted by policymakers with their regulatory forbearance and ultra-loose and asymmetric monetary policy that caused capital to be priced cheaply and incorrectly globally. Ultra-low interest rates never encourage capital investment of the right kind that adds to economies’ productive potential. They are deployed in the cause of speculation and greed. Global bubbles that were spawned by low interest rates in 2002-03 constitute overwhelming evidence.

So, how does one ensure that the theoretically elegant solution of harnessing low interest rates for productive investments is realized when the free market is neither willing to nor capable of doing that?

My sympathy for Reddy’s views stems from my experience in the world of global capital markets. Mint’s editors are informed by their experience in India. It is not that easy to engage in counterfactual thinking. The world has reasons to be deeply suspicious of both economic models.

We are reduced to choosing between the two on the basis of their costs rather than on their benefits. That is not a good thing. We are at a policy cul-de-sac.

There needs to be an honest discussion between pragmatists rather than between ideologues that are congenitally pre-disposed to one model or the other. Discussions suffused with intellectual and moral substance rather than hot air needs to fill the moral, intellectual and leadership vacuum that defines the world today.

V. Anantha Nageswaran is chief investment officer for an international wealth manager.These are his personal views.

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