07.11.2008

• A Wall Street banker has to maintain low profile nowadays
• With all the bloodbath that was witnessed on Wall Street, it is no wonder that visits which were high profile, remained very low profile now.
• So was the case with Mr. Jamie Dimon, the CEO of JP Morgan Chase, the bank which not only stood its ground in the recent turmoil, but wen on to acquire Bear Stearns and Washington Mutual.
• His name is doing rounds for the post of Treasury Secretary in the Obama administration.
• One of you have been asking me a question similar to this one that is posed to Jamie Dimon.
• What explains the supremacy of the dollar even in these turbulent times? Is there no other currency the world can turn to?
  
• He answered: I think there are other currencies that the world can look up to, in particular the euro and the yen. In terms of fundamental valuations, the dollar is here to stay. In terms of the crisis which originated in America, it is still an enormously strong country with $14 trillion of GDP and great technology. It will do fine. It has got a rule of law, and if you have invested your money in the US, you will be OK.
• I agree with him that dollar is backed by a rule of law. But about US being strong with a $14 trillion economy and great technology -- my take is that it's an advantage it will not be able to keep for long over others. Europe, Chindia (or even BRIC), Japan can give it a run for its money there. In the aftermath of G20 deliberations, what would happen if the GCC (Gulf Cooperation Council) or even OPEC decides to stop quoting oil in dollars? Or even when Chiang Mai Initiative gets a broader scope? Similar events can possibly happen. Even their non-happenstance is no gaurantee that dollar's days will not be numbered. The moment world governments start moving away their investments from dollar to some other currency, agreements or no agreements, treaties or no treaties, dollar will lose its pre-eminent position. So, for the present it will remain strong as long as oil gets quoted in dollars and world governments keep investing (read: financing the US current account deficits) in US dollars.
• Am I talking the dollar down? In the context of ideas floating around that Chiang Mai initiative (more on that follows below) needs to be strengthened and / or a successor to it needs to be put in place, coupled with the fact that now Asian economies have notched up about $4 trillion in forex reserves, my feeling is that it is just a matter of time before governments would start looking at alternatives to US treasury bills to park their forex surpluses.
  
• Be that as it may, an interview with such people like Jamie Dimon is what we cannot afford to miss in these times. Read it here. He doen't duck questions. That's what I liked in this piece.
  
• The Chiang Mai initiative and its limitations:
• In the wake of the 1997 east-Asian crisis, Japan had proposed Asian monetary fund as a regional lender of last resort but abandoned under western resistance. A more modest Chiang-Mai initiative (CMI) was launched by 10 Asean countries and China, Japan and South Korea (Asean+3) to provide liquidity assistance to countries in difficulty through a system of bilateral swaps. Subsequently these bilateral swaps have been multilateralised into a pool of about $80 billion of which only 20% can be drawn without invoking IMF’s conditionalities. However, there are many limitations of this arrangement.
  
• Firstly the size of the pool is small especially that without conditionality. In today’s world, bail out packages for financial crises run into hundreds of billions of dollars.
  
• Secondly, CMI is limited to only response to crisis and not generation of additional demand. It may be of limited use for the current crisis which is impacting the region through demand recession.
  
• Thirdly, it is not inclusive, being limited to the crisis-affected countries and Japan during the 1997 crisis.
• Banks cut interest rates
• Taking cue from the Finance Minister, several public sector lenders, led by the country’s biggest lender State Bank of India, have lowered their prime lending rates — the benchmark interest rate — to which all loans are linked. The rate cuts have been around 75 basis points (bps) i.e., 0.75%.
• Why is this practice of talking down interest rates bad for the country?
• A reduction in lending rates means a lower spread (difference between interest income and interest expenditure) and hence, lower profits. And who picks up the tab? In the case of PSBs (Public Sector Banks), the hapless taxpayer! Either by way of lower dividends to the exchequer or recapitalisation expenses (as happened in the 1990s), when the capital base of most PSBs was severely eroded.
• That's why finance ministers have to take a hard look at the ultimate fallout while talking down banks to reduce their interest rates. While they may achieve something in the short term, they may be doing damage in the medium to long term.
• Ever heard of the phrase regulatory capture?
• George Stigler is credited with using the phrase for the first time (about 40 years ago) when he warned that the regulators would gradually come to champion the cause of the regulated rather than the consumers, whom they are supposed to protect.
  
• What are the conflicts of interest that a regulator has to keep constantly watching for? When an entity or related entities engage in multiple businesses — as an agent of the buyer and seller; an adviser to investors as well as proprietary trader; as advisers as well as traders; raters as well as business seekers — all are riddled with conflicts. Identifying these conflicts and avoiding emergence of such entities are a first line defence of the regulators against possible systemic collapse. In addition to this, some more sane advice coming from an op-ed article in today's ET:
• Sometimes products make entry in plain vanilla form but soon take on complexities. It is for the regulators to put them through the prism of economic and social value addition before allowing them entry to the market. Any sign of toxicity, potential systemic concern, should be nipped in the bud like ‘terror futures’ mooted by the Pentagon in the aftermath of 9/11. If there are knowledge gaps, only those products they understand should be cleared — nothing will happen to the world if some of the financial innovations with unknown implications are prevented, but the opposite can be quite disastrous.
• Like a chess master who sees many a moves in advance, regulators must know the implications of organisational structures, products and practices of market participants and ‘front-run’ the financial Frankensteins rather than becoming their worshippers dazzled by their innovations. A relaxed or self-tied up, or captured regulator joining the flight of the Icarus would only heighten the moral hazard rather than reducing it.
• Article 355 is in news. Why?
• Article 355 of the constitution says, “It shall be the duty of the Union to protect every State against external aggression and internal disturbance and to ensure that the Government of every State is carried on in accordance with the provisions of this Constitution.”
• Dealing with a PIL (Public Interest Litigation) on the ongoing attacks against North Indians in Maharashtra, the Supreme Court said that we are all Indians and that political will is what is needed to tackle such troubles. It quoted article 355 and said it is for the Central Government to act. However, it has not yet passed a final judgment in the case.
• Inflation rises to 10.72%
• AFTER declining for five weeks, inflation inched up marginally to 10.72% for the week ended October 25 from 10.68% the week before that. The marginal increase in the wholesale price index (WPI)-based inflation was due to upward movement of primary article prices, which has a weight of 22.02% in the index.
  
• Despite the marginal increase, economists expect the downward movement in inflation to continue. Their expectations are rooted in the prices of primary articles — the only segment that has bucked the general downward movement in the index. They also do not expect the liquidity infusion and the cut in interest rates to have an impact on inflation in the short term.
• A look at this graphic gives us details of the composition of the WPI.