Last week I was very surprised to see a Hindu editorial clearly and squarely place the blame for the current economic crisis on the US Federal Reserve, and the failure of the Bretton Woods monetary arrangements. See this sentence:
"Everyone agrees that the Bretton Woods institutions have performed miserably in the run-up to the crisis. But the crisis was not simply a failure of supervision on their part. It was a logical outcome of the mother of all moral hazards caused by the power of seignorage enjoyed by the United States since World War II and especially since the 1970s when the heyday of the dollar began in earnest. Simply put, the U.S. was able to live on a perpetual debt cycle secure in the knowledge that its economy would not be pauperised by the inevitable crash in the same way as the economies of Argentina or South East Asia were in the 1990s because its national money serves as the international reserve currency and will never be allowed to lose too much value." (emphasis mine)
The editorial exhorts India to put a strong presence in next month's global monetary summit. I am sure the US Fed will be under tremendous pressure then. They might have blamed free markets and praised Karl Marx, but every world leader from Sarkozy to Singh fears that this is the last chance for government managed money. If there is one more systemic failure, private currencies may emerge. Or govt. supported fractional reserve banking could collapse.
On Saturday, the RBI made some bold moves. They cut CRR by 0.1, to 5.5%, and the repo rate from 8 to 7.5% to "infuse additional liquidity into the banking system" (of about 400 billion rupees). This promptly delighted the stock market, esp. valuations of banks like ICICI.
But creating the right amount of money is not such an easy job. So the Prime Minister is going to meet some of the big industrialists and bankers on Tuesday to see if any better or more accurate ways of infusing money can be worked out. The participants include the Ambanis, Mittal, K P Singh Deo (whose DLF real estate company is in some trouble), ICICI Bank MD K V Kamath, Nandan Nilekeni and Jindal Steel MD Sajjan Jindal.
I don't know if we will be privy to the conversations between the PM and these businessmen, but I wish they would be telecast so I can understand the government's moves better. It will be interesting to see what our Parliament, or potential prime ministers like Mamta, Modi and Mayawati have to say about these measures.
- How much is too much?