Economic crisis and interest rates

It is obvious that we are in the midst of an economic crisis. Though some economists are apprehensive that the situation will deteriorate further and we will drift into depression akin to the Great Depression (1929-33), most analysts are less pessimistic and are of the view that the problem is only a recession in some economies like the US and the UK and a slowdown in countries like India and China.

Whatever be the diagnosis, the ailment calls for urgent remedial steps. Recession is theoretically defined as fall in Gross Domestic Product or National Income in two consecutive quarters. Recession may be either cyclical or structural. Economies undergo expansion and contraction alternately. If cyclical contraction is severe and prolongs over a minimum of two quarters, it leads to cyclical recession. On the other hand, if misallocation of resources among various competing sectors in the economy results in recession, we call it as structural recession. Misguided economic policies culminate in asset bubbles causing mispricing of assets like real estate,stocks and shares and commodities.

If we look at the origin of the present global economic meltdown, it all started with the drastic fall in real estate prices in America. Market prices of houses in America were earlier recording vertiginous rise year after year because of cheap availability of credit. Continual increase in house prices resulted in positive "wealth effect" stimulating even higher growth in overall consumption demand. Economy was growing on the unsustainable combination of low savings and high consumption which was typical of American culture. When the house price bubble burst, consumption demand was adversely affected and the hunky-dory days came to an end.

Whereas opinion is divided on whether the recession is cyclical or structural, the intensity and recalcitrance of sluggishness in demand indicate that it is a hybrid of the two. Therefore, urgent fiscal and monetary measures are desperately needed to reflate the economy. It is in this background that governments and central banking authorities in various countries are implementing different stimulus packages and an accommodative monetary policy. Ironically, many economists who had traditionally placed 'market mechanism' on a high pedestal and abhorred nationalisation of any kind are now advocating a crucial role for the state to revive the moribund economy. They are even recommending nationalisation of banks to rescue the battered banks and the effete economy. How times have changed !

As RBI has eloquently observed, "Even as policy responses across countries are broadly similar, their precise design,quantum,sequencing and timing have varied".One common policy measure adopted by all countries so far has been to reduce interest rates.It is hoped that the fall in interest rates will encourage borrowings for scaling up production in the real sector and for purchase of houses,cars etc.If more liquidity is released in the economy, consumption also will increase.Thus, supply as well as demand for goods will spiral up, buttressing the economy in the process.Fed rates have been reduced to as low as 0.25% in the US. RBI has pruned the repo rate (the interest rate at which commercial banks can borrow from RBI by pledging G-Secs) from 9% to 5.5% in the space of just one quarter.Though there has been persistent demand from industry to reduce rates further, RBI has wisely refrained from effecting more cuts atleast for the present, while releasing the third quarter review of Monetary Policy recently.

What are the factors to be considered before scaling down interest rates? Interest rates impact various economic indicators like supply and demand for goods and services, exchange value of the rupee, savings culture and inflation prospects. From April 2008 to January 2009, rupee has depreciated against the US Dollar, Japanese Yen and Euro.It has marginally appreciated against Pound Sterling.The rupee underwent precipitous depreciation during February and has worryingly breached the psychological Rs.50 to a Dollar.Further reduction in interest rates in India will only exacerbate the weakness of the rupee.

The risk perception about an emerging economy like

(Danny) Boyle's Law

In film world, P/V is a constant.P=Praise and V=Vilification. No wonder therefore that Slumdog Millionaire is pilloried and eulogised in proportionate measure. After the Oscar Award, Salman Rushdie sighed that the movie piles impossibility over impossibility. Since when was cinema expected to reflect reality? Incidentally, will the sequel be "Palacedog Pauper"?

Satyam sidelights

Satyam continues to entertain us. GOI is keen that the would-be Directors should not be constrained by conflict of interest. Attempts are being made to exclude people like M.Damodaran (a Director in Tech Mahindra, a former SEBI chief noted for no-nonsense behaviour) and Jerry Rao. We will end up with Directors who are ignorant about software. Government's understanding of corporate governance will bankrupt the company as much as Raju's malpractices.
Krishna Palepu was also a Director in Global Trust(!) Bank which went bust due to Ramesh Gelli's misdemeanour. Dr.Reddy's has requested Palepu to do the company a favour by resigning his Directorship. The company is anxious not to join the holy company of Satyam and Trust.Would the Professor oblige? Dr.Reddy's looks safe as of now because it does not sport qualities like satyam and trust in its name.
It has been reported that M.Rammohan Rao is a mathematician who is innocent about Balance Sheet and its variants.A square peg in a round hole? Contrast him with T.R.Tuli who was CEO of PNB during Sanjay Gandhi's heydays, the Emergency.Tuli was a high-school drop-out.When Justice Shah Commission asked him if he could read Balance sheets, his earthy reply was he could read customers which competence, in his view, was more important for a bank chief.

satyam eva jayate : An issue of corporate governance

Embarrassed by the incongruity of the company's name for doing business, the promoter family (Rajus) of Satyam Computers floated two more companies Maytas Infra and Maytas Realty by name reversal. The family owned a substantially larger share of Maytas companies than of Satyam Computers.Satyam is cash-rich unlike Maytas.Rajus planned to do what many promoter families do.That is, transfer the wealth from Satyam to Maytas or to the family. Satyam's Board adorned by biggies like ISB's Dean, Rammohan Rao, Krishna Palepu and Vinodh Dham "innocently" decided to buy into Maytas companies utilising almost the entire cash holdings. Stated reasons: to develop two more verticals and to derisk business.The illustrious Board was unable to spot any business worthy of purchase in its own industry! This issue has raised hackles on corporate governance front.The Board has since reversed its decision.Isn' t reversing decisions child's play like reversing names? Is corporate governance an oxymoron?

"On Being Certain"

Certainty has always been a mirage. Ancient Indians prayed that they be delivered from untruth to Truth, darkness to Light and from mortality to Immortality. They did not seek deliverance from uncertainty to Certainty. They had the Wisdom to seek only what was possible.

It is exciting to be introduced to the book written by Robert A.Burton, a neurologist entitled 'On Being Certain : Believing you are Right even when you're not'.

It is counter-intuitive that 'certainty' is just another 'feeling' like anger, pride etc.It is incorrect to posit a choice between reason and sense of purpose. One without the other is barren and irrelevant. "Cynical zeitgeist of valuing science over compassion" is good word-play, but misleading. Science is not a compassionless monster.To claim that the belief regarding soul outlasting body is counter to the evidence is dense and imprecise.What evidence do we look for in a matter of faith that cannot be disproved either? If "studies have shown that sham arthroscopic surgery can allow some patients to walk comfortably again", either they were not real patients or the studies lack credibility.Fitzgerald is right in saying that the test of a first rate intelligence is the ability to hold two opposed ideas in the mind at the same time and still retain the ability to function. The caveat that these ideas must both be yet to be disproved remains conveniently unsaid."Our knowledge of the world around us is limited by fundamental conflicts in how our minds work" is a partial understanding of man's modest endowment vis-a-vis mystery of the universe. "The need to tolerate the unpleasantness of uncertainty" is a meek acceptance of reality. The book is thought-provoking.

Who is out?

This is a question for those interested in cricket.
Dhoni and Pathan are batting. The bowler makes an LBW appeal against Dhoni. Before the umpire responds, batsmen take a run. There is an appeal for running out Pathan. The umpire lifts his finger. Who is declared out, Dhoni or Pathan?
Answer: It depends on who is the umpire. If Steve Bucknor, he must be responding to the first appeal belatedly, true to his style. If someone else, Pathan is considered run out.

Misunderestimated President

During a recent visit to England, George W. Bush warned that he would soon start writing a book. Covertly, he did interview a few ghostwriters and historians. None of the ghostwriters could come up with even a single statement that came upto his standards. Predictably, the historians were incapable of twisting and turning the past enough to capture Bush's contribution. So, Bush has decided not to seek anyone's help. He is on his own.

I was lucky to be offered a preview of opening chapters of his "bioautography". He starts with a typical challenge to his detractors: "I want the enemies of our country who think they are capable of destroying USA to know that I am even more capable of that". I am permitted to share a few more glimpses:

"Was I ever against African Americans? Never. I am proud of my successor. I thank the African state of India for gifting the Obama family to America".

"Sonia Singh, the Prime-President of India was always a well-wisher of America. It is a pity (s)he could not sign the ABC agreement and take the nucular proliferation forward".

"Will I invade Iraq again? Certainly. Our enemy is becoming stronger with every invasion".

"What is my advice to American childrens? They should do what I did and also what I did not do and I repeat, both".