Greg Mankiw and Raghuram Rajan

Nicholas Gregory Mankiw , Economics Professor at Harvard University, is associated with right-wing economists and supportive of Republican policies. He is well-known for enunciating "ten principles of economics".

He quotes Raghuram Rajan in his blog:

"SATURDAY, AUGUST 10, 2013

Wisdom from Raghu Rajan

"For economists who actively engage the public, it is hard to influence hearts and minds by qualifying one’s analysis and hedging one’s prescriptions. Better to assert one’s knowledge unequivocally, especially if past academic honors certify one’s claims of expertise. This is not an entirely bad approach if it results in sharper public debate.

"The dark side of such certitude, however, is the way it influences how these economists engage contrary opinions. How do you convince your passionate followers if other, equally credentialed, economists take the opposite view? All too often, the path to easy influence is to impugn the other side’s motives and methods, rather than recognizing and challenging an opposing argument’s points. Instead of fostering public dialogue and educating the public, the public is often left in the dark. And it discourages younger, less credentialed economists from entering the public discourse."

Read more at http://www.project-syndicate.org/commentary/the-declining-quality-of-public-economic-debate-by-raghuram-rajan#Xlo2wzGUe2FcbYDZ.99"

Paul Krugman, a liberal economist, had earlier mocked at Reinhart and Regoff for their goof-up in relating national debt and GDP growth. Rajan probably has in mind Paul Krugman and / or Amatya Sen and Jagdish Bhagwati while making the profound statement quoted above.

It is also possible that Rajan is politely referring to Lawrence Summers who had earlier impolitely called Rajan as "somewhat Luddite and mostly misled". It is better to be Luddite and forecast correctly than to be contemporary and erroneous in predictions.

 

Robert Vadra's shenanigans

We had commented on Robert Vadra's nefarious activities on 6th, 11th, 13th and 29th Oct.2012 and 19th Nov.2012 and 8th March, 2013. Observations were made with a lot of trepidation. The King can do no wrong. Even the wrong committed by any member of the exalted Gandhi family is deemed to be the right act.

The Hindu has mischievously front-paged Ashok Khemka's response to the charge sheet issued to him. In a 100 plus page note, Khemka has listed various irregularities and illegalities indulged in by Robert Vadra. What a sacrilege! I mean, by Khemka.

It is the duty of ministers in the central cabinet to rise to the occasion and defend Robert Vadra. Two full days are already over since The Hindu committed the libel on poor Vadra. Yet the ministers are silent. Do they not deserve to be sacked? What is the prime minister waiting for?

How did Khemka's reply get to The Hindu? Should not Khemka be chargesheeted for releasing a confidential paper? Should not the Law Minister take The Hindu to the court for sharing state secrets with its readers? Had Salman Khurshid continued as Law Minister, he would have done that with celerity.

Raghuram Rajan: Some conspiracy theories

Vitiated political environment invariably produces many conspiracy theories about any move by the government. Many onlookers are surprised that the next RBI Governor's name has been declared three months ahead of Subba Rao's departure and on top of that he would join the central bank immediately. Inevitably some conspiracy theories contradict each other.

Theory 1: Chidambaram was batting for Arvind Mayaram, his confidante in Finance Ministry. PC was bringing pressure on Manmohan Singh. The PM was not for Mayaram. So , before pressure could build up further via Sonia Gandhi, Singh decided to preempt PC. How credible is this theory? Does Singh ever take fast decisions? Isn't Chidambaram a cheetah and Manmohan only a mouse?

Theory 2: Rajan as advisor to Finance Minister was more an impediment to PC since he was too independent. So PC was looking for a quick opportunity to dump him. Rajan would hopefully (for PC) be less of a nuisance at Mint Street than in North Block. Despatching Rajan as OSD for three months lends credence to this theory. Antithesis: Is PC so myopic?

Theory 3: How did the IAS lobby allow a non-IAS to become the Governor? Of course, there have been many Governors of RBI who were not 'blue blooded'. This time the civil servants deliberately let one not from their clan to become the Governor as they know very well that the present economic situation is too perilous to be managed successfully by RBI. It suits them that an IIT, IIM, MIT alumnus who also taught at Chicago and worked for IMF would get his hands dirtied and reputation sullied so that the government would become 'wise enough' next time to fall back on the 'infallible' IAS folks.

Theory 4: PC had recommended Vinod Rai for the post of CAG. Once appointed, Vinod Rai was not 'grateful'. So this time PC was not interested in pushing his candidate (Mayaram) too far. Rajan was nobody's candidate. Sometimes, it helps if one is not sponsored by anyone.

You may choose your pick. 

Raghuram Rajan as RBI Governor

Government of India has done well in appointing the famous financial economist as next Governor of RBI. It is a different question however whether he will be successful in the new assignment. Nowadays, in the VUCA milieu, any person in charge of economic / financial affairs will have to keep his / her fingers crossed after taking any step in the dynamic environment.

RBI's Governor is successful if circumstances match his skills and not the other way round. Y V Reddy and Subba Rao have similar views and skills. Yet, history will record that Reddy was successful and Rao was not. This is because circumstances existing during their respective periods were different.

Raghuram Rajan did foresee the 2007 global crisis. This does not necessarily mean that he can and will predict the next crisis also. Any economist would agree that economic predictions are only as good as astrological forecasts. We can only predict the past!

Rajan does not carry any political baggage or administrative chip on his shoulder. If he refuses to capitulate to  political pressure and keeps his objectivity alive in all tricky situations, probability of his success as Governor will get enhanced.

Will Durga Nagpal suspension be the tipping point?

Our politicians expect and mostly ensure that civil servants are conveniently compliant. There is no established political party which encourages independent and fearless actions of bureaucrats. Oftentimes, the civil servants bend over backwards and carry out orders, irrespective of their legality and more so morality.

Therefore, vindictive transfers and vengeful suspensions take place all over the country. Neither the centre nor any state is an exception. Durga Nagpal is a tyro in bureaucracy and therefore not fully established in its vile ways. Her adherence to law was too much for the state government of U.P. and hence she was suspended.

As the victim was a lady and the government was non-Congress, Sonia Gandhi sent a letter diplomatically worded to catch the favourable attention of vocal public while not upsetting the apple cart. She was silent when such, perhaps even more sinister, unlawful transfers / suspensions were effected by states ruled by the Congress. Victimisation of Ashok Khemka by the Haryana government for his 'temerity' to take on Robert Vadra is fresh in nation's memory. BJP cries foul while in opposition, but is no different while in power.

Has the country's repugnance to such political misdemeanour gathered enough critical mass to become a fastidious movement to ensure non-recurrence of such manifestly unlawful / unethical political overreach? One remains sceptical.

Limits of Exchange Traded Product

Every student of Finance and Economics is repeatedly told that credit risk or counterparty risk is much less when we deal in exchange traded products rather than over the counter contracts. Though theoretically true, this proposition assumes that the exchange is properly regulated.

The ongoing fiasco at National Spot Exchange Limited is an eye-opener for regulators. It conveys a strong message that exchanges do not mitigate credit risk unless its operations are transparent and efficient. It is hoped that SEBI will conduct a detailed enquiry and publicise the learning points. This is not the time for a turf war between SEBI and FMC. The guilty must be exemplarily punished because otherwise other exchanges also will become slack.

Strange Policies

India is perhaps the only country where government policies are flagrantly violated with impunity and inappropriate policies are egregiously formulated to the obvious detriment of the country.

RBI has issued a circular on 1st August as follows:

Risk Management and Inter-bank Dealings

"Attention of Authorised Dealers Category – I (AD Category I) banks is invited to
AP (DIR) Circular No. 121 dated June 26, 2013 wherein it was clarified that if an
FII wishes to hedge the Rupee exposure of one of its sub-account holders, it
should be done on the basis of a mandate from the sub-account holder for the
purpose and that the AD bank should verify the same along with the eligibility of
the contract vis-a-vis the market value of the securities held in the concerned subaccount.

2. In this context, the Reserve Bank has been receiving enquiries as to the
applicability of the clarifications issued in the aforesaid circular to Participatory
Notes(PN) /Overseas Derivative Instruments(ODI) issued by the FIIs. It is
therefore clarified that if an FII wishes to enter into a hedge contract for the
exposure relating to that part of the securities held by it against which it has
issued any PN/ODI, it must have a mandate from the PN/ODI holder for the
purpose. Further, while AD Category bank is expected to verify such mandates, in
cases where this is rendered difficult, they may obtain a declaration from the FII
regarding the nature/structure of the PN/ODI establishing the need for a hedge
operation and that such operations are being undertaken against specific
mandates obtained from their clients."

It was earlier stipulated with justification by RBI that FIIs be not allowed to take positions on the rupee, ostensibly on behalf of subaccounts including PNs where the beneficiary remains anonymous, and thus create more pressure on the rupee. A self-declaration by the FIIs would obviously be self-defeating and therefore the banks were advised to verify the need for 'hedging' by FIIs. The amendment dated 1st August dilutes the guideline to a substantial extent. This amendment only serves to continue to protect the anonymity of PN beneficiaries aka round trippers of funds. Needless to say, the Finance Ministry is a votary of PNs. Poor RBI, they are unable to resist the pressure from the ministry beyond a certain level. Learned prime minister continues to be blissfully inattentive to what is happening.