Global Banking Crisis & India – Modi-Rajan Situation & Indira-Manekshaw


Last week we quoted Dr. Alan Greenspan’s reaction to the crisis in developed economies:

  • “This is the worst period I recall since I’ve been in public service. There is nothing like it, including … October 19, 1987 the day Dow went down by 23%; That I thought was the bottom of all potential problems … This has a corrosive effect that will not go away easily …”

Some thought we were referring to the steep fall in financial markets on Friday, June 24, 2016. That was merely the symptom of the underlying symptom, that underlying symptom being the stunning vote by the English people to leave the European Union. Actually, that vote in itself a symptom of another deeper underlying symptom. In the words of Dr. Greenspan, that deeper underlying symptom is:

  • … this problem that is causing the British problem is far more widespread; fundamentally what we are looking at is a massive slowing in the rate of real incomes across the whole European spectrum; real incomes are not going anywhere; that is creating a serious political problem which is not easy to resolve … “

This is not just restricted to Europe. America has a similar problem that is manifesting itself in the 2016 Presidential campaign. But if that is itself a deeper symptom, what is the underlying cause? Marc Faber, the well known investor & articulator, said it clearly this week:

  • “… growth that we have had since 2009 has been very artificial; it has been driven by money printing 

The root cause of this ugly reality is that the banking crisis of 2008 was never addressed globally let alone solved. Governments all over the world ran away from the problem and left it to the Central Banks to address. And Central banks, led by the innovative & adventurous Fed Chair Bernanke, began pouring waves of money into banks. Their first hope was to stabilize & rescue the banks in their countries.

But only in America did that work. Because only in America did the Treasury Secretaries, first Paulson & then Geithner, work together with Fed Chair Bernanke to recapitalize the big US banks & to enforce stringent stress tests on the banks. Such harsh discipline is not the European way. Neither is it palatable to China, India & Emerging Markets. That is why US banks are the strongest in the world today and, to quote the well respected analyst Mike Mayo, “US banks can absorb multiple Brexits & still have strong balance sheets”. 

In contrast, banks in Europe, China & India have weak balance sheets & carry loads of bad debts. In fact, the European Bank stocks are acting horribly in an explicit warning to European governments & global investors.

When pouring in liquidity into banks didn’t create economic growth, the central banks decided to become even more adventurous. Led by the progressively bolder Bernanke, they began pouring in bigger waves of money into bond markets to artificially create negative rates of interest. They called it Quantitative Easing (QE) to disguise what they were doing. The results proved transient. So QE1 was followed by QE2 and then by QE infinity or QE forever. 

Europe under Chairman Mario Draghi of the European Central Bank went even farther. After promising to do “whatever it takes”, Draghi made the mistake of actually doing what he had promised. Rather than artificially creating negative rates of interest, Draghi decided to do it proactively. He was joined in this Quixotic mission by Bank of Japan Governor Kuroda. 

What is the result of this insanity? Negative interest rates are now pervading the world. The world now has $11 trillion in bonds delivering negative rates of interest. Country after country in Europe is forcing banks to deliver negative interest rates in the vain hope of enticing corporations & businesses to borrow. They don’t care what that is doing to the profitability or the basic health of their banks. 

Think about it. The central banks of the world began acting in 2009 to save & protect the banks in their countries from bankruptcy and they have ended up making their banks far more unsafe than they were in 2009. And in the process they have impoverished the middle class in their countries & further enriched the rich. That is why you see intense political upheaval in the world, the first outbreak of which was last week’s Brexit vote.

The financial markets are undergoing intense upheavals too. These are being seen in financial tsunamis into & out of markets & asset classes on the whims & fears of investors. It feels as if markets have gone mad. And this madness has been the result of do-nothing governments & do-everything central banks. 

For once, India seems removed from this madness. In contrast to do-nothing governments in the developed economies, India has an active & determined leader in PM Modi. Everybody in the world can see the steps being taken by PM Modi to launch India on a sustainable high growth path. Nothing is more important than staying on this course.

And in contrast to semi-insane do-everything & to hell with the consequences central banks in Europe & Japan, India has an absolute expert & sane central banker who is determined to protect the Indian economy from the virulent contagion sweeping the world’s “developed” economies. And his opposition to unconventional methods like QE is now being recognized globally.    

Today’s success of India is due to the tandem of a brilliant & bold political leader and a sane balanced expert banker. That is an enormous relief & a safety blanket in a world that seems to be teetering on the edge of a renewed & more intense 2008-plus banking & financial crisis.

Instead of doing everything to support them, the Indian political system seems determined to break the Modi-Rajan tandem that is so incredibly critical to India’s continued success & safety from the global financial storm. This is so nuts but this is so Indian. Look at the past 1,000 years and you will see the Indian system make the absolutely wrong decision at the wrong time. Consequently, India lost every major battle with every foreign invader for the past 1,000 years. Today, the foreign invader is a global financial crisis & today’s India that makes the wrong decision could suffer massive consequences. 

So it is important, we think, to think back to a similar situation between the office of a powerful Indian Prime Minister and an independent minded head of an Indian institution. Indira Gandhi is still regarded as the most powerful & most authoritarian Prime Minister India has had. The Prime Minister’s office (PMO) in her tenure was also strong & capable.

She faced her greatest challenge in 1971 – the fight for independence by today’s Bangladesh against the tyrannical West Pakistani regime. Genocide was let loose by West Pakistani troops & millions of refugees poured into India from Bangladesh. The Indian economy was under enormous strain and India’s geostrategic safety was under attack. On the other hand, the risks from a military intervention by India were equally great. 

Her Chief of Army Staff was an extremely capable but independent minded General named Sam Manekshaw. He was not willing to rush into a conflict without adequate preparation & without a sensible & workable battle plan.. He advised Indira Gandhi to be patient & told her what she should do. Her PMO was outraged. They expected Mrs. Gandhi to overrule Gen. Manekshaw and, if needed, appoint a different general to lead the Indian Army’s Eastern Command. To their astonishment, Indira Gandhi did neither. After a private one-on-one meeting with Manekshaw, Indira Gandhi accepted his plan.

Mrs. Gandhi then spent the next six months visiting the global capitals of power & tried to persuade the world’s leaders to understand & accept India’s position. While she kept up the diplomatic campaign, Manekshaw perfected his preparations & developed a through & bold battle plan. The final result was a stunning diplomatic & military triumph. In a couple of weeks, Bangladesh was liberated, the Pakistani army surrendered in Dhaka, over 92,000 Pakistani soldiers were taken captive and Pakistan was broken forever.

Indira Gandhi is still remembered fondly & respectfully because of that military & strategic triumph. She should also be remembered for accepting the frank advice of Manekshaw, a type of independent man she rarely tolerated. Could she have won the war had she chosen a more malleable General? Perhaps. But Indira Gandhi was truly smart in not taking that chance. Perhaps she remembered the disaster of 1962 after her father, Jawaharlal Nehru, overruled the Army Chief and chose his own favorite general, B.M. Kaul, to lead the Indian Army against China in the eastern sector. 

 We do not know whether the relationship between PM Modi & Gov. Rajan is anything like the Indira-Manekshaw relationship. The parallel may be totally misplaced. But we do know that you don’t break up a great team like Modi-Rajan especially when standing on the precipice of a global financial & banking crisis.   


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