Eulogising mediocrity - from cricketers to RBI governors

By Shanmuganathan Nagasundaram

The Indian media is very good at certain aspects - like extolling the virtues of ordinary men (perhaps some even below average) to such heights that these men start believing in the hype.

Take the case of our “awesome four” cricketers - Sachin, Dravid, VVS and Ganguly. Despite their patchy record overseas, we continue to use the words “class act”, “great” etc, while referring to these cricketers. Australia or South Africa wouldn’t have accommodated at least three of these players for more than four to five years in their middle-order (excepting Ganguly, where the term would have been for less than a year or two, if at all). Even Sachin wouldn’t have had the rather extended run he has.

While this media eulogy has been true of cricketers for a long time now, off late one another area where it’s even more glaring is the way we treat our former central bankers.

More from Economy

Inflation likely to be a big focus area for budget 2024, say sources Explained: Will the Bank of Japan break tradition and raise interest rates?

Consider the recent CNBC TV-18 interview, where every former Reserve Bank Governor is considered a genius! Dr Y.V.Reddy - Great, Dr IG Patel - Great, Dr D Subbarao - Great, and Dr Manmohan Singh (How can he be anything less than Great?

But somewhere we should ask the question, why is it that these RBI governors, who have collectively debased the rupee by more than 99 percent (read “ Is Our Monetary Policy Sound?”) be considered great? Achieving monetary integrity is the prime objective of a central bank, and even by the most benevolent standards, the RBI has been an unmitigated disaster at it. Why aren’t we holding our central bankers accountable for the negative real interest rates for savers and their mindless expansion in the supply of money?

[caption id=“attachment_384556” align=“alignleft” width=“380”]  Consider the not-so-curious case of YV Reddy - the “Ganguly” of the pack. His brand of economics would be fodder to any real economist[/caption]

Consider the not-so-curious case of YV Reddy - the “Ganguly” of the pack. His brand of economics would be fodder to any real (read: “Austrian”) economist. (Read: The Reddy Years at the RBI - Running Away From Greatness). As I have explained in that article, he defended price controls as a mechanism to manage inflation, did not foresee the fairly obvious increases coming in food and energy prices and expanded broad money supply at a reckless 20 percent plus rate during his tenure.

As the new money that he was so “proactively” creating in his tenure worked through the system to result in various prices going up all over the place, he heroically proclaimed that price increases were “unacceptable”. He deserves an Oscar for the brilliance of pretending that it wasn’t he who lit the fuse or he was completely ignorant.

Consider another basic issue - cash reserve ratio, or CRR, the money banks park with the RBI. Most central banks around the world implicitly accept the fact that the “fractional reserve banking” system is a Ponzi scheme (explained as part of Madoff, Madoff Everywhere). So they prefer to operate with a fixed CRR which is a slightly more intellectually honest way of accepting the real nature of FRB. But Indian central bankers tweak the CRR left, right and centre and use it to “supposedly” achieve all kinds of results - low inflation, high growth, liquidity, etc.

Reddy obviously does not understand why FRB is a Ponzi scheme. He started with the explicit intention of cutting the CRR to 3 percent from the already perilously low levels of 5 percent or thereabouts then prevailing in the system. This is like asking the fox to guard the henhouse. And the fox even made its intentions explicit. Sure enough, he got the government to indulge in a spending binge.

Of course, after having caused all the mayhem, he now thinks he is eminently qualified to offer advice on dealing with the problems. Consider the issue where he said fixing the fiscal deficit should be the number one objective. Why is it in such a poor situation now - reckless government borrowing due to the artificially low interest rates and fuel subsidies. Both are a direct consequence of his actions as central bank governor.

Price controls on fuel: While it’s understandable (though not acceptable) as to why the political class might want to maintain price controls as a way to manage inflation, when a Central banker argues for a price controls, as Reddy did, he certainly deserves an “F” in Economics - 101. Perhaps even Karl Marx would not have dreamt of such ideas - communism under the garb of capitalism!

Artificially low interest rates: Again, while it’s understandable for the government and industry to argue for lower and lower rates, when a central banker makes the cardinal mistake of ignoring the expansion in money supply, which is the result of low interest rates, in measuring inflation, the consequences for the middle-class are dire. The artificially low interest rates that Reddy created fuelled the boom in government spending and also resulted in a real estate bubble that we have witnessed.

The reckless stimulus: The term stimulus is a completely misunderstood terminology, thanks to Keynes. The only legitimate stimulus would be a reduction in government contribution and allocation of resources as a percentage of GDP. Anyway, even Keynes argued for a stimulus and fiscal profligacy only under recessionary conditions. Thanks to good capital inflows during the early part of Reddy’s tenure, there wasn’t even this Keynesian justification for running the note printing presses as hard as he did.

Learning after demitting office: While his easy money policy led to tragic consequences, he seems to have changed his stance post demitting his job as central banker. He finally seems to have understood the fact that we cannot stimulate investments and growth by running the printing press on overtime and his observation that interest rates should be a function of savers’ and borrowers’ requirements is indeed sane. But of course, he doesn’t make the next logical connection. If interest rates are the result of savers and borrowers transacting autonomously, it doesn’t require a third person in the form of a central bank to set the rates at which this money can be lent and borrowed.

Reddy also makes observations about long-term growth rates. He says that over extended periods of 20 years or so, it was not possible to achieve high growth rates. He conveniently forgets that the world had phenomenal growth rates between 1870 and 1914, and that too in conjunction with falling prices that made incomes even better than what they indicated in nominal terms.

What was the secret? Astute followers of economics would instantly recognise that as the period in which we did not have central banks at all. And of course the monetary policy was the gold standard!

Anyway, I always listen to central bankers’ interviews with a sense of humour. How the greatest price manipulators in the history of commerce (which is what setting “interest rates” really does) can sit and talk with a straight face about reforms, markets and liberalisation is a great mystery. But the probable answer is that, with the exception of Alan Greenspan, most central bankers are Keynesian in their beliefs and so they are probably just lip-synching.

But there is hope! As Reddy showed, once can always learn.

Shanmuganathan “Shan” Nagasundaramis the founding director of Benchmark Advisory Services - an economic consulting firm. He is also the India Economist for the World Money Analyst, a monthly publication of International Man. He can be contacted at shanmuganathan.sundaram@gmail.com