“Unlike Alan Greenspan, who didn’t believe it was his job to even point out bubbles, much less try to deflate them, Mr. Reddy saw his job as making sure Indian banks did not get too caught up in the bubble mentality. About two years ago, he started sensing that real estate, in particular, had entered bubble territory. One of the first moves he made was to ban the use of bank loans for the purchase of raw land, which was skyrocketing. Only when the developer was about to commence building could the bank get involved — and then only to make construction loans. (Guess who wound up financing the land purchases? United States private equity and hedge funds, of course!)

Then, as securitizations and derivatives gained increasing prominence in the world’s financial system, the Reserve Bank of India sharply curtailed their use in the country. When Mr. Reddy saw American banks setting up off-balance-sheet vehicles to hide debt, he essentially banned them in India. As a result, banks in India wound up holding onto the loans they made to customers. On the one hand, this meant they made fewer loans than their American counterparts because they couldn’t sell off the loans to Wall Street in securitizations. On the other hand, it meant they still had the incentive — as American banks did not — to see those loans paid back.

Seeing inflation on the horizon, Mr. Reddy pushed interest rates up to more than 20 percent, which of course dampened the housing frenzy. He increased risk weightings on commercial buildings and shopping mall construction, doubling the amount of capital banks were required to hold in reserve in case things went awry. He made banks put aside extra capital for every loan they made. In effect, Mr. Reddy was creating liquidity even before there was a global liquidity crisis….”

More at the New York Times on how India avoided a crisis.

Comment:

This is a very interesting piece, as much for what it says, as for what it doesn’t say.

Look at the first paragraph:

“What has taken a number of us by surprise is the lack of adequate supervision and regulation,” Rana Kapoor was saying the other day. “This was despite the fact that Enron had happened and you passed Sarbanes-Oxley.”

Nowhere does the writer, Joe Nocera, or his editor, qualify this quote. The reader would be left with the idea that there are no regulations in the US banking system. He would think it was all the fault of one man, Alan Greenspan, the chairman of the Federal Reserve Bank, who didn’t do what he should have.

Well, Greenspan didn’t. But there were regulations on the books alright. The problem is not lack of regulation, it’s the existence of a banking cartel and a its PR wing in the financial press.

  What’s more, the Fed is NOT a central bank in the same way as the Indian bank. The Fed system is a private-public system.

What’s the overall effect of the piece? To leave people with the impression that all that’s needed is to replace our financial czar and expand his role.  All we need to do is put in an anti-Greenspan, who can jack up interest rates to 20%. That’s Paul Volcker, on Obama’s team. I am all for interest rates at 20% and a tougher application of the laws. 

But as long as the people who monitor the laws are drawn from the same industry, don’t call it a free market.

At least, the Times admitted that none of this means that the Indian economy isn’t taking a hit. Of course, it is…..