Macro Marbles

T. N. Ninan gets the distinction right: It is not that Public Sector Undertakings are run badly. After all, when India began its own reluctant, partial and tiny liberalisation in the 1990s, many of the executives that private insurance and television companies hired came from the public sector. T. N. Ninan says it well when he says that the Government of India is a lousy shareholder.

Paul Krugman thinks (ht: Naked Capitalism) that PIMCO has lost its macro marbles after Paul McCulley left the firm. He thinks that Mohamed El-Erian is wrong to say that the Fed caused inflation problems for China, Brazil, etc. PK is both right and wrong. Up to a point, it is true that it is possible for the developing nations to squeeze inflation out of their economies by raising interest rates high and by erecting capital control walls to keep capital from flooding in. But, is that politically and socially feasible or desirable?

That said, is the Fed not responsible? Would he say that even after this BoJ study? Loose monetary policy encourages speculation, causes commodities to rise beyond levels justified by fundamentals and thus breeds expectations of higher inflation. Wages may remain restrained and hence we could get into the semantics of relative vs. absolute price increases. But, the truth is cost of living and cost of doing business have risen intolerably.

Quite apart from this,  PK would be happy with this piece co-authored by my good friend Srinivas Thiruvadanthai. I do not know if Srinivas would be proven right or wrong. We are in uncharted territory. Perhaps, the US is correct to pursue fiscal deficit spending as long as the bond market does not protest. Their arguments are similar to those that Richard Koo of Nomura Securities has made in the past.

Whether, at some point in time in the future, American businesses would start to grow, consumers would start to spend, capital spending would rise, etc., as they write are, at best, conjectural or hopeful. That is not to say that they will be proven wrong. There is simply no way of knowing and there are equally powerful examples on both sides.

Raghuram Rajan once again takes up the costs of zero interest rate policy in his ‘Project Syndicate’ column. One commentator had asked whether Raghuram wanted higher interest rates as an expansionary policy measure. Perhaps, the answer is, under certain circumstances, YES, especially when investments are not being starved of capital or are not suffering from higher cost of capital.

In fact, one more cost of the zero interest rate policy is the shadow banking system. If one reads this piece in Economists’ Forum in FT, it is clear that this is an aspect that, by definition, cannot be cured by regulation. The only thing that can keep shadow banking in check is to price risk appropriately. Cost of capital should reflect risk.

Jamie Dimon posed a question publicly to Ben Bernanke as to whether the US was hurting the banks and economic growth by going overboard with regulation (or, words to that effect). An effective and excellent answer is provided by Prof. Anat Admati and Martin Hellwig here.

This post originally appeared at The Gold Standard and is reproduced here with permission.