Saturday, November 15, 2008

Surjit S Bhalla expansion

Surjit S Bhalla asks few questions in BS that the starter has to think and do home works to get answer so consider some of them; 

“…..when everyone has been proven wrong, let us assess what some of the maestros have said, and done. Internationally, the clever people were baying for Bernanke's blood, stating that it was a huge mistake to not let Bear Stearns fail; a mistake because of the principle of moral hazard (didn't you know that Wall Street does not learn a lesson when 95 percent of its wealth is wiped out?)

This "intellectual" non-market pressure was an important component in the US Fed making its first mistake through this financial crisis which started in August 2007 — and what a mistake it has been. It has brought not only the US but the international banking system down. Jobs, and not necessarily of those belonging to Wall Street, are being lost by the millions, and growth is negative. What price moral hazard? I can't help thinking, and believing, that a market participant would never have advocated the arrogant bureaucratic/academic demand for letting Lehman fail. 

It was less than two months ago that several non-market experts were claiming that the RBI was way behind the curve; eg Ajay Shah argued for more monetary tightening, in September, because the highest interest rates in the world were too low to combat imported inflation! (Wall Street Journal Online, Sept 2, 2008). Others echoed with similar sentiments. This was near universal conventional wisdom of leading investment firms, policy makers, pink paper experts, business TV anchor, academics — is there anyone left? If these gentlepersons were in the market, they would readily admit that they were horribly wrong.  

As of October ’08, the consensus was that India would have a double digit fiscal deficit, and that the oil deficit would account for 2 to 3 percent of GDP. But all of the fundamentalists (the moral hazard, monetary and fiscal, RBI/MoF and the IMF types!) were also forecasting a global growth slowdown of historic proportions. The fundamentalists forgot to note that low world growth, and WTI oil price below $65 for the Oct ’08-March ’09 period would mean an off-budget contribution of the oil deficit to be close to zero percent of GDP”.

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