Archive for November 10th, 2009

Banking on the State Support and vice versa

November 10, 2009

Andrew Haldane once again. I have been covering his works in the crisis and all have been excellent reading (here, here and here).

In his recent paper cum speech co-written with Piergiorgio Alessandri he tells you how banks have changed over the years:

Historically, the link between the state and the banking system has been umbilical.
Starting with the first Italian banking houses in the 13th century, banks were financiers of the sovereign. Sovereign need was often greatest following war. The Bank of England was established at the end of the 17th century for just this purpose, financing the war debts of William III. From the earliest times, the relationship between banks and the state was often rocky.  Sovereign default on loans was an everyday hazard for the banks, especially among states vanquished in war. Indeed, through the ages sovereign default has been the single biggest cause of banking collapse.

For the past two centuries, the tables have progressively turned. The state has instead become the last-resort financier of the banks. As with the state, banks’ needs have typically been greatest at times of financial crisis. And like the state, last-resort  financing has not always been repaid in full and on time. The Great Depression marked a regime-shift in state support to the banking system. The credit crisis of the past two years may well mark another.

Further,

Then, the biggest risk to the banks was from the sovereign. Today, perhaps the biggest risk to the sovereign comes from the banks. Causality has reversed.

This is quite true. A complete reversal of history.

He then explores the reason why banks have become so risky and highlights the role of time inconsistent policies that have allowed banks to increase leverage, have low capital and seek higher returns to justify the high risks.

Excellent as always.

What about Indian economy?  It is a bit of both. Government still relies on banking system to help subscribe  to former’s borrowing program (via investment in SLR). Banks on the other hand rely on  government to support in times of crisis like this. The Indian government promised to support banking system if anything goes wrong in this crisis. Then large part of banking system is owned by government so the relationship is always going to be there.

Greece Statistical system as bad as India’s

November 10, 2009

Eurointelligence daily edition of 10 Nov 2009 has this interesting titbit:

EU  finance ministers outraged about Greece

FT Deutschland has an article about the sheer sense of outrage felt, and expressed, by EU finance ministers about the situation in Greece, where the new government suddenly revised upwards the deficit projections from 6 to 12%, citing statistical discrepancies. The EU has lost confidence in Greek statistics, and is now demanding, as a first step, the independence of the country’s statistics bureau. The finance ministers have also commissioned a study on the quality of statistics in the country.

🙂 Nice to know India has company. And that too a developed economy at that. For a flavor of Indian statistical system, One should read RBI Governor’s speech.

Benefits of GST for Indian economy

November 10, 2009

I had posted a while back on India’s goods and service tax. In that post I had pointed to a primer and a speech from Dr Kelkar. In that speech Dr Kelkar had estimated the gains of GST for Indian economy based on similar gains made in Canada.

In his recent speech (not recent actually, given in October 2009) he adds:

The Finance Commission had appointed a Task Force on GST as well as commissioned a study by NCAER to assess its impact on growth in GDP and exports. The preliminary results of the NCAER study indicate that the growth in GDP can be between 2-2.5 per cent with the implementation of a well designed GST. This pioneering study explores the impact of GST on growth through direct cost reduction as well as cost reduction of capital inputs. The increase in exports can be between 10-14 percent. If we use 3 per cent as a discount rate, and lower estimate of the GDP increase of 2 per cent accruing year after year, the net present value of the GST reform exceeds half a trillion dollars.

This is pretty much the amount he had estimated using Canadian estimates as well. The report is still not out. Atleast I couldn’t find it.

He then addresses issues he has discussed in previous speeches as well. Those who did not read earlier speeches can do a quick read.

The economics of  GST is fairly good but politics …well it is another story altogether.


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