India shouldn’t overdepend on finance and central bankers

Jaimini Bhagwati has a piece saying India should not ape the west by overdepending on finance and central bankers.

He highlights how Janet Yellen was put as the most powerful person ahead of Obama in the world. This is even more ironical as Yellen has tried some bit to lower all the hype. She does not draw same attention as her predecessors:

On October 6, it was reported that Janet Yellen, the chairperson of the US Federal Reserve, was at the top of the “Bloomberg Markets Most Influential List”. Ms Yellen was ranked higher than President Barack Obama, who was at the sixth place, below the fifth-ranked Warren Buffet, the CEO of the investment firm Berkshire Hathaway. Further down the list at the eighth place was Lloyd Blankfein, the CEO of Goldman Sachs, ahead of German Chancellor Angela Merkel, who was ranked ninth. According to Fortune magazine “the Bloomberg Markets list was first started in 2011, and usually features individuals with the most power to shift policy and affect markets.”

At first blush, such rankings are amusing and to be taken lightly. It is also likely that Bloomberg ranks relative influence with reference to financial markets and not to national economies. Even so, an understanding thatand CEOs of firms are more influential than heads of governments appears to be off-balance. It is probably a reflection of the exaggerated expectations of the financial sector and central banks.

In 2004, in a meeting of the Eastern Economic Association, former Federal Reserve chairman suggested that “improvements in monetary policy” have contributed significantly towards the so called “Great Moderation” in limiting macroeconomic (growth and inflation) volatility. Well,has certainly been muted – and then we had the financial sector Armageddon of 2008. The seven years of sharply lower growth in developed countries since 2008 suggests that perhaps monetary policies were aimed more at maintaining financial sector stability (read profitability) and comparatively little risk was taken to promote growth.

There is little doubt that central bankers have replaced/or tried to replace political leaders from the influential list. They keep a low profile till appointed and then go all out post appointment creating huge problems in the process. It is all fine till the hype is on but as dust settles down people realise one of the oldest lessons of economics – it is real economy that matters.

But as much of financial markets action now a days depends on what the central banker says (and wears), it is in their interest to keep the game on. Along with the financial media the hype and noise over importance of central banking and finance is reinforced each time. And if you have an over the top central banker who like talking and making heroic statements, it is like cream on the cake.



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