Random Walk

Lords of Finance

By: Santhosh, Nelson

Posted: 5/14/09

The Lords of Finance| All history is biography, said Emerson and it is with this quote that Liaquat Ahamed, former i-banker and World Bank economist, starts off his book about the four Central Bankers who dominated the World of Finance before the Great Depression. In the 1920s, Montagu Norman, Émile Moreau, Hjalmar Schacht and Benjamin Strong ran the Central Banks of Britain, France, Germany and the US, then the financial powerhouses of the world. These men set up the banks, structured the policies and established the standards that nations depended upon and these very men are the central theme of the book. Almost prescient in its timing, the book takes us back to a different era and crisis during which the powerful "Lords of Finance" tried to tame the demons of debt and failed.

Tracing the toxic economic fallout of WW1, Ahamed considers the primary issues that countries faced after the war - the reparations demanded from Germany and repayment of war loans from the Allies to the US. These, combined with the confusion around the Gold Standard, set the stage for the collapse: Germany went down first and everyone else followed. But what is fascinating about this book is not so much the economic theories that laid the ground for the Great Depression but the very human frailties that went hand-in-hand with the policy decisions that were made during those days. Ahamed paints compelling portraits of "the Lords", of their personal and professional lives, of their prejudices, and finally of their decisions - actions that would yield unforgiving economic results and haunt the world for years to come. With Kashyap's "Understanding Central Banks" and some Stiglitz thrown in, this book will make for a combustible mix of history and ideas. "Borrow" it from the University book-store for $30 and return it in 30 days for a full refund - the crisis demands no less. Unless you want to stimulate Amazon with a $21 shot.

The Power of Smart Grids| Lynne Kiesling, a Professor of Economics at Northwestern explores the economic, technological and political implications of Smart Grids. Imagine a legacy electric system with a patchwork of devices, standards and policies; imagine the resultant inefficiencies in power at a time when reserves of power-producing natural resources are dwindling - on top of this electric system, now apply a digital communication network that can use modern technology to optimize generation, minimize transmission losses, detect and automatically repair faults and facilitate "eco-intelligent" devices at homes and offices… that's the potential that the "Smart Grid" technology has!

Through a series of posts on the Knowledge Problem blog, Kiesling has created a primer for anyone interested in understanding how digital tech can change the way we generate, transmit and use power. As the article argues, this has massive economic and environmental implications especially in an energy starved world. Start off with the Smart Grid series at http://tinyurl.com/dh4kj9

Today, Argentina is us | Oxonian Niall Ferguson, Professor at Harvard University suggests some alternative cures for a wildly leveraged world in this article at http://tinyurl.com/aenul2. To start off, Ferguson brushes off the many schools of thoughts that accompany the crisis and cuts through to what he considers the primary driver - the fact that the Western world is in massive debt. Households, corporate institutions, governments are leveraged at incredibly high levels of debt and the latest government led-solution, to issue more debt seems more a measure of desperation than decisiveness. As if the existing deficit was not bad enough, the US taxpayer also has to contend with ownership in banks with highly questionable assets, the value of which remains undisclosed and unmeasured.

And before Keynesians start celebrating, Ferguson also points out that their solutions are unlikely to work in a global economy and is likely to create more volatility and asymmetry. So what do we do?

In framing the answer, the author contends that "today, Argentina is us"- global investment banks, households and corporations are trying to do the same thing that Argentina tried: inflate away debt or default and renegotiate payments, neither of which portends the financial stability that the world seeks. Ferguson argues that first of all we should bite the bullet and ruthlessly "restructure banks" and take our losses, suffering short term pain for possibly long term viability (the price of non-vigilance, he says!). Secondly, he makes the case for converting mortgages into lower interest loans over longer periods of time - for those insisting on the sanctity of the contract, he has rational examples from the past which hardly became a stigma or a precedent. In conclusion, Ferguson quotes Churchill: "Americans will always do the right thing… after they have exhausted all other alternatives". From the Chrysler bailout, there are lessons to be learnt and from these lessons and resultant actions, we will know if the pre-eminence of the American financial system will survive or not. For those interested, Niall Ferguson is in Chi-town on May 18 for a dinner organized by the Chicago Council of Global Affairs at the Ritz Carlton (his book "The Ascent and Descent of Money" makes for a great read too!).

New face, old memories |The general elections are on in India and going by initial vibes, it is unlikely if any one party will enjoy a clear majority. On one side is a centrist coalition put-together by the ruling Congress party and on the other side is yet another patch-work coalition led by the BJP, a right-wing party. It is in this typically confusing Indian context that Robert Kaplan's "India's new face" appears in The Atlantic (go to http://tinyurl.com/q32fyh). Lacking a coherent ruling philosophy and driven by internal dissent the right-wing BJP has been trying to float a popular leader who can get the party back to its winning ways. A strong, emerging option is Narendra Modi, the chief minister of Gujarat, one of India's more prosperous states.

Traveling extensively in Gujarat, Kaplan weaves together an interesting profile of a man who is likely to run for prime-minister sometime in the future. But "the man who may be PM" remains tainted by the anti-Muslim riots during his tenure, in which over 400 women were raped, over 2000 people murdered and 100 times as many rendered homeless. Even after 7 years, this shadow haunts Modi - the US refused him a visa in 2005 and the Indian Supreme Court recently re-opened an investigation about his role in the riots.

Kaplan lays the ground by considering the history of Gujarat state: its geographic position at the border made it a ripe target for Persian invaders like Ghazni who wreaked havoc, destroying temples and towns in the process. For many Hindus that Kaplan talks to about the 2002 riots, these memories from 1025 AD boil over into modern days - indeed all Indian political parties have exploited caste and religious divisions to win elections and kept alive many a memory that may have been better buried.

Surprisingly Modi's political record since the riots is impeccable: he has been re-elected as Gujarat's chief minister in all the elections since the riots; but what is all the more surprising is his unapologetic demeanor and how his political successes have made him a rallying point for the Hindu nationalist movement. It is as if a "hybrid politician" has emerged, a CEO who runs the state with fantastic effectiveness and at the same time, morphs into a rabble rouser to command the ideological support of his minions.

Starting as a propagandist in an extreme-right party, Modi worked his way through the ranks and gained prominence - he joined the BJP and within a year, became the Party secretary. Combining astute political skills with unmatched efficiency, he led Gujarat's resurgence after natural disasters like earthquakes and diseases. An interview with the man himself leaves Kaplan spell-bound - he says that Modi beats Carter, Clinton and the Bushes when it comes to sheer mesmerizing charisma. And his ambition is grandiose, to say the least - "to build Singapore's and Dubai's within the state". What is impressive however is what he has done: in a country that takes corruption for granted, Modi remains the epitome of a non-corrupt politician who maniacally dedicated himself to economic development after the riots with personal simplicity and regimental discipline. Despite or perhaps because of his autocratic leadership style, Gujarat has become one of India's most investment friendly states and leads the pack in many economic indices - when the Tata group faced issues in setting up a plant for the Nano in the Communist-ruled Bengal state, it was to Gujarat that they came to relocate and set up shop. Indeed, corporate India is all praise for Modi's style of leadership, citing it as a no-nonsense model that cuts through the government red-tape that hinders corporate progress in many other regions of India.

In conclusion, the author paints a picture of India with all its paradoxical yet compelling truths and applies it to Modi's dilemma - in order to rise further and pursue his political and economic agenda, Modi will have to set aside the extremist right-wing tendencies that brought him to power; Hindus in other regions of India are less communal-minded and are unlikely to accept the current rabble-rousing version of the man. The autocratic style that worked for him in Gujarat is unlikely to help in managing a vociferous coalition with conflicting priorities. So in order to move further, Kaplan argues, Modi must fit his managerial style to the idea of a communally harmonious and diverse India or he will remain where he is right now; the rest of India may question, as Nandita Das, an Indian movie director puts it, "the willful denial - as if economic development can completely obliterate the social criterion on which all human development is based, which is respect for human rights" that Modi's record seems to espouse.

Make my last days as columnist - feedback at nsanthos@chicagogsb.edu.