Bailouts, Banks and Bankruptcies: Consequence of Asking the Wrong Quesitons

The immediate present seems to be so eerily similar to the very distant past to such an extent that sometimes (with cynicism) I feel that those who claim that history is useless may actually have a point. At the end of the day, there is absolutely nothing more blessed that being ignorant or even better dementia is in the present economic conditions quite a blessing, albeit in the short-term. The fact that we seem to be blissfully ignorant of the economic crisis speaks volumes of our ability to be selectively demential. Every sector of our economic life has innumerable examples of crisis or near crisis level situations that are very recent, leave alone those going back a couple of decades. The problems in India during the period 1995-2000 should have provided sufficient lessons to our businesses and policy makers. Obviously, they have not. We have not made any new mistakes, we have essentially made the same mistakes. Little wonder that Einstein (who lost heavily in the markets) defined insanity as 'doing the same thing over and over again and expecting different results'. That these mistakes have occurred when we have sufficient information is indicative of the fact that information is not the problem and, the problems lie elsewhere - in the changing social forms and connotations in the way we construe money and wealth. 

Almost every segment of economy and society is craving (or demanding) bailouts: Sovereigns are demanding one too - from other sovereigns. IMF, for once seems to have decided that their legitimacy is at stake and seem to have warned the world about the magnitude of the problems in each country (p.3 of their report). Though, they got it right, nobody seems to care because they are like the Indian police - always late to the scene and always state the obvious. 

The IMF report cited below provides a stark picture of our economy: 

Name of Country	Projected Fiscal Deficit (% of GDP)
	2012	2013
USA	8.1	6.3
Japan	10	8.7
UK	8	6.6
Italy	2.4	1.6
Spain	6.0	5.7
France	4.6	3.9
Germany	0.8	0.6
China	3.2	3.0
India	8.3	8.2

Source: http://www.imf.org/external/pubs/ft/fm/2012/01/pdf/fm1201.pdf

The irony of this deficit is that unlike, the other countries' India's economic position is precarious and hence cannot even think of fiscal austerity. But, rest assured over the years as Indian's we have mastered the art of creative accounting so in the next two years, the deficit will decline, not rise.
Considering the fact that this blog has served as some sort of 'canary in the coal mine' over the past three years, we will be right again. The reason for this confidence is the fact that we are still in a stage where we have to provide large scale bailouts: Power sector needs a bailout and the need for a bailout: they have a 40% gap between costs and revenues while debt has reached Rs.200,000 crores. Add the telecom, real estate, mining and every other industry and it becomes hard to count the zeroes. To this add: the debts of the Central and State Governments, we get the picture, or do we?

We have forgotten the banks, which will themselves need a bailout. Deja Vu all over again!

All the above is not very surprising, considering that we prefer selective long/short term memory loss when it is very convenient. But, how we come to such a situation? The short, albeit bitter answer, is that we have conditioned ourselves to ask the wrong questions. Over the past decades, we have not trained ourselves to ask one simple question: who is taking the other side of the bet or what is on the other side? This pervades through the public and the private sector. 

Take for example the government: a large number of our policy makers do not like being asked uncomfortable questions. In order to avoid this inconvenience, they take the easy way out: appoint cronies who are beautifully useless to positions where one can ask uncomfortable questions. That has created a situation where the army of clerks and beautifully useless cronies excel at exactly one thing: follow procedures. Just as anywhere else in the world, there are extremely smart and intelligent policy makers who well intentioned and attempt to get the system to work by granting greater independence. All their reforms end up creating new rent-seeking institutions. Following procedures means that more often then not, the beautifully useless end up in control. Independence and functional autonomy means more money through rent seeking behaviour. Apparently, this independence has reached an extent where a very elastic interpretation of the law has led to the courts to crack the whip. Ironically, we have reached a stage where a private consultancy has to be approached to tutor a regulator agency about how to function!!! Would it not have been better for SEBI (the more recent of the regulators) to simply imbibe a culture of asking uncomfortable, but right questions at the right time rather than the wrong questions at the wrong time with the wrong intentions? If only the government can come out of 'governmentality' we would not be in this place.

The private sector is even worse. Historically, they have never understood that trees do not grow to the sky. Their excessive dependence on the valuation model of wealth creation and their inability to understand the secular change in the global market place may be doing more harm. The past 18 years has seen capital appreciation as the primary vehicle for wealth creation. It is for this reason that we have mastered price rigging of commodity, equity and real estate prices as the best way to create wealth rather than dividends.