Raghuram G. Rajan: "Do All Loans Have a ‘Pound of Flesh’ Clause?"

In addition to having run the Reserve Bank of India, knowing much about American farmland in the 1920's and a fine veg cutlet, he also has a comfy endowed chair at the University of Chicago's Booth School of Business.

Here, via the Chicago Booth Review he talks debt, August 27. His interlocutor, Hal Weitzman, is an Adjunct Associate Professor of Behavioral Science and executive director for intellectual capital at Chicago Booth (oh, and also editor-in-chief of the CBR and host of The Chicago Booth Review podcast):

Almost all companies take loans—some secured by assets they own, and others unsecured. But is that distinction meaningful in the real world? Chicago Booth’s Raghuram G. Rajan talks about his research into corporate debt. In the past century, the amount of unsecured debt has soared. What’s the significance of that, and is it really unsecured? 

Audio Transcript 

Raghuram Rajan: So asset values matter. It's just that they're in the background. So if you have a boom and bust, even in a developed country, you will have fluctuations in your ability to borrow and you'll have really bad consequences if you've over-borrowed and asset values plummet.

Hal Weitzman: Almost all companies borrow money. Some of it's secured by assets they own, other debts, unsecured. But is that distinction meaningful in the real world? Welcome to the Chicago Booth Review Podcast, where we bring you groundbreaking academic research in a clear and straightforward way. I'm Hal Weitzman, and today I'm talking with Chicago Booth's Raghuram Rajan about his research into corporate debt. In the past century, the amount of unsecured debt has soared. What's the significance of that and is it really unsecured? Welcome to the Chicago Booth Review Podcast.

Raghuram Rajan: Thanks for having me.

Hal Weitzman: We're here to talk about your research on debt and all companies have debt, and broadly there are two kinds of debt, right? There's secured debt and there's unsecured debt. What's the difference? Remind us between the two.

Raghuram Rajan: Secured debt is when I attach an asset to the debt and say, "If I default on my debt, you can take the asset." So for example, when you lease a car, basically the debt is secured by the car and if you stop car payments, somebody comes and takes your car away. Similarly, for firms, a lot of secured debt against property plant and equipment, you have debt against receivables. So that's secured debt. Unsecured debt is when you have an obligation to pay, but there's no asset that the lender can seize. Of course, essentially all debt is against all assets. So while there's no specific asset they can seize if you don't pay, they basically can put you in bankruptcy, in which case the assets are really moved over to the creditor.

Hal Weitzman: Okay. And so that's kind of the conceit of this research, is that even unsecured debt is somehow secured. It's implicitly asset-backed.

Raghuram Rajan: Exactly.

Hal Weitzman: So if as you say, the reality is even if you have unsecured debt, at some point I'll be able to claim something back, does that mean there's not much of a difference practically between secured debt and unsecured debt?

Raghuram Rajan: Well, there is in the sense that if I secure my debt today, it gives me less flexibility. Obviously, I can't use the same asset to get more borrowing from somebody else down the line because I've already pledged it to somebody. So it gives me less financial flexibility. It may also give me less real flexibility in the sense that sometimes in the course of business, I want to sell this asset, I don't need it as much, but if it's pledged to a lender, I have to get their permission. Can I substitute this other asset? So it complicates matters.

It complicates the running of your business. It gives you less flexibility. It may also subject you to hold up if your lender basically said, "No, I want no other asset." Then you're stuck with this asset because you've already pledged it and you can't substitute it with something else. So if firms had a choice, they would prefer unsecured debt rather than secured debt as a form of issuance.

Hal Weitzman: Right. And so for those who are not in this world, that begs the question, why can't they get it? Is it just because people don't want to lend against not implicit assets rather than explicit ones?

Raghuram Rajan: Exactly. I mean, go back to Merchant of Venice.

Hal Weitzman: Sure....

....MUCH MORE 

Previous visits with Professor Rajan:

Raghuram Rajan: "We Should Be on the Alert for More Problems"

As noted in March 30 [2023's] "Raghuram G. Rajan: 'The Fed’s Role in the Bank Failures'"

Professor Rajan is one of the few central bankers who seems to know what's what (except maybe for the RBI currency switcheroo of November 2016. That was a fustercluck)....

Long time readers may remember Professor Rajan from such hits as: 

Raghuram Rajan on The Boom and Bust in Farm Land Prices in the United States in the 1920s
and:
India’s Central Bank Governor Discusses Robber-Baron Capitalism and a Fine Veg Cutlet 

Okay, I'm being a bit whimsical, the man is brilliant and I wish he was running the U.S. Fed rather than sitting in his comfy endowed chair at the Booth School of Business.

Also:

• Raghuram Rajan: "When the Interests of Monopolists and Authoritarians Coalesce"
• Raghuram Rajan: "Disruption, Concentration, and the New Economy"
• "World Out Of Whack: An Absurd Unintended Consequence Of Abnormally Low Rates"
• Fannie and Freddie Must Die! Some guy in Chicago Takes on Paul Krugman's Version of the Mortgage Mess (FNM; FRE) 
• Former RBI Governor Raghuram G. Rajan On Development Economics: India Has An Opportunity To Do Something Never Before Attempted
•  Raghuram Rajan: "Breaking the Mould: Reimagining India’s Economic Future"
•  Raghuram G. Rajan: "Central Bank's Independence At Risk Of Being Dominated By Financial Assets"

Raghuram Rajan: "We Should Be on the Alert for More Problems"

As noted in March 30's "Raghuram G. Rajan: 'The Fed’s Role in the Bank Failures'"

Professor Rajan is one of the few central bankers who seems to know what's what (except maybe for the RBI currency switcheroo of November 2016. That was a fustercluck)....

From Neue Zürcher Zeitung's TheMarket.ch, May 15:

Raghuram Rajan, Professor of Finance at the University of Chicago and former Governor of the Reserve Bank of India, fears that the crisis in the US banking sector is not over. He explains why he thinks the stress in the financial system is an unintended consequence of easy monetary policy, and why a soft landing seems unlikely.

Deutsche Version

In the United States, one bank after another is collapsing. After the failures of Silicon Valley Bank and Signature Bank in March, another bank, First Republic Bank, had to be rescued through an emergency takeover at the beginning of May. PacWest is feared to be next. Even the shares of larger banks such as US Bancorp and Capital One are under heavy pressure.

*****

Although things otherwise remain remarkably quiet in the financial markets, Raghuram Rajan sees no reason to sound the all-clear. «Unfortunately, the sense is that this particular phase of the banking problems is over, but I think the banking system still needs watching», says the finance professor at the University of Chicago and former Governor of the Reserve Bank of India.

Dr. Rajan knows what he is talking about. In the summer of 2005, he caused a stir when he warned against excesses in the banking system in front of the assembled financial elite at the economic symposium in Jackson Hole. He was sharply criticized back then, but today he is one of the most renowned economists of our time.

In an in-depth conversation with The Market NZZ, which has been lightly edited for length, he explains why the banking crisis is likely to continue, where the main vulnerabilities in the financial system are and why, in his view, they are a consequence of the easy money with which the Federal Reserve has repeatedly flooded the system in the past years. He also says why the risk of a hard landing for the economy is high.

«At some point, we need to pay more attention to easy monetary policy, creating the kind of financial vulnerabilities that lead to the problems we’re seeing today»: Raghuram Rajan.

Professor Rajan, the regional banking crisis in the US is dragging on. With First Republic Bank, another institution recently collapsed. How do you assess the situation?

As it was the case with Silicon Valley Bank and Signature Bank, First Republic Bank was in a very difficult situation. This was a bank in the category of the «walking wounded», it was inevitable that something would happen eventually. Unfortunately, the sense is that this particular phase of the banking problems is over, but I think the banking system still needs watching.

Why?

The recent events highlighted mid-sized banks with volatile deposits and asset problems. I think the asset problems haven’t gone away. There are still lots of losses to be absorbed on bank balance sheets, and the problem with volatile deposits hasn’t gone away either. There certainly are deposits that are looking at higher interest rates and demanding higher interest rates to stay. That means net interest margins for many banks are shrinking considerably. As a result, there will be an issue of longer-term health of the banking system, especially regarding mid-sized banks exposed to areas like commercial real estate....

....MUCH MORE

Some of our posts on Professor (U.Chicago-Booth) Rajan:

February 11, 2022
Former Reserve Bank of India Head, Raghuram Rajan: "Central Banks Have to Start to Move"

«We sort of stopped thinking about countries like Italy. But if we come out of the pandemic and interest rates are not at 1% or 2%, but at 4% or 5%, what happens to public finances? Obviously, the biggest risks are always the ones you don’t see. But this is a risk we haven’t paid attention to for a long time»:

—Raghuram Rajan.

Long time readers may remember Professor Rajan from such hits as: 

Raghuram Rajan on The Boom and Bust in Farm Land Prices in the United States in the 1920s
and:
India’s Central Bank Governor Discusses Robber-Baron Capitalism and a Fine Veg Cutlet 

Okay, I'm being a bit whimsical, the man is brilliant and I wish he was running the U.S. Fed rather than sitting in his comfy endowed chair at the Booth School of Business.

Also:

• Raghuram Rajan: "When the Interests of Monopolists and Authoritarians Coalesce"
• Raghuram Rajan: "Disruption, Concentration, and the New Economy"
• "World Out Of Whack: An Absurd Unintended Consequence Of Abnormally Low Rates"
• Fannie and Freddie Must Die! Some guy in Chicago Takes on Paul Krugman's Version of the Mortgage Mess (FNM; FRE)

Former Reserve Bank of India Head, Raghuram Rajan: "Central Banks Have to Start to Move"

Long time readers may remember Professor Rajan from such hits as:

Raghuram Rajan on The Boom and Bust in Farm Land Prices in the United States in the 1920s
and:
India’s Central Bank Governor Discusses Robber-Baron Capitalism and a Fine Veg Cutlet 

Okay, I'm being a bit whimsical, the man is brilliant and I wish he was running the U.S. Fed rather than sitting in his comfy endowed chair at the Booth School of Business.

From Neue Zürcher Zeitung's TheMarket.ch, February 10:

Raghuram Rajan, Professor of Finance at the University of Chicago and former Governor of the Reserve Bank of India, believes the risk of persistently high inflation is significant. He warns that financial markets are underestimating the possibility of a substantial rise in interest rates.

Deutsche Version

The news is troubling: In the U.S., inflation rose further to 7.5% in January; again faster than expected and the highest level since the early 1980s. Bond market yields are rising, with interest rates on ten-year treasuries trading higher than pre-pandemic levels for the first time.

Despite these violent movements, equity markets remain surprisingly calm. The S&P 500 is barely more than 6% below its record high of early January – and that, in Raghuram Rajan’s view, is precisely the problem.

«Central banks have to switch to a different environment where they have to signal quite strongly that they mean business in going back to their old task which was containing inflation,» says the Professor of Finance at the University of Chicago and former Governor of the Reserve Bank of India. «Unfortunately, the perception that central banks are unwilling to do what it takes on the downside - not on the upside - makes this somewhat harder,» he adds.

Dr. Rajan knows what he is talking about. In the summer of 2005, he caused a stir when he warned against excesses in the banking system in front of the assembled financial elite at the economic symposium in Jackson Hole. He was sharply criticized back then, but today he is one of the most renowned economists of our time.

In an in-depth interview with The Market/NZZ, which has been lightly edited and condensed for clarity, he explains why he sees a real risk of persistently high inflation and what this could mean for financial markets. He also comments on China’s ambitious reform plans and on structural changes in the economy caused by the pandemic.

«We sort of stopped thinking about countries like Italy. But if we come out of the pandemic and interest rates are not at 1% or 2%, but at 4% or 5%, what happens to public finances? Obviously, the biggest risks are always the ones you don’t see. But this is a risk we haven’t paid attention to for a long time»:

—Raghuram Rajan.

Professor Rajan, in your latest essay for Project Syndicate you argue that we’re approaching «the end of free-lunch economics». What do you mean by that?

In developed countries, we’ve grown used to central banking as effectively having an unlimited capacity to do things that seem pleasant. In other words: We can keep interest rates really low which, of course, is not pleasant for the savers, but quite pleasant for borrowers and more generally for the economy. Meaning, we can buy assets and that increases asset prices. Typically, those who own assets enjoy that, whether it’s houses or financial assets. Overall, there has been very little constraint on the leeway to do more in terms of stimulative policies because of the low level of inflation....

....MUCH MORE

Some previous visits:

• Raghuram Rajan: "When the Interests of Monopolists and Authoritarians Coalesce"
• Raghuram Rajan: "Disruption, Concentration, and the New Economy"
• "World Out Of Whack: An Absurd Unintended Consequence Of Abnormally Low Rates"
• Fannie and Freddie Must Die! Some guy in Chicago Takes on Paul Krugman's Version of the Mortgage Mess (FNM; FRE) 

Raghuram G. Rajan: "The Case for and against Central Bankers"

From the former head of the Reserve Bank of India via the University of Chicago, Booth School of Business (where he has a comfy endowed chair) Chicago Booth Review, November 16: 

Monetary policy makers set the stage for inflation but were slow to respond when it appeared.

Hindsight is, of course, 20/20. The pandemic was unprecedented and its consequences for the globalized economy very hard to predict. The fiscal response, perhaps much more generous because polarized legislatures could not agree on whom to exclude, was not easy to forecast. Few thought Vladimir Putin would go to war in February 2022, disrupting supply chains further and sending energy and food prices skyrocketing.

Undoubtedly, central bankers were slow to react to growing signs of inflation. In part, they believed they were still in the post-2008 financial crisis regime, when every price spike, even of oil, barely affected the overall price level. In an attempt to boost excessively low inflation, the US Fed even changed its framework during the pandemic, announcing it would be less reactive to anticipated inflation and would keep policies more accommodative for longer. This framework was appropriate for an era of structurally low demand and weak inflation but exactly the wrong one to espouse just as inflation was about to take off and every price increase fueled another. But who knew the times were a-changing?

Even with perfect foresight—and in reality, they are no better informed than capable market players—central bankers may still have been understandably behind the curve. A central bank cools inflation by slowing economic growth. Its policies have to be seen as reasonable or else it loses its independence. With governments having spent trillions to support their economies, employment just recovered from terrible lows, and inflation barely noticeable for over a decade, only a foolhardy central banker would have raised rates to disrupt growth if the public did not yet see inflation as a danger. Put differently, preemptive rate rises that slowed growth would have lacked public legitimacy—especially if they were successful and inflation did not rise subsequently. Central banks needed the public to see higher inflation to be able to take strong measures against it.

In sum, central bank hands were tied in different ways—by recent history and their beliefs, by the frameworks they had adopted to combat low inflation, and by the politics of the moment, with each of these factors influencing the others.

Yet stopping the postmortem at this point is probably overly generous to central banks. After all, their past actions reduced their room to maneuver and not just for the reasons just outlined. In particular, take the emergence of both fiscal dominance (whereby the central bank acts to accommodate the government’s fiscal spending) and financial dominance (where the central bank acquiesces to the imperatives of the market). They clearly are not unrelated to central bank actions of the past few years.

Long periods of low interest rates and high liquidity prompt an increase in asset prices and associated leveraging. And both the government and the private sector levered up. Of course, the pandemic and Putin’s war pushed up government spending. But so did ultra-low long-term interest rates and a bond market anesthetized by central bank actions such as quantitative easing. Indeed, there was a case for targeted government spending financed by long-term debt issues. Yet sensible economists making the case for spending did not caveat their recommendations enough, and fractured politics ensured that the only spending that could be legislated had something for everyone. And, of course, politicians, as always, drew on unsound but convenient theories (think Modern Monetary Theory) that gave them the license for unbridled spending.

While central banks can make the case that they were surprised by recent events, 

they played a role in constraining their own policy space. 

Central banks compounded the problem by buying government debt financed by overnight reserves, thus shortening the maturity of the financing of the consolidated balance sheet of the government and the central bank. This means that as interest rates rise, government finances, especially for slow-growing countries with significant debt, are likely to become more problematic....

....MUCH MORE 

 

I thought hindsight was 20/23 (or whatever the current year is) Anyhoo...

I am really coming around to the idea that both the inflation and the retarded reaction to it were deliberate. More on that another time. For now some previous visits with the good Professor:

 

May 25, 2023

Raghuram Rajan: "We Should Be on the Alert for More Problems"

As noted in March 30's "Raghuram G. Rajan: 'The Fed’s Role in the Bank Failures'"

Professor Rajan is one of the few central bankers who seems to know what's what (except maybe for the RBI currency switcheroo of November 2016. That was a fustercluck)....

February 11, 2022
Former Reserve Bank of India Head, Raghuram Rajan: "Central Banks Have to Start to Move"

«We sort of stopped thinking about countries like Italy. But if we come out of the pandemic and interest rates are not at 1% or 2%, but at 4% or 5%, what happens to public finances? Obviously, the biggest risks are always the ones you don’t see. But this is a risk we haven’t paid attention to for a long time»:

—Raghuram Rajan.

Long time readers may remember Professor Rajan from such hits as: 

Raghuram Rajan on The Boom and Bust in Farm Land Prices in the United States in the 1920s
and:
India’s Central Bank Governor Discusses Robber-Baron Capitalism and a Fine Veg Cutlet 

Okay, I'm being a bit whimsical, the man is brilliant and I wish he was running the U.S. Fed rather than sitting in his comfy endowed chair at the Booth School of Business.

Also:

• Raghuram Rajan: "When the Interests of Monopolists and Authoritarians Coalesce"
• Raghuram Rajan: "Disruption, Concentration, and the New Economy"
• "World Out Of Whack: An Absurd Unintended Consequence Of Abnormally Low Rates"
• Fannie and Freddie Must Die! Some guy in Chicago Takes on Paul Krugman's Version of the Mortgage Mess (FNM; FRE)

Raghuram Rajan: "Breaking the Mould: Reimagining India’s Economic Future"

I think the Professor is on  good terms with the Prime Minister, I wonder if Modi is listening.

From the University of Chicago's Chicago Booth Review, December 11:

In their new book, Breaking the Mould: Reimagining India’s Economic Future, Chicago Booth’s Raghuram G. Rajan and Pennsylvania State University’s Rohit Lamba make the argument that India should follow an economic development path that is based not on manufacturing, as China has done, but rather on services. In this episode of the Capitalisn’t podcast, Rajan discusses with cohosts Luigi Zingales and Bethany McLean why India’s strengths play to services-based development, how India can deal with the economic and educational inequality created by its past, how Western business should engage with India, and why democracy is critical to India’s future economic success.

Capitalisn't Podcast (transcript)

Raghuram Rajan: I really think India needs to rethink its development path. And I think if it does all this, here is a coherent path which is different—I want to emphasize—from the path we are currently on.

Bethany: I’m Bethany McLean.

Phil Donahue: Did you ever have a moment of doubt about capitalism and whether greed’s a good idea?

Luigi: And I’m Luigi Zingales.

Bernie Sanders: We have socialism for the very rich, rugged individualism for the poor.

Bethany: And this is Capitalisn’t, a podcast about what is working in capitalism.

Milton Friedman: First of all, tell me, is there some society you know that doesn’t run on greed?

Luigi: And, most importantly, what isn’t.

Warren Buffett: We ought to do better by the people that get left behind. I don’t think we should kill the capitalist system in the process.

Luigi: During the last couple of years with Bethany, we have focused on the interaction between capitalism and democracy. At the end of the 20th century, this combination looked triumphant. As the Berlin Wall was crumbling down, capitalism and democracy were spreading the world over.

Now that we are approaching the end of the first quarter of the 21st century, this relationship looks much more problematic. Democracy is in retreat and basic democratic principles are questioned, even in the ultimate cradle of democracy, the United States of America.

If this was not enough, the enormous economic success of China makes people wonder whether democracy is an obstacle to development. I regard democracy as a value regardless of its economic effect. And I think that you, Bethany, feel the same, don’t you?

Bethany: I do, although it’s sometimes hard for me to know if I feel so strongly about it because that’s what I grew up with, and I don’t know anything else, and I’m naturally a defender of it.

Then, I also wonder, as you and I have explored a lot on this podcast, the ways in which supposed democracies, including ours, are not really very democratic and the ways in which they become corrupted. And so, I also worry about the gaps between the values that both democracy and capitalism espouse, both of which I’m big believers in, and then the reality as they are practiced.

Luigi: Yes, but actually, I regard democracy, i.e., the ability of people to express their opinion and to influence the direction of the government, as a value per se. Even if you were to tell me that you lose a little bit of GDP by being democratic, I would prefer to be democratic over nondemocratic. Now, if the question is whether you’re starving, that’s a different story.

Bethany: Yeah.

Luigi: I think that other people have started to question whether maybe there is a trade-off between being free and being wealthy. The success of China really makes people wonder, and the natural comparison is India. India is now rising very quickly and is currently the fifth-largest economy in the world. They recently passed the United Kingdom, and as you can imagine for Indian people, that’s a very important step. But according to the FT’s chief economics editor, Martin Wolf, by 2050, the Indian economy will be 30 percent larger than the US economy, at least in purchasing power parity.

Bethany: I think that’s why you see so many large corporations, from Netflix to McDonald’s, localizing their content for the Indian market. But India just recently overtook China to be the world’s most populous country, and it’s still extraordinarily young. And so, I think the question remains if India has achieved its growth because of its democracy—and India has been a democracy since independence—or despite it.

Luigi: And, of course, a lot of people are asking the question, is it the fault of democracy that India fell behind or not? One interesting statistic is that in 1960, India, China, and Korea had the same GDP per capita. Today, China is five times as wealthy as India. This is really remarkable, and it makes people question, should India give up democracy for prosperity?

There is no better person to address this question than Raghuram Rajan, who is not only my colleague at the University of Chicago, but more importantly, was a former governor of the Reserve Bank of India, which is the Indian central bank, and a very informed and acute observer of the Indian economy.

He just released a new book with a younger colleague, Rohit Lamba, and the book is called Breaking the Mould. The subtitle of the book reveals a very ambitious goal, which is “Reimagining India’s Economic Future.” The main thesis of the book is that India is now trying to emulate the path to success that China followed, and so many other so-called Asian tigers followed, but the book says it’s too late to follow that path.

The persistence of China and many other China-like developing countries in the low-skilled manufacturing sector, and the competition coming from automating manufacturing, make the traditional path of specializing in low-skill manufacturing, then working your way up, not feasible. One of the things that the book points out is that if we plot the value added per employee against the value stage or value creation, we get a smile-shaped curve. So, value added is very high in the design phase, low in manufacturing, and very high again in distribution.

Just one statistic the book reports that is very interesting in this dimension: Apple, which does not produce anything but only designs and distributes, today is capitalized at roughly $3 trillion. Foxconn, which produces the iPhone and specializes only in manufacturing, is capitalized below $50 billion.

Bethany: Part of the core argument in Raghuram’s book is that pursuing the manufacturing way to development by subsidizing new plants is hopeless for India. It’s unable to provide a young generation with enough jobs, and those jobs will not be that well paid. So, his argument is that the future is in service, and India, which has demonstrated excellence in a number of sectors, like software and consulting, should aggressively pursue the service route. This gets to his defense of democracy because he argues that this requires freeing the creative spirit of Indian entrepreneurs, and so, it can only be pursued by making India more, not less, democratic.

But Luigi, we could keep talking forever. Let’s discuss these ideas with Raghuram himself.

Raghuram, just to set the stage as we get started, how would you describe India’s economy today? Would you say it’s successful? Would you say it’s in a good place?

Raghuram Rajan: Well, it stands out as one of the few fast-growing economies in the world today, but that’s a headline number, and we have to look beyond that. One of the big concerns for Indians is jobs. Even at this pace of economic growth, around 6 percent, 6.5 percent, if you look at an annualized basis, India is not generating enough jobs. What seems to be going on is really that the higher-end firms, the more capital-intensive firms, are doing very well. What is not going so well is the small and medium sector, which is often the job-creating sector in the economy....

....MUCH MORE

Raghuram G. Rajan: "The Fed’s Role in the Bank Failures"

Professor Rajan is one of the few central bankers who seems to know what's what (except maybe for the RBI currency switcheroo of November 2016. That was a fustercluck).

I don't know his co-author (NYU-Stern) on this piece, from Project Syndicate, March 28:

There are four reasons to worry that the latest banking crisis could be systemic. For many years, periodic bouts of quantitative easing have expanded bank balance sheets and stuffed them with more uninsured deposits, making the banks increasingly vulnerable to changes in monetary policy and financial conditions. 

CHICAGO – The recent bank collapses in the United States seem to have an obvious cause. Ninety percent of the deposits at Silicon Valley Bank (SVB) and Signature Bank were uninsured, and uninsured deposits are understandably prone to runs. Moreover, both banks had invested significant sums in long-term bonds, the market value of which fell as interest rates rose. When SVB sold some of these bonds to raise funds, the unrealized losses embedded in its bond portfolio started coming to light. A failed equity offering then set off the run on deposits that sealed its fate.

But four elements of this simple explanation suggest that the problem may be more systemic. First, there is typically a huge increase in uninsured bank deposits whenever the US Federal Reserve engages in quantitative easing. Because it involves buying securities from the market in exchange for the central bank’s own liquid reserves (a form of cash), QE not only increases the size of the central-bank balance sheet, but also drives an expansion in the broader banking system’s balance sheet and its uninsured demandable deposits. 

We (along with co-authors) called attention to this under-appreciated fact in a paper presented at the Fed’s annual Jackson Hole conference in August 2022. As the Fed resumed QE during the pandemic, uninsured bank deposits rose from about $5.5 trillion at the end of 2019 to over $8 trillion by the first quarter of 2022. At SVB, deposit inflows increased from less than $5 billion in the third quarter of 2019 to an average of $14 billion per quarter during QE. But when the Fed ended QE, raised interest rates, and switched quickly to quantitative tightening (QT), these flows reversed. SVB started seeing an increase in outflows of uninsured deposits (some of which were coincident with the downturn in the tech sector, as the bank’s stressed clients started drawing down cash reserves).

Second, many banks, having benefited from the firehose of deposits, purchased liquid longer-term securities such as Treasury bonds and mortgage-backed securities, in order to generate a profitable “carry”: an interest-rate spread that provided yields above what the banks had to pay on deposits. Ordinarily, this would not be so risky. Long-term interest rates had not moved up much for a long time; and even if they did start to rise, bankers understand that depositors tend to be sleepy and will accept low deposit rates for a long time, even when market interest rates move up. The banks thus felt protected by both history and depositor complacency. 

Yet this time was different, because these were flighty uninsured deposits. Having been generated by Fed action, they were always poised to flow out when the Fed changed course. And because large depositors can coordinate easily among themselves, actions taken by just a few can trigger a cascade. Even at healthy banks, depositors who have woken up to bank risk and the healthier interest rates available at money-market funds will want to be compensated with higher interest rates. The juicy interest-rate spreads between investments and somnolent deposits will be threatened, impairing bank profitability and solvency. As an apt saying in the financial sector goes, “The road to hell is paved with positive carry.”....

....MUCH MORE

Some of our posts on Professor (U.Chicago-Booth) Rajan:

February 11, 2022
Former Reserve Bank of India Head, Raghuram Rajan: "Central Banks Have to Start to Move"

«We sort of stopped thinking about countries like Italy. But if we come out of the pandemic and interest rates are not at 1% or 2%, but at 4% or 5%, what happens to public finances? Obviously, the biggest risks are always the ones you don’t see. But this is a risk we haven’t paid attention to for a long time»:

—Raghuram Rajan.

Long time readers may remember Professor Rajan from such hits as: 

Raghuram Rajan on The Boom and Bust in Farm Land Prices in the United States in the 1920s
and:
India’s Central Bank Governor Discusses Robber-Baron Capitalism and a Fine Veg Cutlet 

Okay, I'm being a bit whimsical, the man is brilliant and I wish he was running the U.S. Fed rather than sitting in his comfy endowed chair at the Booth School of Business.

From Neue Zürcher Zeitung's TheMarket.ch, February 10:....

Also:

• Raghuram Rajan: "When the Interests of Monopolists and Authoritarians Coalesce"
• Raghuram Rajan: "Disruption, Concentration, and the New Economy"
• "World Out Of Whack: An Absurd Unintended Consequence Of Abnormally Low Rates"
• Fannie and Freddie Must Die! Some guy in Chicago Takes on Paul Krugman's Version of the Mortgage Mess (FNM; FRE)

Whoa!—Raghuram Rajan: "Where Has All the Liquidity Gone?"

When Professor Rajan was running the Reserve Bank of India he stood head-and-shouders above most all of the other Central Bankers of his cohort (except maybe for the RBI currency switcheroo of November 2016. That was a fustercluck)

From Project Syndicate, October 7:

Raghuram Rajan and Viral Acharya

After two years of quantitative easing, central banks have begun to shrink their balance sheets, and liquidity seems to have vanished in the space of just a few months – revealing acute financial-system vulnerabilities. It is now clear that monetary-policy normalization will be exceedingly difficult and fraught with risk.

CHICAGO/NEW YORK – The malfunctioning of the government bond market in a developed economy is an early warning of potential financial instability. In the United Kingdom, the new government’s proposed “mini-budget” raised the specter of unsustainable sovereign debt and led to a dramatic widening in long-term gilt yields. Recognizing the systemic importance of the government bond market, the Bank of England correctly stepped in, both pausing its plan to unload gilts from its balance sheet and announcing that it will buy gilts over a fortnight at a scale near that of its planned sales for the next 12 months. 

Markets have since calmed down. But as commendable as the BOE’s prompt response has been, we must ask what blame central banks bear for financial markets’ current fragility. After all, while long-term gilt yields have stabilized, gilt market liquidity (judging by bid-ask spreads) has not improved. And across the Atlantic, the market for US Treasuries is also raising liquidity concerns. Many metrics are flashing red, just like at the onset of the COVID-19 pandemic in 2020 and in the aftermath of Lehman Brothers’ failure in 2008. 

After two years of quantitative easing (QE) – when central banks buy long-term bonds from the private sector and issue liquid reserves in return – central banks around the world have begun to shrink their balance sheets, and liquidity seems to have vanished in the space of just a few months. Why has quantitative tightening (QT) produced that result? In a recent paper co-authored with Rahul Chauhan and Sascha Steffen (which we presented at the Federal Reserve Bank of Kansas City’s Jackson Hole conference in August), we show that QE may be quite difficult to reverse, because the financial sector has become dependent on easy liquidity. 

This dependency arises in multiple ways. Commercial banks, which typically hold the reserves supplied by central banks during QE, finance their own asset purchases with short-term demand deposits that represent potent claims on their liquidity in tough times. Moreover, although advanced-economy central-bank reserves are the safest assets on the planet, they offer low returns, so commercial banks have created additional revenue streams by offering reserve-backed liquidity insurance to others. This generally takes the form of higher credit card limits for households, contingent credit lines to asset managers and non-financial corporations, and broker-dealer relationships that promise to help speculators meet margin calls (demands for additional cash collateral).

The speculators are not limited to hedge funds, as we recently learned in the UK. Rather, they also include normally staid pension funds that have engaged in so-called liability-driven investment: To compensate for the QE-induced low return on long-term gilts, they increased the risk profile of their other assets, taking on more leverage, and hedging any interest risk with derivatives. 

While their hedged position ensured that an interest-rate increase would have an equal impact on their asset and liability values, it also generated margin calls on their derivative positions. Lacking the cash to meet these calls, they were reliant on bankers with spare liquidity for support. In sum, during periods of QE, the financial sector generates substantial potential claims on liquidity, effectively eating up much of the issued reserves. The quantity of spare liquidity is thus much smaller than that of issued reserves, which can become a big problem in the event of a shock, such as a government-induced scare.  

Our study also finds that, in the case of the United States, QT makes conditions even tighter still, because the financial sector does not quickly shrink the claims that it has issued on liquidity, even as the central bank takes back reserves. This, too, makes the system vulnerable to shocks – an accident waiting to happen. During the last episode of QT in the US, even relatively small, unexpected increases in liquidity demand – such as a surge in the Treasury’s account at the Fed – caused massive dislocation in Treasury repo markets. That is exactly what happened in September 2019, prompting the Fed to resume its liquidity injections...

....MUCH MORE

Also at Project Syndicate:

Germany’s Emerging War Economy

Some of our posts on Professor (U.Chicago/Booth) Rajan:

February 11, 2022
Former Reserve Bank of India Head, Raghuram Rajan: "Central Banks Have to Start to Move"
Long time readers may remember Professor Rajan from such hits as:

Raghuram Rajan on The Boom and Bust in Farm Land Prices in the United States in the 1920s
and:
India’s Central Bank Governor Discusses Robber-Baron Capitalism and a Fine Veg Cutlet 

Okay, I'm being a bit whimsical, the man is brilliant and I wish he was running the U.S. Fed rather than sitting in his comfy endowed chair at the Booth School of Business.

From Neue Zürcher Zeitung's TheMarket.ch, February 10:....

Also:

• Raghuram Rajan: "When the Interests of Monopolists and Authoritarians Coalesce"
• Raghuram Rajan: "Disruption, Concentration, and the New Economy"
• "World Out Of Whack: An Absurd Unintended Consequence Of Abnormally Low Rates"
• Fannie and Freddie Must Die! Some guy in Chicago Takes on Paul Krugman's Version of the Mortgage Mess (FNM; FRE)
  

And previously on our obsession with the events of September 2019:
"Economist Michael Hudson Says the Fed 'Broke the Law' with its Repo Loans to Wall Street Trading Houses"

A Nomura Document May Shed Light on the Repo Blowup and Fed Bailout of the Gang of Six in 2019 

"A Closer Look at the U.S. Bacon Situation"

 Money, Money, Money: "A Self-Fulfilling Prophecy: Systemic Collapse and Pandemic Simulation"

"The Day When Repo Rates Blew Out: Fed Recounts a Fiasco that Occurred as the FOMC Was Meeting, and How it Reacted

"The Federal Reserve's Explanation Of What Happened In The Money Markets In September 2019

For now this is just a personal bookmark but we may be referring back to it. What was going on in Q3 and Q4 2019 was a big enough deal that the Fed felt compelled to publish this little bit of narrative.

What seems to have happened was that somebody's derivative book got upside down to the tune of a few trillion dollars (notional, always say notional) and in addition the contagion through the counterparty daisy chain was also in the trillions and well, here's the Fed with their version.

From the Board of Governors of the Federal Reserve System....

....And more to come. We've been picking at this scab for quite a while and the picture puzzle  is only now coming together so dribs and drabs.

And how does this ancient history tie into what's going on in 2022?

Who knows? 

As noted in Saturday's "StockCats Asks For Clarification":

I have a feeling that lands somewhere in "the nebulous region between mere suspicion and probable cause"

 (LaFave & Israel on U.S. v. Ramsey, 431 U.S. 606 [1977])

that there is some sort of misdirection going on that I'm not understanding.

If so, any attempt at analysis of Fed policy and market moves by traditional means, global macro, central bank policy and practice, market internals such as options gamma etc., etc. is just so much blather.

And I keep coming back to the 3rd and 4th quarters of 2019 as the period when things were getting very weird.

More to come (maybe)

Trouble In Repo Land—The QE Endgame: A Big Problem Is Emerging For The Fed

Also "The Fed Is About to Ramp Up Balance-Sheet Shrinkage. It May Get Dicey". 

Raghuram Rajan on The Boom and Bust in Farm Land Prices in the United States in the 1920s

From the former head of the Reserve Bank of India, now hanging his hat at the University of Chicago's Booth School of Business (comfy endowed chair):

 

The Anatomy of a Credit Crisis: The Boom and Bust in Farm Land Prices in the United States in the 1920s (with Rodney Ramcharan), American Economic Review , April 2015

How important is the role of credit availability in inflating asset prices? And does greater credit availability make the economy more sensitive to changes in sentiment or fundamentals?  In this paper we address these questions by examining the rise (and fall) of farm land prices in the United States in the early twentieth century, attempting to identify the separate effects of changes in fundamentals and changes in the availability of credit on land prices. We find that credit availability likely had a direct effect on inflating land prices. Credit availability may have also amplified the relationship between the perceived improvement in fundamentals and land prices. When fundamentals turned down, however, areas with higher ex ante credit availability suffered a greater fall in land prices, and experienced higher bank failure rates. We draw lessons for regulatory policy.

*****

Does credit availability exacerbate asset price inflation? Are there long-run consequences? During the farm land price boom and bust before the Great Depression, we find that credit availability directly inflated land prices. Credit also amplified the relationship between positive fundamentals and land prices, leading to greater indebtedness. When fundamentals soured, areas with higher credit availability suffered a greater fall in land prices and had more bank failures. Land prices and credit availability also remained disproportionately low for decades in these areas, suggesting that leverage might render tem-porary credit-induced booms and busts persistent. We draw lessons for regulatory policy. (JEL E31, G21, G28, N22, N52, Q12, Q14 )

Asset price booms and busts often center around changes in credit availability (see, for example, the descriptions in Minsky 1986 and Kindleberger and Aliber 2005; theories such as Geanakoplos 2010; and the evidence in Borio and Lowe 2002, Mian and Sufi 2008, and Schularick and Taylor 2009). Some economists, however, claim that the availability of credit plays little role in asset price movements (e.g., see Glaeser, Gottlieb, and Gyourko 2010).

In this paper, we examine the boom (and bust) of farm land prices in the United States in the early twentieth century, using the variation in credit availability across counties in the United States to tease out the short- and long-run effects of the availability of credit on asset prices.The usual difficulty in drawing general lessons from episodes of booms and busts in different countries is that each crisis is sui generis, driven by differences in a broad range of hard-to-control-for factors.

The advantage of focusing on farm lending in the United States in the early twentieth century is that lending was local. So in effect, we have a large number of distinctive sub-economies, specifically, counties within each state, with some common (and thus constant) broad influences such as monetary policy and federal fiscal policy. Ceteris paribus, the more the banks in a county, the greater is the competition for depositor funds as well as the competition to offer credit, and closer is any bank to a potential customer, hence greater is the potential supply of intermediated funds. So our proxy for credit availability, through much of the paper, will be the log number of banks in a county. We rely on differences in bank regulations across states and Federal Reserve districts to allow us to isolate exogenous differences in credit availability.In addition, we have an exogenous boom and bust in agricultural commodity prices in the years 1917–1920, to which counties were differentially exposed.

The reasons for the commodity price rise are well documented. The emergence of the United States as an economic power helped foster a worldwide boom in commod-ities in the early twentieth century. The boom, especially in the prices of wheat and other grains, accelerated as World War I disrupted European agriculture, even while demand in the United States was strong. The Russian Revolution in 1917 fur-ther exacerbated the uncertainty about supply, and intensified the commodity price boom. However, European agricultural production resumed faster than expected after the war’s sudden end, and desperate for hard currency, the new Russian gov-ernment soon recommenced wheat and other commodity exports.

As a result, agricultural commodity prices plummeted starting in 1920 and declined through much of the 1920s (Yergin 1992; Blattman, Hwang, and Williamson 2007).1 Because different counties differed in the kind of crops they were most suited to produce, and each crop was affected to a different extent by the events in Europe, we have county by county variation in the perceived shock to fundamentals. Correcting for differences in the positive shock to fundamentals, we can tease out the effect of the availability of credit on land prices in 1920 (the peak of the boom).

We find that both fundamentals and credit availability mattered, but there was also a positive interaction effect; the shock generally boosted land prices even more in counties that had greater credit availability. We also explore the channels through which credit might have operated—whether it allowed marginal land to be brought into opera-tion, facilitated the more intensive use of existing land, allowed more investment in machinery, improved crop yields, or facilitated more leverage.

Credit availability seems to be primarily associated with higher leverage at the peak of the boom.The post-1920 collapse in commodity prices, induced by the resumption of European production, also allows us to examine the aftermath of the boom. Importantly, agricultural incomes fell, but only to levels before the acceleration in commodity price growth that started in 1917. This allows us to focus on the role of the financial leverage—both at the farm level and at the bank level—that built up in the boom years.

If the role of credit is relatively benign—borrowers simply sell the assets they had bought and repay credit—we should see relatively little independent effect of the prior availability of credit on asset prices, other than what rises the most falls the most. But if purchased assets are illiquid and hard to sell, and leverage cannot be brought down easily, we should see prices fall even more in areas that had easy access to credit. Also, distress, as evidenced in bank failures, should be more pronounced....

....MUCH MORE (39 page PDF)

 

Other visits with the former Reserve Bank of India honcho:
Raghuram Rajan: "When the Interests of Monopolists and Authoritarians Coalesce":
Raghuram Rajan: "Disruption, Concentration, and the New Economy"
"World Out Of Whack: An Absurd Unintended Consequence Of Abnormally Low Rates"
Fannie and Freddie Must Die! Some guy in Chicago Takes on Paul Krugman's Version of the Mortgage Mess (FNM; FRE)
India’s Central Bank Governor Discusses Robber-Baron Capitalism and a Fine Veg Cutlet

Raghuram Rajan on The Boom and Bust in Farm Land Prices in the United States in the 1920s

Attempting to get a handle on the possible trajectories for the current crises in farm country and also to fulfill a promise made last week* we have:
From Professor Rajan at the University of Chicago's Booth School of Business:

The Anatomy of a Credit Crisis: The Boom and Bust in Farm Land Prices in the United States in the 1920s (with Rodney Ramcharan), American Economic Review , April 2015

How important is the role of credit availability in inflating asset prices? And does greater credit availability make the economy more sensitive to changes in sentiment or fundamentals?  In this paper we address these questions by examining the rise (and fall) of farm land prices in the United States in the early twentieth century, attempting to identify the separate effects of changes in fundamentals and changes in the availability of credit on land prices. We find that credit availability likely had a direct effect on inflating land prices. Credit availability may have also amplified the relationship between the perceived improvement in fundamentals and land prices. When fundamentals turned down, however, areas with higher ex ante credit availability suffered a greater fall in land prices, and experienced higher bank failure rates. We draw lessons for regulatory policy.

*****

Does credit availability exacerbate asset price inflation? Are there long-run consequences? During the farm land price boom and bust before the Great Depression, we find that credit availability directly inflated land prices. Credit also amplified the relationship between positive fundamentals and land prices, leading to greater indebtedness. When fundamentals soured, areas with higher credit availability suffered a greater fall in land prices and had more bank failures. Land prices and credit availability also remained disproportionately low for decades in these areas, suggesting that leverage might render tem-porary credit-induced booms and busts persistent. We draw lessons for regulatory policy. (JEL E31, G21, G28, N22, N52, Q12, Q14 )

Asset price booms and busts often center around changes in credit availability (see, for example, the descriptions in Minsky 1986 and Kindleberger and Aliber 2005; theories such as Geanakoplos 2010; and the evidence in Borio and Lowe 2002, Mian and Sufi 2008, and Schularick and Taylor 2009). Some economists, however, claim that the availability of credit plays little role in asset price movements (e.g., see Glaeser, Gottlieb, and Gyourko 2010).

In this paper, we examine the boom (and bust) of farm land prices in the United States in the early twentieth century, using the variation in credit availability across counties in the United States to tease out the short- and long-run effects of the availability of credit on asset prices.The usual difficulty in drawing general lessons from episodes of booms and busts in different countries is that each crisis is sui generis, driven by differences in a broad range of hard-to-control-for factors.

The advantage of focusing on farm lending in the United States in the early twentieth century is that lending was local. So in effect, we have a large number of distinctive sub-economies, specifically, counties within each state, with some common (and thus constant) broad influences such as monetary policy and federal fiscal policy. Ceteris paribus, the more the banks in a county, the greater is the competition for depositor funds as well as the competition to offer credit, and closer is any bank to a potential customer, hence greater is the potential supply of intermediated funds. So our proxy for credit availability, through much of the paper, will be the log number of banks in a county. We rely on differences in bank regulations across states and Federal Reserve districts to allow us to isolate exogenous differences in credit availability.In addition, we have an exogenous boom and bust in agricultural commodity prices in the years 1917–1920, to which counties were differentially exposed.

The reasons for the commodity price rise are well documented. The emergence of the United States as an economic power helped foster a worldwide boom in commod-ities in the early twentieth century. The boom, especially in the prices of wheat and other grains, accelerated as World War I disrupted European agriculture, even while demand in the United States was strong. The Russian Revolution in 1917 fur-ther exacerbated the uncertainty about supply, and intensified the commodity price boom. However, European agricultural production resumed faster than expected after the war’s sudden end, and desperate for hard currency, the new Russian gov-ernment soon recommenced wheat and other commodity exports.

As a result, agricultural commodity prices plummeted starting in 1920 and declined through much of the 1920s (Yergin 1992; Blattman, Hwang, and Williamson 2007).1 Because different counties differed in the kind of crops they were most suited to produce, and each crop was affected to a different extent by the events in Europe, we have county by county variation in the perceived shock to fundamentals. Correcting for differences in the positive shock to fundamentals, we can tease out the effect of the availability of credit on land prices in 1920 (the peak of the boom).

We find that both fundamentals and credit availability mattered, but there was also a positive interaction effect; the shock generally boosted land prices even more in counties that had greater credit availability. We also explore the channels through which credit might have operated—whether it allowed marginal land to be brought into opera-tion, facilitated the more intensive use of existing land, allowed more investment in machinery, improved crop yields, or facilitated more leverage.

Credit availability seems to be primarily associated with higher leverage at the peak of the boom.The post-1920 collapse in commodity prices, induced by the resumption of European production, also allows us to examine the aftermath of the boom. Importantly, agricultural incomes fell, but only to levels before the acceleration in commodity price growth that started in 1917. This allows us to focus on the role of the financial leverage—both at the farm level and at the bank level—that built up in the boom years.

If the role of credit is relatively benign—borrowers simply sell the assets they had bought and repay credit—we should see relatively little independent effect of the prior availability of credit on asset prices, other than what rises the most falls the most. But if purchased assets are illiquid and hard to sell, and leverage cannot be brought down easily, we should see prices fall even more in areas that had easy access to credit. Also, distress, as evidenced in bank failures, should be more pronounced....

....MUCH MORE (39 page PDF)

*The outro from May 3's Raghuram Rajan: "When the Interests of Monopolists and Authoritarians Coalesce":

...On another topic, the good Professor (and former RBI head) has written on the farm economy crisis of the 1920's that was the trial run for the Great Depression of a few years later. I've been meaning to link to one of his papers and with the currently unfolding rural econ disaster gaining momentum should probably get it on the blog sooner rather than later. Maybe this weekend.

Other visits with the former Reserve Bank of India honcho:
Raghuram Rajan: "Disruption, Concentration, and the New Economy"
"World Out Of Whack: An Absurd Unintended Consequence Of Abnormally Low Rates"
Fannie and Freddie Must Die! Some guy in Chicago Takes on Paul Krugman's Version of the Mortgage Mess (FNM; FRE)
India’s Central Bank Governor Discusses Robber-Baron Capitalism and a Fine Veg Cutlet

Former RBI Governor Raghuram G. Rajan On Development Economics: India Has An Opportunity To Do Something Never Before Attempted

From the Chicago Booth Review, July 30:

Democracy and Innovation Could Set India on a Different Development Path
The emphasis should be on new companies, ideas, and products that allow the country to own the high end of the value chain.

India can adopt a new path to development, one that no developing country has taken before, wherein its firms come up with world-beating ideas and products and deliver them globally.

No large developing country has skipped the middle step in the typical development route, which entails first shifting workers from agriculture to manufacturing before shifting them again to services. India has partly jumped from agriculture straight to services, but it must now reinvent itself once again so as to accelerate growth and provide jobs to the teeming millions joining its labor force every year.

Instead of making generic pharmaceuticals, which it has been good at, India should turn to finding new cures for the diseases that plague its people and sell those new medicines to the world. Instead of buying expensive 5G technology from a vendor in an industrial country, India should create a cheaper version domestically and sell it to the emerging world, assuring buyers that India will create no backdoors through which it can snoop on them. It is important to recognize that India has the foundations on which it can build to fulfill these aspirations. But it is not there yet.

For instance, India has only a few top-quality research institutions, such as some of the Indian Institutes of Technology, the Tata Institute of Fundamental Research, and the Indian Institute of Science. To move from incremental innovation to pathbreaking innovation, India needs to raise many more of its universities to global standards, and encourage and fund innovative research as well as business-academia collaborations.

India should also create the conditions for more manufacturing at home, but the export-led, low-skilled variety—such as the assembly of electronics components or the stitching of garments—has become highly competitive and no longer offers an easy path to becoming a middle-income nation. Instead of trying to capture the bottom of the value-added chain and climbing up from there, as the East Asian countries did, India could aspire to own the high end of the value chain directly. In some cases, the low-skilled segments would then migrate naturally to India. While high-skilled services can also expand to provide the foreign exchange and jobs India needs, the emphasis should be on new firms, ideas, and products, whether in manufacturing or services, that can allow India to leapfrog.

The right climate for innovation
One critical support to India’s development path will be its democracy. Citizens benefit intrinsically from democracy—the dignity that comes from being able to vote and possessing the right to express your opinion through your ballot, having freedom of thought and expression more generally, being treated fairly, enjoying the rule of law, and so on. India’s citizens just exercised their universal adult franchise in the recently conducted national elections, where about 650 million people voted. But there is also an instrumental reason India should strengthen its democracy.

In the early stages of development, the focus is, as we have seen, on catch-up growth. The ideas and know-how needed for development are already out there, discovered by some other country and its businesses; they simply have to be imitated or licensed....

....MUCH MORE

Professor Rajan has a comfy endowed chair at the University of Chicago's Booth School of Business. Previously: 

Raghuram G. Rajan: "The Indian Election and the Country’s Economic Future"

I think the Professor is on good terms with the Prime Minister but you can see where Modi's muscle guys might take offense at straight talk.  

If interested we've visited him on everything from central banking to American farmland prices in the 1920's.

India’s Central Bank Governor Discusses Robber-Baron Capitalism and a Fine Veg Cutlet

From the Financial Times:

Lunch with the FT: Raghuram Rajan
One year on from his appointment as India’s central bank governor, the man credited with spotting the last financial crisis discusses robber-baron capitalism and a fine veg cutlet 

Dark monsoon rain clouds hang over Mumbai, as I gaze down at the city’s gothic skyline from the 18th floor of the Reserve Bank of India, waiting for Raghuram Rajan to arrive. It’s a suitably stormy backdrop against which to contemplate my guest’s first year in charge of India’s central bank.

Rajan took over as governor in September last year during a moment of profound financial crisis. He had returned to his homeland in 2012 with an academic superstar’s reputation, forged first at the University of Chicago, then at the International Monetary Fund, where he was chief economist for three years. In 2005 Rajan also gave a celebrated speech at an event for Alan Greenspan in which, instead of praising the outgoing chairman of the US Federal Reserve, he was critical of the financial establishment, predicting many elements of the global financial crisis. Even so, Rajan had never led an institution like the RBI, let alone at a moment when the rupee was in free fall, capital fleeing and India perilously placed, even among the so-called “fragile five” emerging economies.

One year on, and that sense of disaster at least has passed, in part thanks to Rajan’s economic competence and calm public persona which themselves seemed to revive confidence, beginning a market rally that ran from his appointment last September through to the election of India’s new prime minister, Narendra Modi, this May. But the journey has not been smooth, and I am keen to hear his reflections on the often-awkward realities of political power.

Rajan arrives just a few minutes late, looking relaxed in a dark suit, offset with swirling red and blue tie. RBI rules do not allow the governor to be bought lunch, he apologises, while trips to restaurants involve too many interruptions. “It’s very hard for me to go out,” he says, with a sheepish shrug. “So when I have guests, they come here, and we eat.”

We are in a suite near Rajan’s office, where a white cloth has been laid over a conference table, on which a bouquet of red roses has been placed. Roughly two dozen portraits of former RBI governors stare down solemnly from the far wall, while a nearby menu lists five courses, featuring a quixotic mixture of Indian and western dishes. Rajan is a vegetarian, he says, but the RBI’s chef has added “non-veg” options for me, including fish and chips.

The menu offers no hint of alcohol so I take a fruit juice, while two waiters in dark traditional Indian suits serve our first course: a salty, warming French onion soup. I begin by asking the governor about his early days in the job. “It felt a little panicky,” admits Rajan. “And, to some extent, this was our fault . . .  It seemed like we were flailing around a little bit, with a measure every week . . .  It gave the impression of ‘They’re really worried, they’re really panicking.’ ” In fact, he says, India’s position was stronger than it appeared: “The important thing was to change the conversation away from the rupee, which was the underlying measure of panic.”

In person Rajan, 51, is tall, with a tennis- and squash-honed physique, and thick black hair, greying slightly at the temples. In the Indian media, in those early months at the bank, his good looks attracted as much admiration as a hawkish inflationary stance. “The guy’s put ‘sex’ back into the limp Sensex,” wrote one columnist, referring to India’s main stock index....MUCH MORE

Raghuram Rajan: "When the Interests of Monopolists and Authoritarians Coalesce"

What if they're authoritarian monopolists?
From the University of Chicago's Stigler Center ProMarket blog:

It is when the behemoth of monopoly enterprise consorts with the leviathan of the authoritarian state that both are likely to achieve permanence, writes Raghuram Rajan.

Power prefers permanence. Unregulated markets tend toward concentration as the successful try and entrench themselves by pulling up behind them the ladder of competition that they themselves climbed. Equally, the politically powerful are tempted to suppress any competitive threat to their future posed by democracy. James Madison was persuaded that democracy would work in the United States because in a large country with many different competing political interests, it would be hard for any specific interest to dominate. Yet interests can coalesce.

It is when the behemoth of monopoly enterprise consorts with the leviathan of the authoritarian state that both are likely to achieve permanence. History is strewn with examples of these collusive arrangements, some of which we have already encountered. Communism brought all business enterprise under government planning and control, with the state dominated by the Communist Party, the self-appointed representatives of the proletariat. Business and the state were united under the proletarians. Fascism was different only in the language of the dominant group and its stated aims, which was national supremacy instead of the communist paradise of the universal brotherhood of workers. In practice, fascism too involved permanent party dominance of the state, and state control of industry. Today, we have milder versions of these totalitarian regimes, with state-controlled capitalism in countries like China and Russia, and authoritarian capitalism in Turkey.

While the nomenclatures vary, at the heart of such regimes is a pact between the cartelized market and the state, leaving little room for economic or political competition, or the community. Such arrangements are examples of what political economists Douglass North, John Wallis, and Barry Weingast call limited-access societies.

In contrast, the liberal market democracies in developed countries are what they call open-access societies, combining free and open markets with vibrant democratic control over the government. Implicit in the work of a number of political scientists is the belief that open-access societies are the desirable pinnacle of social development, and they will not regress back to limited- access societies because of the strong institutions that protect them. They are probably right in believing that open- access societies are the best we can do for now, but they are mistaken in thinking that open-access societies cannot regress.

To prevent regression, it is critical that the balance be maintained. As we will see now, communities of citizens, expressing their interests through democracy, played an important role in the United States in preventing a corrupt compact between the state and the markets....

...MORE

I don't think we're out of the woods quite yet.

On another topic, the good Professor (and former RBI head) has written on the farm economy crisis of the 1920's that was the trial run for the Great Depression of a few years later. I've been meaning to link to one of his papers and with the currently unfolding rural econ disaster gaining momentum should probably get it on the blog sooner rather than later. Maybe this weekend.

Blueprint For America: "Fascist Italy's Experiment With Economic Corporatism"

From our March 2013 post "Copyright Infringement Now Seen As Terrorism":

As Political Capitalism becomes indistinguishable from Mussolini's Corporatism it's getting close to the time where the West has to decide just what it wants to be when it grows up.

"The rich and powerful too often bend the acts of government to their selfish purposes, many of our rich men have not been content with equal protection and equal benefits, but have besought us to make them richer by acts of Congress."
Andrew Jackson (1830) Cited by Charles Sellers, The Market Revolution: Jacksonian America 1815-1846. New York: Oxford University Press, 1991, p. 62

"Capitalism's biggest political enemies are not the firebrand trade unionists spewing vitriol against the system but the executives in pin-striped suits extolling the virtues of competitive markets with every breath while attempting to extinguish them with every action."
Raghuram Rajan and Luigi Zingales, Saving Capitalism from the Capitalists. New York: Crown Business, 2003, p. 276. 

And yes, I know the distinction between Fascism and vertical syndicalist corporatism based on guilds. I'm just using a shorthand, readily understandable usage....

From Bloomberg Echoes:

What if the economy were organized in corporations, one for each trade and industry, each including owners and workers? Would capitalism’s fierce competition and wasteful failures be replaced by a cooperatively managed system?

As world economies struggled to recover from the Great Depression in the summer of 1933, politicians looked for alternatives to free-market capitalism.

In capitalism, "force plays the chief part in the settlement of industrial disputes and victory belongs to the stronger party, quite irrespective of the merits of the cases," the New York Times wrote. On the other hand, communism "recognizes no rights but those of the workers."

Italian fascism strove to find a middle way between the claims of capital and labor. Prime Minister Benito Mussolini chose the summer of 1933 to form corporatism’s key institutions: state-managed national corporations that would centralize control of production.

How to do this was a genuine puzzle, though. Guiding the process was the National Corporations Council, which was divided into sections -- agriculture, commerce, industry, land transportation, navigation, banking, liberal and artistic professions. If the sections could agree on policy, the council could regulate prices, production and markets.

Yet this didn’t entail only top-down control. If in any sector the employer and employee associations wished to restrict production by closing a factory, they could apply to their corporation on the council.

Noting the Italian program's partial resemblance to U.S. efforts to manage industrial output, competition, wages and consumption, the Economist drew several worrisome conclusions from the experiment.

First, such regulation would eventually be extended across the economy. The Soviet Union, Germany and the U.S. all confronted the Italian dilemma: How much control would be sufficient to kick-start economic renewal?...MORE 

To repeat, the West isn't doing the Mussolini "Corporatist" thing but we are doing a fascistic big business/big government hybrid that has been emerging for the last 50 years under governments of both parties.
Meet the new boss, same as the old boss.

"Fascism should more appropriately be called Corporatism because it is a merger of state and corporate power. "
-B. Mussolini via BrainyQuote

See also:
"Blaming Capitalism for Corporatism"
"The Left Right Paradigm is Over: Its You vs. [Big] Corporations"
Newsweek: Goldman Supplied 9 Pages of Proposed Changes to Derivatives Legislation (GS)

This Big Business, Big Government, Big Union (what the Italian fascists* called 'corporatism') is antithetical to democracy.
On the other hand the totalitarian impulse has its attractions, if that's what you're into....

*...The Labour Charter (Promulgated by the Grand Council ofr Fascism on April 21, 1927)—(published in the Gazzetta Ufficiale, April 3, 1927) [sic] (p. 133)
The Corporate State and its Organization (p. 133)
The corporate State considers that private enterprise in the sphere of production is the most effective and usefu [sic] [typo-should be: useful] instrument in the interest of the nation. In view of the fact that private organisation of production is a function of national concern, the organiser of the enterprise is responsible to the State for the direction given to production.
State intervention in economic production arises only when private initiative is lacking or insufficient, or when the political interests of the State are involved. This intervention may take the form of control, assistance or direct management. (pp. 135-136)

Benito Mussolini, 1935, Fascism: Doctrine and Institutions, Rome: 'Ardita' Publishers.

And many more. If you care to, use the site search box keyword Mussolini.

And finally, from "Breaking: 'Chavez to join the blogosphere'":

That's what the world needs, more goofy-assed dictator bloggers.
Mugabe anyone?
Just think what Mussolini could have done with the medium.*...

...*He did have stuff to bitch about:

From Drexel University's Smart Set:

Scent of a Führer
Hitler wanted to control the world. But he couldn't even control his flatulence.

Guests at the Berghof, Hitler’s private chalet in the Bavarian Alps, must have endured some unpleasant odors in the otherwise healthful mountain air....

Mussolini and Hitler
The dictator who smelt it, dealt it.