Tag Archives: state

The Financial Crisis: “Too big, interconnected or Chinese to fail”?

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“Too big to fail” is a phrase used to describe an institution that has grown, or rather been allowed to grow, to such a scale and scope that its failure will mean a systemic collapse. The banks had morphed from the regular Jimmy Stewart banks to market-based Wall Street megabanks, a financial overgrowth that had spread its tentacles into the houses of regular persons, their businesses, their education, their healthcare – all across the world, from the US to UK and Europe.

Their failure was deemed so destabilizing that they had to be saved at all odds. Institutionally, this revealed a peculiar logic: the national interest was in saving purveyors of high finance that had caused the crash. As Tooze writes, Geithner’s “commitment was to upholding the stability of “the financial system,” because without that, the entire economy was bound to fail. That was his key article of faith. The interests of America and the financial system were aligned.”

“Too interconnected to fail” describes the interconnected nature of banks such that failure of one of them precipitates a panic of failure of the entire banking system such that the policymakers find it imperative to save them. For example, globalized finance was deeply interconnected with the American mortgage boom through the shadow banking system. When the Lehman was allowed to fail, the costs in wholesale funding markets rose steeply due to risk of contagion in the interconnected banking system.

As Tooze writes, “The Fed and the Treasury misjudged the scale of the fallout from the bankruptcy of Lehman on September 15. Never before, not even in the 1930s, had such a large and interconnected system come so close to total implosion. But once the scale of the risk became evident, the US authorities scrambled.”

“Too Chinese to fail” refers to the fact that a large portion of the debt issued GSEs, Fannie Mae and Freddie Mac, were held by Chinese investors and Paulson “didn’t want them to dump the securities on the market and precipitate a bigger crisis…”, one that would jeopardize the ‘system’. As Tooze writes in the end, “what worried observers was the possibility of a mass sell-off of dollar-denominated assets by China’s reserve managers.

As the storm clouds gathered, holding China in place was the first priority of Paulson’s Treasury. And Paulson was willing to pay a high political price for doing so…. Nationalizing them helped to prevent a simultaneous Atlantic and Chinese crisis with consequences too awful to contemplate.” However, America was a big market for Chinese goods and “balance of financial terror held”. There was no Chinese dollar sell-off and “the crisis that followed was not an American sovereign debt crisis driven by a Chinese sell-off but a crisis fully native to Western capitalism”.

While the three phrases represent three different features of globalized finance, there also are big overlaps between them. These are not stand-alone characteristics.

References:

  1. Tooze, A. (2018). Crashed: How a decade of financial crises changed the world. Penguin.
  2. Kapadia, A. (2019). Capitalism: Theories, Histories and Varieties, HS 449 (Class Slides). IIT Bombay, delivered Jan – Apr 2019

Institutions: Independent Decay or Decaying Independence?

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In the present decade, we have seen an unprecedented amount of writing on the decay of institutions worldwide – whether it is the media or the courts or the legislatures. – from New Delhi to the Washington, from Brussels to Westminster. Commentators and critics lament the hollowing out of institutions that had been presumed to be bedrocks of constitutional democracy especially after World War II. The inability of these structures to stem the tide of illiberal, personalized, cult-based governments has evinced some surprise, even introspection, in the promoters of liberal democracy.

Newspaper columns, essays, editorials and even some books are filled with historical analysis of institutions – their origins, their structures, their functions and their present decay. Most of this is quite convincing and seemingly accurate. But they only present a part of the story. A lot of commentary presumes institutions as stand-alone setups that function above the dynamic of everyday politics. For example, the Election Commission of India was assumed to be an ‘apolitical’ for long time. Now, the liberal intelligentsia in India find that adjective to be false.

Similarly, prominent commentators have time and time again cast the personal shortcomings of some institutional leaders as exceptions. For example, the former Chief Justice of India Deepak Mishra was seen as an aberration who would be repaired over by his successor, Justice Ranjan Gogoi. Many editorials who praised him while he was CJI in waiting now have much to complain about him. Moreover, suddenly the Supreme Court of India looks like a palace of intrigue.

On the other hand, the former RBI governor Raghuram Rajan was a darling of the liberals as much for his policy decisions as his comments on socio-political issues. RBI, it seemed during his tenure, could do no wrong. His successor Urjit Patel, who was initially seen as a timid bureaucrat, suddenly found himself being praised for standing upto the incumbent government. His successor Shaktikanta Das has had no such turn in fortune.

It would seem from these example and those from around the world that the persons leading the institutions are just as important as the artifice of the institutions themselves. That is certainly true. However, the political dynamics and ideological contests that surround institutions are just as important, and often ignored by commentators. Do institutions matter? Yes, they do. But people that lead them and their ideas matter just as much.

Take the example of the ECI. The lament of its ‘decay’ from a strong force of impartiality to its shortcomings in the present sometimes conveniently forgets the political struggle that created its strength – under the leadership of T. N. Sheshan, the support of Supreme Court and popular belief in ECI’s newly acquired powers to ensure free and fair elections. It did not stop there, there was a change in the lexicon of Indian electoral democracy – Model Code of Conduct, which had to be adhered to no matter what. What we have failed to appreciate while this became the norm is that it was not an event, but a dynamic process that brought us to a place where out expectations from ECI had changed – it was and continues to be a struggle to keep the elections free and fair. ECI does not exist outside the realm of everyday politics. Its officers are not objective robots but subjective bureaucrats. It is not an independent, autonomous body but an inter-dependent, constrained institution that depends as much on the courts and popular support as it does on the some of the very people it is supposed to keep in check – the powerful leaders in government.

Similarly, the Supreme Court of India is a case in point. It would appear from commentary that the SC has suddenly taken a turn towards decay. Presumably, it was a fine institution earlier. What this ignores is that the roots of today’s decay lie precisely in the fineness of the court in the preceding period. This was underlined by an unprecedented power-grab by the court – to appoint its own members, justified by the inability of Indian politicians to be sensible and popular resentment against them. While the ‘collegium’ temporarily solved some problems, it created a facade of independent judiciary without oversight by the people’s representatives. Today, the same independence that was applauded and institutionalized has created a situation where a sitting judge can be a judge in his own case without the slightest bit of irony. Not just that, it has created a situation where the political executive can exploit these gaps and shortcomings to its advantage while preaching the rhetoric of judicial independence when suitable.

The example of RBI is even more baffling. While a major headliner in the limited reaches of the financial press, the RBI Governor wasn’t a figure of media commentary until Raghuram Rajan became the Governor. And suddenly the person holding the post has become a thing of daily news. However, the previous ignorance and the recent stardom of the RBI fails to capture the institution of India’s central bank in its entirety. While 1991 liberalization is seen as a major step in opening India to global trade, its role in changing RBI’s functions is only mentioned in passing. Moreover, the changed financial market landscape in which RBI functions today means that its institutional dynamic with the government with the central governments is vastly different from what it was two or three decades ago. At the same time, the ideological bent of Indian economists and financial commentators has changed – the institutional expectation from RBI is therefore not the same. At the same time, the role of political executive has been made more prominent via the monetary policy committee (MPC) – away from the singular role of the Governor in monetary policy. But that is not all that RBI does. In a globalized and digitized financial landscape, there is a struggle between government and the RBI for jurisdiction over emerging arenas. This makes the RBI board and the RBI Act important structures – both of which remained outside common public discourse until recently.

These examples should suggest that institutions are neither autonomous nor independent. Neither should we want them to be. They are dependent – on their leaders, on other institutions, on people, on ideas, on precedents, on political dynamics and on many other things. To narrow them down to just their leaders or just their independence is both disingenuous and naive. They reflect a tenuous social contract that emerges after every small struggle for power and for ideas – one that happens at all times and that is shaped by a variety of potent forces that make the adjectives ‘autonomous’ and ‘independent’ seem childish and hollow.