Thursday, July 15, 2010

Developments since my last post

It’s been almost a week since my last post and for that i apologize to regular visitors. There have been some interesting developments since. Some good, others not so…
Firmly in the good category is the new symbol for the Indian Rupee.

Designed by D. Udaya Kumar, an alumnus of and assistant professor at IIT-Guwahati, the symbol is one all of us can be proud of. What good does it do? Well, its a “coming of age” event, one that will go a long way when we get to the point of having Capital Account Convertibility. Its my belief that the INR will be a reserve currency at some point, something that will change only if the world gives up the idea of having reserve currencies. The latter is a possibility, but since survival for the US depends on a continuation of the reserve currency system, a distant one.

In the irrelevant category, the Arms Act 1959 has been amended. There is a growing group of voters who believe that laws made by parliament should expire after 25 years. This will help each generation establish rules that suit the times. Currently, laws become irrelevant over a period of time but they can, are are, used by a corrupt police force to harass honest upright citizen. How many of us know that its necessary to obtain a license for each radio set we own? And yes, that includes the one in your car. 
The amendment to the Arms Act 1959 makes it more difficult for a person without antecedents to get a gun… legally. It took them all of 50 years to think of it… Awesome! 

In other developments, the Finance Ministry has succeeded in getting both the RBI & SEBI to knots their knickers. The June 18th ordinance issued by the government to settle the ULIP dispute supposedly includes a mechanism to govern warring regulators. The RBI has a problem with this as it would infringe on its independence, which if this article is to be believed, is not up to the mark anyway. From where I stand, in no country is the central bank more independent. The governor supposedly reports to the Ministry of Finance, but can choose to defy it if the fancy grips him. Remember YV Reddy and his famous wars with P Chidambaram? Even in the US, the Chairman of the Board of Governors of the Federal Reserve has to testify, under oath, to a bi-partisan committee of the Senate. The RBI’s position is already like that of an extra-constitutional body which isn’t accountable to the people at all. But that isn’t enough.

If the Ministry steps in to settle disputes that rage between these regulators, its a threat to these regulators. To those that have sacrificed market development and homogenization because they couldn’t see eye to eye. The ULIP controversy isn’t the only one. Debt  Market development has been on the back-burner forever because the RBI and SEBI cannot agree on who regulates what. SEBI believes that the Negotiated Dealing System, an order matching system for Government Securities, is an exchange and should come under its purview. The RBI believes it should regulate it since its a part of the Government Securities market. As a result, banks are allowed direct access to the market while mutual funds are excluded, or allowed indirect access. Petty differences like this stand on the way of even the government securities market becoming a homogeneous whole.  And we haven’t even scratched the surface with this.

In the face of this idiocy, someone has to step in. Since RBI, SEBI, IRDA & PFRDA all come under the Ministry of Finance, its only natural that it would. When children squabble, and this squabbling starts to vitiate the home environment, parents need to step in. Our regulators can either behave like adults or be treated like children. There is no other way out.

Internationally, economic policy mavens are still discussing issues discussed by Keynes & Hayek in 1932. And there is as much venom between the two sides as was then. All it tells me is that the profession hasn’t grown over the last 80 years or so. There are no new ideas, no new thoughts. Its the same old wine in the same old bottle. The funny part is, even though Keynesians believe they won the last round and central banks, which are Keynesian creations, have been conducting monetary policy along Keynesian lines over this time, reality points elsewhere. Central Banks have systematically sabotaged Keynes' proposed system to a point when it just stopped functioning (more of this in my next post). This isn’t a Keynesian failure. Its betrayal.

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