Wipe Your Tears, Silly Liberal : Raghuram Rajan in Perspective
After it was announced that Raghuram Rajan would be returning to academia from his post as Governor of the Reserve Bank of India, much has been made of the fall of “merit” in public posts. One opinion piece speaks of the return of “The Chamcha Age” – borrowing Kanshi Ram’s term and leaving out half the regimes that followed similar practices, not to mention the main subject of Kanshi Ram’s time – the Congress. If the Congress party has not had a history of sycophancy then we must say that chamchagiri is a creation of 2014 – a very ignorant notion. The real difference, however, under BJP rule is that the “chamchas” placed have an agenda of saffronisation. This does not mean, however, that Raghuram Rajan is a middle of the road centrist, as some editorials by even Marxists seem to suggest.
These two tropes, one of merit, and the other of "lack of sycophancy” have been at play in the media discourse over the past few days. True, Rajan was not the current regime’s chamcha. However, I wonder when all the young leftists and liberals will stop shedding tears for Raghuram Rajan, to realize that a follower of Greenspanian ideology at the head of a federal reserve doesn't become a progressive simply because he accuses, not even the BJP, but mostly PM Modi of 'intolerance'.
It would be worthwhile to look at whether the Modi government and Rajan differed on economic policy. Rajan is clearly a social liberal – the BJP is a party of social conservatives. Nehruvian on the social issues, he’s not quite Nehruvian when it comes to economics. He has championed dropping Fixed Deposit interest rates – which are now 7.25% p.a. Senior citizens, the disabled, and the retired have Mr. Rajan to thank for reduced savings. He has consistently not had the rates raised. Despite claiming in several interviews that domestic household savings was his priority, the only tool he used was to attempt to curb inflation.
Indian economic policy since 1991 has involved even the NDA governments following the Manmohan Singh line. That Dr. Manmohan Singh himself could not bring all of his ideal neoconservative policies to fruition has more to do with the coalition nature of UPA I and II rather than differing ideologies. The current BJP regime, however, has no such constraints: what it opposed when it was in the opposition, it is now championing.
If Mr. Rajan was the great savior of our economy, then I see no reason why people shouldn’t be stepping over each other to praise Manmohan Singh and Montek Singh Ahluwalia. Economics-wise, on broad doctrine Subramanian Swamy, Manmohan Singh and Raghuram Rajan do not differ much – Swamy has lately been recommending the opposite of Rajan’s policy tweaks – more concerned with showing the RBI Governor the door rather than demand changes. If only Dr. Swamy was half as concerned about recommending resignations over the Vyapam scam or the squandering of India’s relationship with Nepal.
If Rajan was, say, the finance minister with adequate autonomy, it is difficult envisioning him implementing anything but IMF-like economic policy. If “intolerance" and "authoritarianism” are the magic redeeming words, then I can already see us welcoming Arun Shourie. More importantly, would you then embrace Praveen Togadia next if he called Modi authoritarian?
Rajan appears to be the standard Chicago economist, who spoke out fully against globalization and neoliberalism – only in 2007 on the eve of the Wall Street crash. Up to 2004, he was in favor of an unfettered free market:
"Capitalism, or more precisely, the free market system, is the most effective way to organise production and distribution that human beings have found … healthy and competitive financial markets are an extraordinarily effective tool in spreading opportunity and fighting poverty. …Without vibrant, innovative financial markets, economies would ossify and decline." (Saving Capitalism from the Capitalists)
Though his 2004 book Saving Capitalism from the Capitalists did have some warnings for the financial system, what's the point of speaking out against neoliberalism in 2005-7? Secondly, Rajan’s issue was one of degree – the level of cronyism involved.
Senior and far more respected economists like James Galbraith, Joseph Stiglitz, Robert Reich, Stephanie Kelton had questioned it back in 1999 itself – and were also battling the erosion of state welfare policy and attacks on social security. Bernie Sanders questioned Wall Street lackeys such as Gary Gensler, Larry Summers, Robert Rubin, Timothy Geithner and Alan Greenspan on repealing Glass-Steagall, IMF policy and loans, the Bankruptcy bill and deregulating swaps and derivatives throughout the 1990s multiple times on the floor of the House. So, the questions arises, where was Rajan then? It is preferable to look into the stances of leading economists towards Glass-Steagall’s repeal (a watershed moment and the most consequential financial deregulation since the Gilded Age) rather than on the eve of a crash that many insiders had known about, and which no one could have condoned. It is with a pinch of salt one must approach Rajan’s subsequent book Faultlines. As many know, Paul Krugman took a turn to the left after 2008 too! Today Krugman is posturing as a ‘progressive’ to shoot down any sort of New Deal-style proposal, calling them “unviable”.
An interesting insight into Rajan’s record has to do with a major debate occurring in the US currently, between Hillary Clinton and Bernie Sanders. In 1999, Bill Clinton had repealed the Glass-Steagall Act, a law enacted after the Great Depression that required banks to keep people’s savings and risky investment funds separate – to safeguard the economy and ordinary citizens from the reckless speculation and unsustainable greed of Wall Street. Sanders wants the law reinstated, while Clinton argues that Glass-Steagall would not have prevented something like the Wall Street crash of late 2007-08, and that the Dodd-Frank bill was enough to regulate the banks. That law was something not even a right-wing Republican president like Ronald Reagan had been willing to repeal.
Rajan and his coauthor in an essay published in 1994 titled ‘Is the Glass-Steagall Act Justified? A Study of the U.S. Experience with Universal Banking Before 1933’ assert that they would "evaluate the argument for the separation of commercial and investment banking, that conflicts of interest induce commercial banks to fool the public into investing in securities which turn out to be of low quality. A comparison of the performance of securities underwritten by commercial and investment banks prior to the Act shows no evidence of this. Instead, the public appears to have rationally accounted for the possibility of conflicts of interest."
The above extract clearly shows a concern with the investing public, and not the general public whose savings were imperiled by the repeal of Glass-Steagall and subsequently destroyed by the Wall Street crash. And guess what – the taxpayer had to bail those banks out. Guess more – the banks were not made to lower credit card interest rates to the public that bailed them out – and neither did Rajan suggest it. In short, Rajan’s concern has been that regular Wall Street investors as well as the small amount of citizens earning $250,000 a year and above were not earning nor investing as much as they could have had Glass-Steagall not been there, and advocated the repeal by attempting to demonstrate that investors were smart enough to ignore conflicts of interest they were often not privy to even without regulation – by accumulating data from the 1920s to basically argue that the market is self-regulating. What is more important, however, is to note is the matter that in case of a Wall Street crash due to risky investment, savings of people would have remained safe under Glass-Steagall. In addition, while defaults happened just as often among commercial affiliate banks and investment banks in the unstable 1920s as per Rajan and his coauthor, according to that very data: the average level of reduced returns vis-à-vis the original bond value when a default occurred was much lower (and hence paid off less to investors) under commercial affiliates.
Rajan also argues that "For smaller, lesser-known firms, the discount the market imposes on affiliate-underwritten issues suggests that the affiliates may suffer from a lack of credibility. Ceteris paribus, affiliates thus would be at a disadvantage vis-a-vis investment banks in competing for their business.” How about he look at the history of the Export-Import Bank in the USA, which in the name of lending to private business, regularly loans upto 65% of its funds to mammoth companies with lobbyists such as Boeing? That the game was always rigged against small businesses is not even an afterthought.
In the end, Rajan asserts that the Glass-Steagall did not fulfill its stated objective and hence the motivations behind it must have been purely political. The imperative of not letting citizen savings dwindle, or people starving in the case of a crash – was merely “political”, and apparently not half as economically healthy as the billionaire baron free market.
While Rajan may be partially correct on judicious investing for the small sample decade under the free market (the same decade where speculation led to the Depression) as compared to subsequent 61 years of regulation. But it is that regulation that allowed for the steady and sustained growth of American manufacturing as well as global market dominance post-World War II without mindless economic bubbles that would be bound to burst. Further, judicious and injudicious apart, Glass-Steagall provided a ceiling to the potential size of a bank, so that if the bank fails (whether due to risk, fraud or crisis) it would not bring down the economy with it. This is precisely what happened in 2007-08, the sheer size of the banks created a domino effect that led to a black hole of bankruptcy. Clearly, to Rajan in the 1990s that was a small price to pay for the wonders of the free market, which benefitted only the top 1/10th of 1%.
The man who “warned” against Wall Street speculation in 2005 was the same man who argued for the repeal of the single-most important law that prevented the most dangerous sort of speculation. The fact that credit-rating agencies were complicit in the 2007-08 foreclosure fraud makes the basis of his 1990s argument even weaker. An argument has been made by economists close to Wall Street that Glass-Steagall would not have prevented the Wall Street crash – due to role of non-conventional shadow banks, etc. It is easy to dispute. When Clinton repealed the law, his Treasury Secretary was Robert Rubin, former head of Goldman Sachs. When Glass-Steagall was in place, there was just Citibank – immediately after the repeal, Rubin left the Treasury department to join the newly merged Citigroup. Bank of America was a commercial bank that also toppled due to the lack of a savings-investment firewall. The tactic of inflating values of bad bonds was an old Goldman Sachs tactic from the dotcom crash era – something that the bank emerged from a dozen times richer despite the huge unemployment and bankruptcy it created. The repeal of Glass-Steagall hence enabled ALL the banks to do what Goldman Sachs had been doing for about a decade – only with an increased pool of money (savings in commercial banks) and multiple overlapping chains of lending – namely more of other people’s money to gamble.
The story of the 1990s era of financial deregulation ultimately showed us that regulation was the way, and not deregulation as Rajan the Chicago economist was arguing. Rajan being 'brave' in 2007 is like the shadow neo-con Hillary Clinton calling herself a progressive in 2016, incredibly pragmatic. You cannot credibly switch sides once the tide has turned the other way when you were an enabler of the previous system.
In addition, let us not forget that Rajan was as enthusiastic as the Modi government about disinvesting public sector banks and units. The only difference was that Rajan wanted justice against the bad loans given by PSU banks and used it as a pretext to suggest disinvestment, while the Modi government is keen on sweeping the scandal under the carpet and sell off the banks quickly.
After Rajan’s departure, two economic moves have come up: reducing RBI reserves and shifting some of them to public sector banks – this would effectively mean the Indian public would be bailing out the public sector banks for the lakhs of crores of bad loans (which may or may not be recovered, and would also morally undermine the resolve to recover) as well as the fact that there is a big chance the new money may be used for more loans that may end up as ‘bad debt’. Secondly, the government has opened up 9 major sectors to 100% FDI – including defence, civil aviation, pharmaceuticals and single-brand retail – at the behest of PM Modi and Finance Minister Jaitley. However, the Rajan-Jaitley divide on economics seems one of degree (both very neoliberal) as well as qualitative. One is a neoliberal who knows what he is doing, and the other is one who doesn’t. One wonders whether Rajan was blocking these changes, or whether these changes were the price the World Bank/IMF/US demanded if the Indian government was to remove their hand picked choice from the post of RBI Governor.
The only redeeming feature of Rajan seems to be that while he was RBI Governor he personally wasn’t seen as PM Modi’s “chamcha”, like the person who will replace him will be seen. The rest of his record, as one of Chicagoan extraordinaire and IMF chief economist, in the face of the American corporate establishment, is not as flattering.
(The author is a research scholar in Modern and Contemporary History at Centre For Historical Studies, Jawaharlal Nehru University).