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C3S Discussion: Economic Tangents-A Debate on Regulations

C3S Paper No. 0024/2016

The following is a dialogue conducted on January 23 2016 among C3S members on the subject of the debate on economic regulations, vis-à-vis China.

Mr.Sivaraman IAS (Retd.),

Former Revenue Secretary, Ministry of Finance Government of India.


There is no way to compensate losses in the stock market. Nobody will and nobody should as it is always a casino and nobody will compensate you if you lose on the card table. Brokers are intermediaries only most times. The broker does not lose if he buys shares that you order.

Commodity stabilisation funds are different and they are basically intended to protect the producers. Instead in India we have prices fixed for procurement particularly for grains. Now contagion it is a new terminology for the spread of financial crisis from one country to another on account of the interconnections in the financial markets which are well known.

The price effect of stock markets or commodity markets of one country does affect another country producing similar commodities and this is not great economics. So the word contagion and one can produce many models that may have no use for predictive purposes as rightly stated by K. Subramanian. No model in economics has been useful in that sense.  IMF failed to predict a crisis but it will be uncharitable to say that they did not point out the undesirables in the economy. The Thailand Govt had been cautioned on the unsustatinability of short term debt but not to the extent of predicting a crisis. IMF did fail in not warning adequately.

In solving the crisis also some of us differed in the board but then consensual decision making took the better of informed decision making. But I did make them reduce the harshness of measures to curb expenditure. There is little to say on volatility, as stock markets shiver when some leader catches severe cold. But currency volatility could be genuine and also on account of attacks on the currency as was done by Soros to the UK pound.

T.V. Krishnamurthy

Management Professional, Chennai.


There exist very advanced mathematical models and analysis on individual companies, sectors, currencies and economies and advanced forecasting techniques employed by investment banks and wealth funds. Despite this, the speculative nature of the markets arising out of conflicting interests of different cartels, euphemistically called Bears and Bulls make them most vulnerable, unless one has the wear withal and tenacity to remain invested for years.

Compensation hence is just out of question. In fact it can be said that compensation in the form of subsidized interest rates or waiver of portions of borrowings should become taboo as we progress in time. One makes this statement cautiously.

The is the biggest problem our nation is facing today is thus: These culprits have, as the RBI Governor said rightly in Davos, made borrowings expensive for every one besides subverting the whole system, even while maintaining their personal wealth and life styles. Like in the U.S, willful defaulters should be sent to prison. But that is a far cry in this nation.

As for the financial crisis that struck the U.S, let us be honest. Everyone including the legendary Allan Greenspan could not foresee it. That is the beauty of greed. It strikes with vengeance in most unexpected ways. Mankind has never learnt this despite great epics in Greek and Latin and in our own Sanskrit and Bali languages highlighting  this sordid side of human tragedy from time immemorial.

K. Subramanian had once referred to algorithms used by traders to determine trade positions in the computer, broken to nano seconds and preempt that by contras. This is a paradigm shift in the ways the culprits engage to subvert existing systems. So on line trade is no more guaranteed for integrity. The FBI has gone in to it with great detail, enlisting support from universities, doctorates and software experts and they are expected to arraign the first set of culprits very soon.

With regard to the contagion effect, the ways the IMF has worked in the past to bail out countries , with intent to save the lending banks: To be fair to IMF , in the Korean crisis , they helped the Korean banks from going bust in unprecedented ways.

But let us face it, there is no way an IMF or World Bank will be dumped. Everyone aspires to be part of this beautiful club. All are witness to what extraordinary length the Chinese walked to be part of SDR. Similarly, let us not imagine a world without stock markets. It is the most beautiful face of Capitalism, which sometimes becomes ugly. Draupadi in the great epic Mahabharata was the most beautiful face of the insatiable gambling of the great Dharmaputra. A war fought precisely for Capital acquisition and assets of great Hastinapura.

B.S. Raghavan IAS (Retd),

Former Policy Advisor to UN (FAO), Chief Secretary, State Governments of West Bengal and Tripura, Secretary to the Ministry of Food and Agriculture, Government of India.


Kindly read the following extract from Franklin R. Edwards’ article, as it contains some clues as to how volatility can be made to right itself:

“Would changing the institutional structure of our market-making systems in these markets result in less volatility? Should, for example, a specialist on the New York Stock Exchange have responsibility for maintaining an orderly market (or stabilizing prices) in the face of huge institutional buying or selling? Is this realistic? Or, can an auction market where “locals” have little capital be expected to make a market for large institutions? Is there a problem with having one kind of market-making system for the cash market (a specialist system) and another kind for the futures markets (an open-outcry auction market)? …..It seems apparent that we need new trading systems capable of providing liquidity for the institutional trading of “baskets” of stock.

In addition, the internationalization of equity and futures markets is still in its infancy, but it will not be long before the most important U.S. instruments are traded on foreign markets and vice versa. Capital will move freely to the most liquid, least costly, and safest markets, wherever they are.

Internationalization is likely to increase the institutionalization of markets and perhaps, the role of the largest institutions as well. In this world can each country have different regulations and expect them to be effective? One is doubtful.

Measures to curb stock market volatility must obviously be considered in the context of internationally competitive global capital markets. A global movement toward the development of electronic, automated, auction markets is under way. The first totally electronic automated futures and options market just opened in Switzerland; and Toronto, London, and Tokyo are all well along in their plans to have 24-hour electronic “screen-trading.” Last September, the Chicago Mercantile Exchange and Reuters entered into an agreement to create a global electronic automated-trading system (known as “GLOBEX”, Global Electronic Exchange). Recently, Telerate, another giant in financial-information services, announced an agreement with Bermuda-based INTEX Holdings to market that exchange’s automated-trading system.

While it is too early to be certain, it seems inevitable that we will have fully automated screen-trading at some point in the future. Adherents of these systems claim that they will result in less price volatility than we have now, by providing better information about order flows and disseminating this information to a wider group of investors and traders. Market liquidity, it is argued, will increase, resulting in greater price stability.

It is one’s personal view that focusing on recent stock market volatility is not a constructive approach to the future. Our goal should be to provide an institutional and regulatory framework that facilitates the development of efficient and liquid international capital markets: in equity, futures, and options markets, as well as other financial markets. We must adopt a global perspective, especially with respect to our regulatory framework. International competition will be a driving force in the future, whether or not we like it. The key issue for the future is to determine what kinds of global institutional arrangements can best facilitate the development of liquid, efficient, and competitive international securities markets.”

The purport of what he says in short, is that attempting to curb stock market volatility in isolation with ad hoc regulations is both “myopic and dangerous” (to quote his words).

T.V. Krishnamurthy


It is found that the author (Franklin R. Edwards ) had co-authored a number of articles with other writers on financial markets and related matters in the mid 1990s when the stock markets in the U.S did not have the benefit of present technology and the U.S stocks were traded in NYSE. It was like the old Fiat car of the early 1980s compared to the present day automobiles which are 90% tech driven.

Nevertheless the good news is that stock markets and trades are fully technology driven and that by itself is giving rise to new sophisticated tools from criminal traders to undermine the system. After all technology is not proprietary in the realm of human intellect and innovation.

As for the US companies being traded in other stock markets, yes it did happen. Some were simultaneously traded in the NYSE and Tokyo stock exchanges. But it led to unforeseen consequences on both stock and currency arbitrage, besides curtailing income to the main stock exchanges from trade deals.

The era in which Franklin wrote his mind was without Internet or telecom or technology of the kind which have changed the way we lived for ever. More changes are bound to happen and are bound to impact our lives including our thinking and beliefs on several dogmas.

It should be mentioned before one concludes, about academic papers. They are great in their language and ideology and in theory but many times lack the test of reality and applicability in concerned domains.


Former Joint Secretary (Retd.) Ministry of Finance, Government of India.


On its handling of 1997 crisis, it is accepted that IMF did not cover itself with credit. On evidence of this was that developing countries began to move away from the Fund. The Fund faced a predicament that it did not have enough income to meet its annual budget and administrative expenses. It had to cut down staff whole sale and also sell a chunk of gold to bail itself out of the crisis!

One is unable to agree with the view that one should not criticize international institutions. If some qualifications are required to do it, what are those and who lays them down? All that can be said is that criticism should be based on valid facts be analytical and balanced. If there are infirmities in the analysis or arguments, they have to be identified in the interest of maintaining and enriching quality of debate. This is not helped much when references are made to internal discussions in the Ministry or the Fund which other members of the group either don’t know or have no way of verifying.

One fully agrees that theories (economic or political) alone cannot solve all our problems. Theories have to be tempered by on the ground experience. At the same time, experience can greatly improve if informed by sound theories.  It is difficult to draw a line on the sands.

Yes, IMF had seen the short term debt issues in its reports on developing countries. But, unfortunately, sitting close to U.S Treasury in Washington, in its Art.IV Report on the US for 2008, it did not warn the US Treasury about the sub–prime crisis which led within weeks to the crash of their economy.

As for the work of Phds in IMF/Bank, one can only refer to the report of Prof. Angus Deaton which condemned their work as substandard. The report accused the IMF/Bank of driving the agenda of researchers and over sold globalization. Perhaps, persons sitting outside these agencies read more about them than those inside. Incidentally, Prof. Deaton got the Nobel Prize in Economics this year.

T.V. Krishnamurthy


In the link above: At first sight, John Jullen of PWC hits the bull’s eye in first two paragraphs. He echoes the analysis usually put out by investment banks across the world about the stock market, its depth, liquidity and so on.

He is partly right in his third paragraph too when he talks about depletion of Chinese reserves in U.S dollars being deployed to stem currency fall. But from where is it coming? He says from reserves. That is a convenient argument by the author without clarity. One questions whether it will be from long term investments held in dollar designated securities or current cash flow surpluses. Apparently the Chinese have not touched their long term reserves held in U.S dollars. But like many Western observers the author overlooks the fact the China has not stopped generating cash from exports to this day, and that the economic activity relating to exports is just not dead as yet. Thus it will be for many more years to come. And hence their argument about recourse to long term reserves to plug currency fall.

Far from it, as it is seen from the latest statistics that Chinese exports touched, as per IMF estimates, $2 trillion plus in 2015. The GDP growth no doubt is declining .And IMF estimates that at 6.2 or 6.3 % for 2015. Currency managers in charge of the country’s foreign reserves must be using the current cash flows to support the currency instead of diverting it to investments in projects, since domestic investments in projects is by and large nil now.

The fourth paragraph deals with lower than expected domestic consumption. This is a serious matter to push the economy, but is not happening as planned. To understand this, one will need to understand the Chinese psyche and culture which detest spending and encourage thrift, historically speaking .It is validated by investment banks with huge experience operating out of Hong Kong.

The other two paragraphs deal with structural adjustments that are needed. The author knows like anyone else tracking economics of nations, that the current turmoil and fallout are caused by attempts at rebalancing the economy. So the West will say rebalance and will simultaneously cry “You are falling like London Bridge!” One opines it as imaginary and childish.

The reaction of global stock markets is just make believe and farce and is contagion in nature without real logic. This phase of turmoil in the Chinese economy can be expected to continue for the medium term, for at least another 3 years, mainly on account of rebalancing efforts. During that time it is not as if the Chinese exports will collapse. Unless the global demand dramatically crashes , due to intercontinental wars or other causes.

As far Vietnam and Thailand, it is illogical to compare them with Chinese merchandise exports.On the latest IMF report on the basket of Chinese exports: Leading the pack is electronics ,almost about $700 million plus. Vietnam, Thailand or even India have hardly benefitted from this product category alone.

Let the world wait before playing Johann Strauss’ requiem on China. But the real worry is how long will the requiem wait. Not before the Chinese banks start collapsing , despite whatever reserves. That should be the potential worry, at least in the long term; unless the banks are mercilessly cleaned up.

And what will the West do? Ask China to clean up their banking upside down when structural adjustments assume hectic pace. This is the real test in one’s opinion.

B.S. Raghavan IAS (Retd)


There were two financial earthquakes that rocked the financial edifices and almost brought them down; the first was in 1997-98 which goes by the name of South Asian melt-down, and the second was the world financial crisis of 2004-07, triggered off by what was dubbed as the sub-prime crisis. On both occasions, without doubt, economists including Nobel Laureates, and institutions such as the World Bank and the IMF were casting about like babes in the wood for ways to deal with them. As Mr. K. Subramaniam has been saying, there are studies galore by in-house inquiry mechanisms of the financial institutions and think tanks, experts, journalists and others as to the reasons why the crises were not anticipated and why all the expertise and talents of the reputed economists and intellectually and professionally well-endowed institutions failed to measure up. Two notable contributions are ‘Globalisation and its discontents’ by Jospeh Stiglitz, Nobel Laureate, who analysed the Asian, Mexican and Argentina crises thread- bare, and the report of Ruben Lamdany and Nancy Wagner on the performance of the IMF during the 2004-07 crisis.

This is all old hat. The cardinal question is whether the world is better equipped now than before in preventing a similar crises and whether the world can be sure that the 2004-07 crisis will be the last. Alas, there can be no such guarantee, simply because the ambiguities and uncertainties of economics, the equations and models it spawns, and the conclusions it comes to are at best akin to groping in the dark in view of the complexities of human behavior and imperfections of markets. As Angus Deaton says: “The majority of today’s economists seek refuge in …. complicated modeling and theory to solve the growing conundrum of mismatch between theory and reality in economics.”  He has been constantly striving to put the economists and financial institutions wise to the fact that there exists no magic wand that will hit upon the exactly right policies to produce the exactly right effects. This, according to Deaton, is not due to want of theories and hypotheses, but due to the diversity or heterogeneity which prevails in human society.

However, what is clear is that any uniform, one-size-fits-all approach is a strict no-no. Similarly, any fixed  and immutable set of mantra-like prescriptions such as the Washington Consensus — Devalue; privatize; let prices find their level; abolish subsidies; break the tariff walls; open the doors; throw away the keys; remove all controls; make capital accounts freely convertible — will be the height of foolishness.

It is because India kept its head in all these respects that it was spared the worst effects of the crises on both occasions. We must acknowledge the caliber and capacity for independent thinking and action of our finance ministers of whatever political hue, and finance professionals, percipient public servants and the Governors of the Reserve Bank who steered India at a steady pace through all these turmoils.

T.V. Krishnamurthy


The first question: Have we learnt from past lessons?

The answer is certainly yes. Whether in medicine or physics or in economics ,empirical demonstration of past failures  set the course corrections. That is why we see so much studies, research in fundamentals and applications .One is the head another is the heart, in a metaphoric sense.

Who are doing the research?

Mainly Universities in the West, apart from other institutions.

Is the research biased?

Yes, sometimes, depending on the philosophy and outlook of the guide or the researcher himself.

So is it a travesty and agenda driven?

Mostly not.

So the bottom line is, the learning curve never stops. Let us understand this clearly, economics is not a static science. It is much like other sciences.

Is there an early warning system to predict crisis?

Yes there are plenty .Specifics, like inflation trends in future, monetary expansion in future, interest rate movements in future and so on and so forth.

Investment banks use the word ‘Foresee’,rather than prediction, because foreseeing involves forecasting techniques, mostly statistical and mathematical models.  That is why the world is what it is today, better than worse.

Who are the radars of early warning systems?

The FED in US or the RBI in India or a CRISIL in India .And so on so forth in other developed countries. And let it be frankly stated, this list includes the top notch investment banks and outstanding individual scholars in economics mainly in the West.

Are we better equipped to tackle it than ever?

Yes, we are better equipped. This is because we do not try to re invent fundamentals.

Now the last question: Do we have the tools to manage an unpredictable crisis?

Yes we have the tool kit. But like in medicine if it is asked whether we have a vaccine ready for an unknown disease, how can one answer. Real solutions are products of real problems.

As for economics, in the application domain it is as political as the country is. For example, the U.S might allow brinkmanship in their securities markets, much against the fundamentals of economics. This is because more than 95 per cent of wealth is controlled by 6 per cent of the population, mainly with dominating presence in securities markets. They include even technology czars whose wealth is related to the market value of their share holdings in their different companies.

Let us be honest. Let us not dump economics as predictive science, it is an empirical science. It is based on assumptions, which are not imaginations, but much closer to reality. That is why one will find invariably in all economic theories lots of financial models that factor reality in numbers. We mostly read theories because we do not have the patience or tools to appreciate the empirical models.

It is said with one’s own experience: Every Global Investment bank has an economist whose job is just not to philosophize, but to come out with possible hard outcomes in facts and figures. Institutions like IMF or World Bank or ADB are powered with huge resources in economics.

Usually the absence or presence of bias is discovered post event, in the process of analyzing good or bad outcomes. Additionally, big names are there in this business: Nobel laureates, former heads of Investment banks and Consulting firms, former Fed Chiefs and sometimes all and sundry.

(All views expressed in this dialogue are the members’ own.)

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