America’s divided economists


America’s divided economists

by

Subroto Roy

First published in

Business Standard 26 October 2008

Future doctoral theses about the Great Tremor of 2008 will ask how it was that the Fed chief, who was an academic economist, came to back so wholeheartedly the proposals of the investment banker heading the US Treasury. If Herbert Hoover and FDR in the 1930s started something called fiscal policy for the first time, George W Bush’s lameduck year has marked the total subjugation of monetary policy.

In his 1945 classic, History of Banking Theory, the University of Chicago’s Lloyd Mints said: “No reorganisation of the Federal Reserve System, while preserving its independence from the Treasury, can offer a satisfactory agency for the implementation of monetary policy. The Reserve banks and their branches should be made agencies of the Treasury and all monetary powers delegated by Congress should be given to the Secretary of the Treasury…. It is not at all certain that Treasury control of the stock of money would always be reasonable… but Treasury influence cannot be excluded by the creation of a speciously independent monetary agency that cannot have adequate powers for the performance of its task…” Years later, Milton Friedman himself took a similar position suggesting legislation “to end the independence of the Fed by converting it into a bureau of the Treasury Department…”(see, for example, Essence of Friedman, p 416).

Ben Bernanke’s Fed has now ended any pretence of monetary policy’s independence from the whims and exigencies of executive power. Yet Dr Bernanke’s fellow academic economists have been unanimous in advising caution, patience and more information and reflection upon the facts. The famous letter of 122 economists to the US Congress was a rare statement of sense and practical wisdom. It agreed the situation was difficult and needed bold action. But it said the Paulson-Bernanke plan was an unfair “subsidy to investors at taxpayers’ expense. Investors who took risks to earn profits must also bear the losses. Not every business failure carries systemic risk. The government can ensure a well-functioning financial industry, able to make new loans to creditworthy borrowers, without bailing out particular investors and institutions whose choices proved unwise.”

Besides, the plan was unclear and too far-reaching. “Neither the mission of the new agency nor its oversight are clear. If taxpayers are to buy illiquid and opaque assets from troubled sellers, the terms, occasions, and methods of such purchases must be crystal clear ahead of time and carefully monitored afterwards…. If the plan is enacted, its effects will be with us for a generation. For all their recent troubles, America’s dynamic and innovative private capital markets have brought the nation unparalleled prosperity. Fundamentally weakening those markets in order to calm short-run disruptions is desperately short-sighted.”

The House’s initial bipartisan “backbench revolt” against “The Emergency Economic Stabilisation Act of 2008” (ESSA) followed this academic argument and rejected the Bernanke Fed’s advice. Is there an “emergency”, and if so what is its precise nature? Is this “economic stabilisation”, and if so, how is it going to work? The onus has been on Dr Bernanke and his staff to argue both, not merely to assert them. Even if the House “held its nose” and passed the measure for now, the American electorate is angry and it is anybody’s guess how a new President and Congress will alter all this in a few months.

Several academic economists have argued for specific price-stabilisation of the housing market being the keystone of any large, expensive and risky government intervention. (John McCain has also placed this in the political discussion now.) Roughly speaking, the housing supply-curve has shifted so far to the right that collapsed housing prices need to be dragged back upward by force. Columbia Business School economists Glenn Hubbard and Chris Mayer, both former Bush Administration officials, have proposed allowing “all residential mortgages on primary residences to be refinanced into 30-year fixed-rate mortgages at 5.25 per cent…. close to where mortgage rates would be today with normally functioning mortgage markets….Lower interest rates will mean higher overall house prices…” Yale’s Jonathan Koppell and William Goetzmann have argued very similarly the Treasury “could offer to refinance all mortgages issued in the past five years with a fixed-rate, 30-year mortgage at 6 per cent. No credit scores, no questions asked; just pay off the principal of the existing mortgage with a government check. If monthly payments are still too high, homeowners could reduce their indebtedness in exchange for a share of the future price appreciation of the house. That is, the government would take an ownership interest in the house just as it would take an ownership interest in the financial institutions that would be bailed out under the Treasury’s plan.”

Beyond the short run, the US may play the demographic card by inviting in a few million new immigrants (if nativist feelings hostile to the outsider or newcomer can be controlled, especially in employment). Bad mortgages and foreclosures would vanish as people from around the world who long to live in America buy up all those empty houses and apartments, even in the most desolate or dismal locations. If the US’s housing supply curve has moved so far to the right that the equilibrium price has gone to near zero, the surest way to raise the equilibrium price would be by causing a new wave of immigration leading to a new demand curve arising at a higher level.

Such proposals seek to address the problem at its source. They might have been expected from the Fed’s economists. Instead, ESSA speaks of massive government purchase and control of bad assets “downriver”, without any attempt to face the problem at its source. This makes it merely wishful to think such assets can be sold for a profit at a later date so taxpayers will eventually gain. It is as likely as not the bad assets remain bad assets.

Indeed the University of Chicago’s Casey Mulligan has argued there is a financial crisis involving the banking sector but not an economic one: “We’re not entering a second Great Depression.” The marginal product of capital remains high and increasing “far above the historical average. The third-quarter earnings reports from some companies already suggest that America’s non-financial companies are still making plenty of money…. So, if you are not employed by the financial industry (94 per cent of you are not), don’t worry. The current unemployment rate of 6.1 per cent is not alarming, and we should reconsider whether it is worth it to spend $700 billion to bring it down to 5.9 per cent.”

Dr Bernanke has been a close student of A Monetary History of the United States in which Milton Friedman and Anna J Schwartz argued that the Fed inadvertently worsened the Great Contraction of 1929-1933 by not responding to Congress. Let not future historians find that the Fed, at the behest of the Treasury Secretary, worsened the Great Tremor of 2008 by bamboozling Congress into hasty action.

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Excuse me, but ISRO’s self-congratulation is absurdly premature!

Author’s Note, December 28 2008:  This post of mine has been superceded ex post facto by the following text:

Chandrayaan adds a little good cheer! Well done, ISRO!

The news that Chandrayaan-I has sent back scientific data as intended is excellent.  ISRO has my warm congratulations at last! Iron is apparently very abundant in lunar rock so discovering it is not revolutionary but even so, the fact India has a successful lunar orbiter which is sending back signals and scientific data is simply delightful. It brings good cheer in a season marred by the Mumbai massacres and the clouds of war.

On November 9 2008, I had incidentally diagnosed the basis of my own earlier pessimism about Chandrayaan as follows, reproduced here again:
“I have been very pessimistic about Chandrayaan-I’s prospects and I am delighted to hear ISRO say it has been successful in placing the spacecraft in lunar orbit.   I have had to wonder where, precisely, my pessimism was mistaken.  The answer is that I had completely left out in my thinking the vast technological progress that has taken place in telecommunications  and telemetry in the last 40 years.  I had surveyed the history of similar attempts by the USSR and USA in the 1960s and that was a history littered by failures of  many sorts.    Let aside rocket-launch failures, the other main sources of failure were in trajectories and in communications.  I have been deeply concerned that India was simply going to fall in the same pitfalls along the way.   But  what I neglected was that our attempt was being made forty years  later and the world has seen enormous technological progress during that time, especially in telecom.  The Soviet and American missions took place in the early 1960s when, for example, colour television hardly existed.  Today, in 2008, ISRO seems to have managed control and guidance systems that have been up to the (very complex) task of placing the spacecraft in lunar orbit.  Hats off to ISRO if it turns out they have succeeded, and cheers if they actually manage to get the scientific data they have wished to receive.

The same mistake that I made here in a  field not my own is what I have myself pointed out being made  in a different context regarding the current world financial crisis. Viz., I said in my September 18 2008 Business Standard article “October 1929? Not!” that the world since the 1929 stock market crash had witnessed so much technological progress that the current crisis could not be compared to the one back then.”

 

Hats off to all at ISRO!

Subroto Roy

The original text was as follows:

 

Chandrayaan-1 had not completed a single “parking orbit” around Earth (in fact had just reached the atmosphere above Indonesia) before a dozen scientific bureaucrats at ISRO were pouring forth self-congratulations in front of TV cameras — and Indian television news media, including the privately-owned NDTV, were proclaiming “Moon Mission Successful”!

Hello, hello, ISRO and Indian journalists: all of you need a serious reality-check!

Of course India has put satellites into terrestrial space which has been wonderful for telecommunications etc.

But that is not what the present mission is purportedly about.

Please wait until we have managed to get Chandrayan

to escape Earth’s gravity,

reach the Moon’s vicinity,

not crash into the Moon,

or miss it altogether,

(I leave out getting into lunar orbit itself, let aside transmit any data from lunar orbit)

before all the self-congratulations.

No one should want to contribute, after all, to what might still be seen as a large and expensive Government of India publicity/propaganda stunt.   Remember that credibility is all important to the good scientist.  (Just because New Delhi may be delusional does not mean all-India needs to be so as well.)

Subroto Roy, Kolkata

My Subjective Probabilities on India’s Moon Mission

[Author’s Note December 29 2008: Please see my ‘Chandrayaan adds a little good cheer! Well done ISRO!”  — as a good Bayesian would, I  have had to update my subjective probabilities ex post and gladly so!]

The subjective probability I would place on the odds

of our Moon rocket leaving earth orbit successfully is 20:1 against,
of it reaching the moon’s vicinity about 50:1 against,
of it entering lunar orbit successfully about 100:1 against,
and of it transmitting half the data it is intended to about 200:1 against.

Going to the Moon requires a spacecraft reach an “escape” velocity of some 40,000 km per hour. After some 324,000 km, the craft escapes Earth’s gravity and comes to a “standstill” or “neutral” point, a fictional station on the Earth-Moon axis, still some 32,000 km (about 19 Moon radii) away from the Moon. The Moon’s gravity then gradually takes over, drawing the spacecraft faster and faster towards the Moon, to either land on its surface or go into orbit around it, though to avoid a fatal impact crashing into the Moon, the spacecraft may require retrorockets to slow itself down.

All Indians will be delighted if the Moon-launch  tomorrow is successful. At the same time, all Indians, especially millions of wide-eyed children, will be more than disappointed if ISRO’s plans fail through avoidable error.  It was of the highest national importance to try to ensure beforehand that the Indian mission succeeded if it is going to be tried at all.  That has not taken place.

The numerous sources of possible failure include

(A) launch-failure causing the spacecraft to never reach, let aside exit from, terrestrial space onto a path to the Moon, all through belts of intense heat and radiation;

(B) trajectory-failure causing the spacecraft to move wrongly through cislunar and translunar space, miss the Moon and go into solar orbit like everything else in the solar system;

(C) failing to enter lunar orbit, crashing into the Moon instead;

(D) failing to transmit intended data from lunar orbit.

Only if all these and more are avoided, can ISRO’s Moon mission be considered successful.

Here are some questions the PM and his Government needed to answer before the liftoff but failed to do so:

1. Is there an indigenous rocket powerful enough for a spacecraft to reach 40,000 kmph, the escape-velocity from Earth’s gravity?  If a foreign rocket is being used in whole or in part, what are the terms of collaboration?

2. India’s will be mankind’s 85th mission to the Moon on record and there  was a vast amount of publicly available knowledge already gained in other countries; did ISRO do a survey of all previous Moon missions by other countries, especially the USSR and USA since 1957 to investigate and analyse the numerous errors and failures they made?  If not, why did it not do so ?  If we did absorb all existing lessons available, and there are people at ISRO wholly conversant with what went wrong with every case of launch-failure, trajectory-failure, instrumentation-failure causing spacecraft to fail to reach or leave Earth orbit, or miss the Moon, or fail to communicate etc, what identifiable improvements did this learning cause in our Mission-planning?  The cause of nationalism is not served if we repeat the known mistakes of others;  why were we made to feel so confident we were not headed to be making the same mistakes as had been already made by others?

3. It is a blow to national prestige and self-confidence if there is failure at any stage of this difficult enterprise and it may have been better to do the job in discrete and successful stages or not do it at all than fail at it most spectacularly; was any thought given to breaking down the present aim into several stages – e.g., improving rocketry to aim at a “parking orbit” around Earth permitting ground control to better calculate trajectories to the Moon, then to flyby the Moon, then to attempt to go into lunar orbit? Why are scientific payloads being planned to be carried even before we have gained any experience in successful rocketry through terrestrial, cislunar, translunar and lunar space?

4. Our country has not been a major manufacturer of engines, aircraft bodies, computers or communications and imaging equipment, all vital to this enterprise; did we import the components to be used and if so, which ones?

5. Science is universal, and belongs to all mankind; all mundane international disputes appear petty when seen from selenocentric space which is the one good reason to want to try to reach it; why not release into the public domain for scrutiny by everyone in the country and the world the equations involved in the rocketry, and even whether Newtonian or Einsteinian frames of reference are being used?

Subroto Roy
Kolkata, October 21 2008

How the Liabilities/Assets Ratio of Indian Banks Changed from 84% in 1970 to 108% in 1998

This graph was created by me in 2002 from Reserve Bank of India data published until 1998. Although I had been “full professor” at the time for six years at something known as an “Institution of National Importance” in India, I had received not a rupee by way of any research-assistance, and had to be assisted in the creation of this graph by two very elderly lay persons, one aged 87 and another aged 77, who read out over many hours  (despite frail eyesight) long columns of RBI data which I then typed into an Excel file. The graph came to be published for the first time to accompany my two-part article “Indian Inflation” published in The Statesman April 15-16 2008,  and available elsewhere here.

The Prime Minister of India has today spoken in India’s Parliament of how sound India’s banking seems to him compared to that in the rest of the world at present.  I  trust he has available to him vast amounts of fresh data since 1998 which  the many members of  his  “Dream Team” of government and other establishment economists  in Delhi and Mumbai have analysed adequately to justify his confidence.  The data in my RBI graph end at 1998 but  they do cover all the years of the PM’s own career as  India’s top economic bureaucrat up through his tenure as Finance Minister in the Narasimha Rao Government.

As it happens, I do think India’s banks are relatively insulated from  the world economy and its present financial crisis but the reason for that insulation has nothing to do with any purportedly better bank governance in India; rather it has to do with the fact the rupee is not a hard convertible currency and therefore there has been a vast and continuing distortion of relative prices (including interest rates and wages) from world prices.

Subroto Roy, October 20 2008


Indira Gandhi in Paris, 1971

This is a photograph of Indira Gandhi emerging with Andre Malraux for a press-conference at the Embassy of India in Paris  in the Autumn of 1971.   (My father, pictured in the centre, had been posted to the Embassy  just a few weeks earlier in anticipation of the visit.  [My father recalls her asking him during or between one of these meetings, “Mr Roy, I am very hungry, can you please get me something to eat?”, and he went and grabbed a small hotel plate full of peanuts which she devoured…])  Indira was making the serious diplomatic effort that she did in world capitals to avert war with West Pakistan over its atrocities in East Pakistan.  War could not be averted and within a few weeks, in December 1971, Bangladesh was born.

 

“Indira Gandhi’s one and paramount good deed as India’s leader and indeed as a world leader of her time was to have fought a war that was so rare in international law for having been unambiguously just. And she fought it flawlessly. The cause had been thrust upon her by an evil enemy’s behaviour against his own people, an enemy supported by the world’s strongest military power with pretensions to global leadership. Victims of the enemy’s wickedness were scores of millions of utterly defenceless, penniless human beings. Indira Gandhi did everything right. She practised patient but firm diplomacy on the world’s stage to avert war if it was at all possible to do. She chose her military generals well and took their professional judgement seriously as to when to go to war and how to win it. Finally, in victory she was magnanimous to the enemy that had been defeated. Children’s history-books in India should remember her as the stateswoman who freed a fraternal nation from tyranny, at great expense to our own people. As a war-leader, Indira Gandhi displayed extraordinary bravery, courage and good sense.” (From my review article of Inder Malhotra’s Indira Gandhi, first published in The Statesman May 7 2006 and republished elsewhere here under “Revisionist Flattery”.)

 

“She had indeed fought that rarest of things in international law: the just war. Supported by the world’s strongest military, an evil enemy had made victims of his own people. Indira tried patiently on the international stage to avert war, but also chose her military generals well and took their professional judgement seriously as to when to fight if it was inevitable and how to win. Finally she was magnanimous (to a fault) towards the enemy ~ who was not some stranger to us but our own estranged brother and cousin.  It seemed to be her and independent India’s finest hour. A fevered nation was thus ready to forgive and forget her catastrophic misdeeds until that time….” (From  “Unhealthy Delhi” first published in The Statesman June 11 2007,  republished elsewhere here).

Sarat writes to Manindranath 1931

These three little documents give slight glimpses of the relationship between Saratchandra Chattopadhyaya and his friend Manindranath Roy.  In reverse chronological order, the first is a 1931 note from Sarat to Mani on a  domestic matter about the transport of a table (or perhaps a  writing-desk?) by rail; the second is a 1925 diary entry in English by Manindranath that speaks of travel to Shibpur and Sarat coming to breakfast, and then  of going with him to the “Ram Mohan Library” ;  the third is a 1919 letter to Manindranath from Sudhindranath Tagore (son of Rabindranath’s elder brother) which makes reference to the literary journal Bichitra and also asks of news of Sarat.

The 1931 note (translation by KM):

“Mani, I have asked Tulu to bring the table by train. If by this time the man Bipin has already taken it away that makes it more problematic. Unfortunately, this man intervened unasked and created all the trouble. If you can, please retrieve it from Bipin and deliver it at Howrah station. The rest will be done by Tulu.  Dada (Elder Brother) 23 Ashar 1339  P.S . If there is no chance of getting it back for whatever reason please let me know . I will ask carpenter to make another one as soon as possible.”

The 1919 letter (translation by KM):

“My dear,
Have received your letter. How can a great friend like you be forgotten! I can hardly say how happy we are to have met you.  But you know the difference between Hazaribagh and Kolkata. The hazards we face here are as stressful as those in the  brick-and-mortar jungle!  I have so many worries to attend to that I have had no scope  thus far to invite you to my place to enjoy your peaceful company. I do not have the necessary peace of mind yet. I shall obviously contact you as soon as I get a little bit settled. Please, never think otherwise even if I am silent for a while. I shall never forget you.

You are still a member of Bichitra but there has been no meeting for a long time. I have also got no such information. However, if there had been one or two it might have been missed due to postal irregularity. I have informed Bireswar about it.   I  hear you have joined Grace Brothers, is it so? How do you find things there?  I hope all is well at your end. Do you meet Saratbabu these days?    We are so so .  Yours, Sudhindranath Tagore”

Origins of India’s Constitutional Politics: Bengal 1913

This is a 1913 photograph of the Indian members of the  first Bengal Legislative Council elected (in 1912)  after the 1909 Morley-Minto reforms; the members apparently were being greeted by gentlemen of the sub-urban areas south of Calcutta.  The Englishman sitting at the centre  seems to be Sir Henry Cotton (1845-1915), the 1904 President of the Indian National Congress and a  great political friend of India.   To his right sits Surendranath Roy, who may have been the Council’s first President.

 

Academic studies include notably those by JH Broomfield, “The Vote and the Transfer of Power: A Study of the Bengal Election 1912-1913” Journal of Asian Studies, Feb 1962, his book Elite Conflict in a   Plural Society: 20th Century Bengal (Berkeley 1968); and Rajat Kanta Ray, Social Conflict and Political Unrest in Bengal 1875-1927 (Oxford 1984).  Professor Ray writes about the 1912 election: “Only  a few candidates of the “Popular Party” — Surendranath Banerjea, Abul Kasim, Byomkesh Chakravarti and Surendranath Ray — scraped through…. (A) sympathetic moderate wrote in 1919: ‘The Popular Party is a bundle of disjoined units which cannot resist the slightest pressure from without.’  This charge was eventually disproved by the stand taken by (the Popular Party) in the Bengal Legislative Council.  It showed no sign of wilting under the pressure exerted by the European group…”

 

Other studies of the period include John R McLane, Indian Nationalism and the Early Congress (Princeton 1977), Anil Seal, The Emergence of Indian Nationalism (Cambridge 1971),  Gordon Johnson, Provincial Politics and Indian Nationalism (Cambridge 1973) etc.

By way of incidental reference, the young Jawaharlal Nehru had returned from his studies in England in 1912; MK Gandhi was still in South Africa and would not be returning until 1915.  The Tilak-Gokhale clash though had been in full swing since 1907.

 

 

Subroto Roy

Nota Bene: The text and photograph in this post may be considered in the public domain and may be freely used for purposes of a Wikipedia article or any other publication in the common interest.