Tales of Hands on Hank and Cool Hand PC

Tales of Hands on Hank and Cool Hand PC


CEO’s as front-men are hard-wired to be optimists.Henry, "Hank" Paulson, Treasury Secretary in the United States was, till lately, a consummate private sector CEO. He did very well at the helm of Goldman Sachs, just before taking on, probably the worst paying job of his life, in the US government.

Our own Mr. P. Chidambaram (PC) is a patrician Senior Counsel of lofty, if expensive, integrity; backed by much inherited land-holding and old money; gilded further by erudition and intellectual superiority; and crowned by tempered political experience. This is, after all, Mr. Chidambaram’s third stint as Union Finance Minister.

So, it is not surprising that every time PC makes one of his anodyne pronouncements on the state of the Indian economy, its stability, its prudence, in contrast with the financial storm that has seized the Western world; it soothes our financial markets and reinforces shaky sentiment. PC does not think we are in any substantial danger of being caught in the maelstrom, despite the Indian stock markets indulging their deep pessimism.

But PC’s boss, Prime Minister Manmohan Singh, quite the internationalist these days, glowing from his success with the Indo-US Nuclear Civil Cooperation Agreement, doesn’t believe we are insulated from the goings-on abroad. Being a celebrated economist himself, Mr. Singh warns us that we cannot possibly maintain our growth plans on track when the rest of the world is teetering on the edge of recession. He is therefore more interested in battening down the hatches and waiting out the fury.

But, in the eye of it, “Hands on Hank”, as The Economist describes Paulson, is challenged by the forces of posterity. He can fail, or go down in history as the man who, like the little Dutch boy with his finger in the dyke, prevented not only the trickle but the flood. And it is veritably a flood of absolute deluge proportions. Paulson did wonder, just as he took the job, about just how many people left after a turn at government, with their reputations intact.

Hank didn’t readily accept the ferocity of the approaching storm at first, using one rescue at a time tactics. But now, Paulson is manning the pumps 24/7 with horns and sirens blaring. The trillion odd, handed out in rescuing Bear Stearns, Fannie Mae, Freddie Mac, AIG, Merrill Lynch; and sundry others, via the newly established government credit programme; plus watching over the orderly dismemberment of Lehman Brothers, will obviously help.

So will the new bailout pack of 700 billion. It too is very creditable first aid. But to create actual solvency and sail into calm waters with most of the flotilla will take much more money than is being talked about at present.

The good thing is, that the US government, like governments everywhere, do not have to find real money in a drawer, to pay out. Governments can simply make book entries for lines of credit; and print more greenbacks on demand, for those who insist on cash. The US financial services economy is leveraged to about 3.5 times the size of the real economy of 12 to 15 trillion, and there is not much choice, because no one else, not even the funds rich Sovereign Funds from the Gulf, are going to throw good money after bad.

Still, the US government, of all governments, is good for the debt. Beside Henry Paulson’s colleague Ben Bernanke, at the Federal Reserve, will cut interest rates all the way to a quarter per cent, if need be, in a replay of the post 9/11 scenario.

Europe will be following suit; and begin by cutting interest rates this week, in addition to its frantic spate of nationalisations. Because, standing on the platform of their smaller economies, they are, in fact, leveraged much more than the US.

India is going to be conservative, months away from general elections, and with food prices spiking higher, but it will probably be persuaded to ease-up on its chokingly high interest rates designed to curb inflation.

Inflation is, in any case, headed downwards now. But so is growth, estimated now at about 6.5 to 7 per cent for fiscal 2008, down from the 8 to 8.5 per cent thought of just a couple of months ago. But, India could ease up; oil prices have dropped and look like they will stay below USD 100 a barrel for some time to come against reduced demand.

While the global analysis from all sides is deeply pessimistic, the state of play in America is hardly irremediable. Consider the fact that the bailout of USD 700 billion represents just 6 per cent of American GDP and the prior nationalisations and loans another 8 per cent or so. US unemployment is still at just 6 per cent, and not the 20 per cent it was in the Great Depression. Of course, the American economy is also much larger than it was in the 1930s and consequently more resilient.

But for now, as long as it is the government underwriting, nationalising, and printing notes, as necessary, there is really nothing to fear but fear itself. It is fortunate that Republican urges to back free-market capitalism have been reigned in, because at present, that simply wouldn’t work.

On the plus side, the US and European governments are picking up a lot of deleveraged assets very cheap, and buying off equity considerably below par. They are likely to make a profit on quite a lot of it in due course. In a miniscule parallel that is exactly what the Indian government rescue of Unit 64 achieved. They also end up providing much needed succour to the general public.

With all this turmoil, there are those who are announcing the imminent deposition of America as the pre-eminent economic power in the world. These delusional personages are unlikely to see this fond wish come true. But, calmer heads, like PC’s and that of the Prime Minister might well see opportunity calling. India could earn a bigger say in the international financial system as just rewards for our fiscal prudence and efficient management.

We have already been allowed, on an exceptional basis, to pull up a chair to the nuclear high table. Who knows, there may be quite a few others, waiting for us in the financial centres of the Western world too.

(1,050 words)

October 3rd, 2008
Gautam Mukherjee

Published in The Pioneer on the OP-ED Page as "Needed,a bold response" on Wednesday, October 8, 2008 and online at www.dailypioneer.com