Opinion Clarifying a crisis

Initial anger in America at Wall Street’s inefficiencies and self-regard seemed to allow itself to be diverted,with almost Goldman Sachs-esque skill,towards elitist policy-makers instead of bankers. Taxes that bailed out banks,insurance companies — and General Motors — became the fault of this new African-American president. Meanwhile,outside America,the temptation grew to assign blame not to laziness in your own country’s banks,but on a slavish imitation of America. The French,for example,would not bother to examine the overextension of their own balance sheets; because,after all,this was just another problem born of Anglo-American arrogance.

In India,too,reactions have been unthinkingly ideological: some refused to accept that lax regulation needed rethinking,others conducted a self-defeating celebration of American weakness. Those who should call the system to account are instead celebrating,prematurely,its death; those who should be working to fix it are happy fixing the blame elsewhere. Left unaddressed are the most urgent lessons of the conflict — that a financial system should be open and comprehensible,and that financing of real estate,in particular,will always need close,independent regulation.

The result: finance has not changed. Nor has our unthinking tolerance for some of its more idiotic pronouncements — such as the impending doom of Spain and Italy,of which more later.

The other big change we expected as Lehman fell was to the power of the state. High officials of the government called bankers together and dictated terms. Everywhere,it seemed,governments were saviours,stepping in with their inexhaustible funds,and warning that bailouts don’t come cheap. Surely,we thought,it was them that would dictate terms to finance now.

Instead,on the third anniversary of Lehman’s fall,the state is as compromised and hesitant as ever,and those responsible for crisis are everywhere on the ascendant. America’s timid administration has been wounded by a credit-rating agency,the greatest villains of the sub-prime crisis. And the herd-like stupidity that improperly regulated finance can display is visible right now in southern Europe,as emails are fired out from every financial centre in the world warning of the imminent fall of Italian and Spanish government debt.

Of course,as with all mass hysterias,this is a self-fulfilling prophecy. The institution doesn’t exist that can survive a full-scale run on its debt. Is there any real danger of default from Italy or Spain,as there was from Greece? Well,the only high-growth sector in Berlusconi’s Italy has been comedy,and the country’s debt is high — 120 per cent of national income. But that isn’t really a worry,as its deficits are low; there’s little chance that it will run out of money to pay interest on its debt before it gets round to the labour reform it needs to raise its growth rate and pay off what it owes. Spain is an even more dubious target: it has minimal debt,a constitutional cap on deficit financing and a drearily responsible political class. Clearly,there is something wrong,structurally,with an international financial system that forces troubles where there are none.

And when we look at the causes of the current European crisis,we are back to those endless discussions three years ago. Because the problem is an excessive focus on short-term return — can I make more by making this country’s debt fail than I can by investing in its future? — as well as governments’ inability to coordinate,as northern Europeans can’t fix the southern European fiscal policy that endangers the monetary policy both are subject to.

The rumour now is that China,not Germany,will bail out Italy by buying its bonds,giving it,finally,a grateful client within the EU. It is remarkable how,at every twist and turn of recent history,from Iraq to Lehman to Libya to the euro crisis,the only real beneficiary winds up being China.

We have heard so often that crises are opportunities,but we rarely examine the cliché’s truth. When India’s reforms began in 1991,we were,yes,faced with a crisis. But the biggest reforms began in 1993,with the crisis long past,and when a minority Congress government felt it could finally make the political case for them. The wait for another crisis in order to launch a second generation of reform is futile — because a crisis is only an opportunity to those who’re moving anyway.

That was 20 years ago; 10 years ago,as the Twin Towers fell,we thought we had a crisis,which would change the nature of security,and of war. Ten September 11s have come and gone,and that crisis birthed,apparently,few changes. War is still a bombing campaign,ever more technologically aided; politicians still cannot tell the truth to their voters about the insecurity that comes with modern life; America is still insulated from the world. The only people who used it as an opportunity: neo-conservatives,who were looking to implement their agenda anyway.

So it was with the crisis three years ago. Nobody used it as an opportunity — except China — because nobody had a ready-made agenda. We learnt a lot,but did very little.

Which is why the most impactful recent anniversary for finance,I think,is not a crisis. Not Lehman from three years ago,nor 9/11 from 10,nor even the Reform Budget from 20. It is from 40 years ago: the launch,in 1971,of the first index fund. Vanguard and its peers — tied,machine-like,to the S&P 500 — have regularly outperformed the best guesses of the most brilliant masters of the universe. Finance works. But financiers,frequently,don’t. We’ve known this for three years,or 30. But we don’t appear to want to fix it.

mihir.sharma@expressindia.com