India’s recruitment master stroke and a future clash of central bankers

Posted: August 8, 2013 in Global Economy, India
Tags: , , , , , , ,

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The Indian government has just made a rather interesting new appointment. It concerns the man who is to head the country’s central bank. The man is… well, he is rather clever and well regarded across the world. But what makes this one so very interesting, is that talk is that Barack Obama’s choice for the next boss of the Fed is rather controversial. And what is really really interesting is that amongst the critics of Obama’s choice is the man who is set to take over at India’s central bank.

Okay let’s name some names. The man who is to take over at India’s central banks is Raghuram Rajan – former chief economist of the IMF and the author of ‘Fault Lines’. In his book, Mr Rajan postulated the theory that surging house prices were used by western governments as a way to kind of compensate for the fact that real wages were rising only very slowly. So, during the boom years, the gap between the super-rich and everyone else grew, profits to GDP rose while wages to GDP fell, and median workers in many countries found that over a period of many years – years of boom that is – their real disposable income didn’t grow at all. These were not good developments. We should have had recession when demand was suffocated from the economy. Instead, the money that companies were not spending sloshed around the system, eventually leading to lower interest rates, more credit, more mortgages, higher house prices, more household debt, and a consumer boom based on leverage.

Mr Rajan was one of the most prescient of the world’s economists and his theories to explain what was charging the boom and then the crash are probably spot on.

Now to change the mood a little: consider the Fed. The Fed’s deputy chair is Janet Yellen, and she is the person many want to see take over from Ben Bernanke next year. Talk is that Barack Obama wants Larry Summers to have the job. Now Summers was US treasury secretary under Bill Clinton – a massive critic of QE – and was the man whom many hold responsible for loosening the stranglehold of the Glass–Steagall Act, which separated investment and retail banking. Summers is not liked by Republicans and quite a lot of Democrats have their doubts about him, but he is a heavy weight in the world of international finance and politics – there is no doubt about that.

Many of the world’s top economists are critics of Summers, including the likes of Paul Krugman and Joseph Stiglitz, and Raghuram Rajan of course. Let’s say it happens and next year Summers and Rajan are both central bankers. For once when India’s central bank meets up with the Fed, many will see it as a meeting of equals – that will come as quite a shock for a US that is used to having things its way.

As for India, the appointment of Rajan may yet prove to be a key moment as the country attempts to re-establish itself as one of the world fastest growing economies.

© Investment & Business News 2013

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