Today, while I was browsing through the Telugu channels for all the news on the Telangana happenings, I suddenly came over to a Telugu news channel broadcasting business news and I could see Dr.Y.V.Reddy, Governor RBI (Reserve Bank of India) talking something about the world economy and the recent financial crisis in Telugu!! (I said, good to see the economist talking in Telugu..my language)
BTW, some very pertinent and important comments were being made by Mr. Reddy on the recent (I hope its not current any longer!) financial crisis which were very sensible and thought provoking! So, just wanted to share these with you guys..
1) Too much development of financial markets – In the boom times precipitating the financial crisis, financial markets became too complicated, with very complex financial instruments arriving in the markets at a very great pace.(I was in part a witness to the rapidity of the these instruments coming up while I worked for a short span at the NYSE in their listings department.) The issue was not with a lot of options to invest for the investors, but the pace at which they were being created, let to no time being given to properly evaluate the impacts of these instruments on the markets, by both the creator and the Regulators!
2) Transparency – Dr. Reddy, put this is a very apt way when he said that the objective of transparency regulations and measures in the financial markets, was outwitted, by the sellers of complex financial instruments (the Global Investment Banks, which are now busy giving out Billions $ bonuses to their employees!), because what these sellers did was to make the complications of their complex financial products transparent, instead of making the products themselves transparent!! (Bloody Rascals.. isn’t it!!)
3) Free Movement of Capital – Another very pertinent point made by the Governor, was about the movement of capital. The assumption with the internationalization of the markets, capital would freely move from the developed countries to the developing or under-developed economies. But, in reality what is happening is that the poorer countries are exporting capital to the wealthy countries and especially to the US, including developing economies like India and China! (buying the treasuries?.. At least now they think of Gold!) ..Haa..all the fruits seem to be in one basket and thats why, the global scare that when the US sneezes the World economy catches Cold!! 😉
4) Markets Global – Regulation Local – Another superb point to understand and realize! Markets have become International, so the US people invest in Indian Markets, Chinese Markets etc. and we could invest now in International Markets, but regulation however is predominantly National/Local! With the cross-border barriers of trade coming down, internationalization of trade has happened at a rapid pace..Now what is the Problem!? The problem is that with Regulation being local/national, they are not able to effectively regulate a lot of these financial transactions not happening on their shores – a lot of offshore financial transactions and hedge fund operations! Regulators are way behind in trying to make regulations as financial markets keep ever expanding off the country’s shores.
Dr. Reddy gave a quotation from another great economist Mervyn King who said, “Banks are Global in life and Local in Death“. Now, all you guys should say, hahaha.. we’ve seen that happen! I think that summaries the voes of the Financial Regulators.. at the end these large banks with global presence (including the Icelandic Ones;) ) end up at home on their dying beds, when the bad times come! So, better beware for the Regulators, who are being attacked from all sides…
Now, I think, the points we need to understand is to direct our Financial Managers/ Asset Managers, to invest in financial products which are really transparent (and then make them explain what it all means;) ) and are tried and tested. These other funky products are not for us, but for those big shots, who won’t have lost anything, even if they loose a million or two in a single gamble!!