Global Financial Crisis
Global financial crisis: ‘A lot more is yet to come’
D. Murali and Goutam Ghosh
Chennai, Aug. 17: The current liquidity crisis that central bankers around the world are battling with is “just the tip of the vast American mortgage iceberg, and is likely to simmer in the coming months,” says Dr Ravi Batra, Head, Department of Economics, Southern Methodist University, Dallas, US.
“It will probably worsen by the end of this year, with the real crisis starting early next year. The European Central Bank (ECB) and the Federal Reserve Bank have injected new funds that seem to have contained the crisis, at least for now. But a lot more is yet to come,” he adds, speaking to Business Line.
Excerpts from an interview.
How would you explain the current global financial crisis?
If I recall correctly, it was in the month of March when you last interviewed me about my new book, ‘The New Golden Age: The Coming Revolution against Political Corruption and Economic Chaos’ (Palgrave Macmillan, January 2007). I remember telling you that a global financial crisis would erupt from the US around the middle of the year and that it would begin with the bursting of the American housing bubble. Precisely that has happened towards the end of July and continues to this day.
And the markets have been hit hard…The Dow Jones Index peaked on July 19 at 14,000 and has been moving negatively ever since. The world stock indexes also peaked around that time and followed the Dow’s decline. Sensex, for instance, crested on July 24 at 15,742 and is now hovering around 15,000. (On August 17, the index plunged below 14,000). To be sure, global share markets are still lofty, but I believe they have seen their highs for this year.
What is at the root of the problem?
The real problem is that investors now view some types of housing bonds as very risky, because record numbers of homeowners in the US have been defaulting on their loans. Many of these loans were sold to private investors and financial institutions such as Goldman Sachs, Bear Stearns, Morgan Stanley. Even European banks invested in risky American mortgages, although India’s hedge funds mostly avoided these securities.
Is there a chronology of the crisis?I am sure there exists a chronology of this crisis, but it would be hard to pin down. The crisis has been simmering since May 2007 when Bear Stearns divulged problems with two hedge funds, but it came to a head in the final week of July when stock market was hit by great volatility that continues to this day. I would put the starting point of this crisis at July 20, when the Dow began to fall and has been trending down ever since.
Is the US crisis spilling over to other countries too?Apart from Europe, another country that was heavily involved in the US housing market was Japan, where the interest rates were and still are rock bottom. Investors borrowed money from Japanese banks at low interest rates and bought American mortgages that paid substantially higher rates. This practice is known as carry trade. As a result, a number of unforeseen events followed.
Such as?First, the Japanese currency, the yen, depreciated while the dollar appreciated. Second, Japanese exports surged and so did the Tokyo stock exchange. The Nikkei index jumped along with the Dow. But now the reverse cycle is happening.
What are the consequences?As a result of heavy losses in US mortgages, the carry trade has almost ground to a halt, the yen has risen, but the Nikkei has sunk. Even though Indian investors are not into American hedge funds, the Mumbai share prices have also fallen. This is because we now live in a global market where local markets are essentially linked to the New York Stock Exchange. So the decline of the Sensex is in sympathy with the decline of the Dow.
Dr Batra had sent the following answers during the first quarter of 2007 in response to questions from Business Line:
Now that Wall Street has taken a plunge, and you feel the phenomenon corroborates your hypothesis in your book, ‘The New Golden Age’, where do you think India will stand in the world hierarchy in 2022?
First, February ended with uniformly bad economic news; durable goods orders and new home sales plunged in the US while inflation and oil prices shot up. The share markets duly reacted to the news around the world and the Dow Jones Index (DJI) dropped 416 points on February 27. The sell off began in China and quickly spread to Europe and the US. The markets may have stabilised, but fear and uncertainty remain.
This is precisely what is predicted in my new book, which was released just three weeks before the plunge in China. The book foresees that by mid-year there will be economic chaos around the globe, which will snowball into a major economic debacle over the next three years, culminating in a revolution against the rule of money in society, which in turn will lead to a wonderful free market system and a golden age. The age of money will also end in India by 2016 or, at the latest, the end of the next decade.
By 2022, or 15 years from now, India will be a prosperous economy and a major political player in the world. Its ideas and intellectuals will have a significant say in global affairs.
You insisted, as a teacher, that what matters is the ability of a researcher to keep pushing the frontier and not stop with one’s net addition to the stock of knowledge. Do you still stick to that view or has it changed somewhat in the last 30 years?
This view will never change. The stock of knowledge is like an ocean, inexhaustible and unfathomable. All we can do is to add a little to what is known, do our best and hopefully discover ideas that help society.
How do you rate the quality of research papers published from India and other developing countries (not the research done by expatriate Indians)?
India has a deep spiritual background that goes back to ancient times. True spirituality creates great intellect, and that is why in spite of hunger and malnutrition prevailing until 1980, India has been producing great intellectuals. The nation’s engineers, professors and doctors are in demand all over the world. India’s writers are great researchers.
What is the direction Indian macro policy should take to make its presence felt quickly? The country should encourage competition at home; mergers among big domestic firms should not be permitted, and those companies that keep raising prices should be broken up. This is the only way to make sure that the fruit of India’s high growth reaches its masses in the form of rising salaries and wages.
Do you think India’s quest for a Permanent Seat in the UN will be fulfilled if India were to become an economic giant?
Most likely, yes. But the UN itself might be restructured after the coming global revolution against the rule of money.
Will the spillover of massive economic growth pull the dispossessed and the voiceless in India out of the hellhole they are in now? Or will it lead to a heavily skewed distribution of resources (including purchasing power) again?
Destitution will end only when large domestic firms are broken up to increase the level of competition. Until then, income and wealth disparity will be on the rise.