| 22 Mar 2009, 0248 hrs IST, Swaminathan S Anklesaria Aiyar |
| Through history, said my former editor Girilal Jain, whenever things go wrong, Indian rulers blamed the bania. The US is no different. After the global meltdown, US politicians are baying for the blood of financiers. They have just legislated a 90% tax on bonuses of staff at AIG, the insurance giant rescued by the US government. Legislators were angry that financiers responsible for AIG's collapse could be rewarded with bonuses, and sought to expropriate these. Many Indians will cheer. Yet, banias alone are rarely responsible for disasters: many others are usually responsible too. The financial crisis occurred in the most regulated sector of the US and world economy. So it was a failure not just of bankers but of the state, regulators, investors, and all other participants. If you can tax AIG staff, why not all the others? For starters, what about a retrospective 90% tax on the two Fed chiefs, Alan Greenspan and Ben Bernanke? They knew bubbles were forming in housing and stock markets, but instead of halting this they claimed it was best to let the bubbles burst and then sweep up the mess. Next, tax all US legislators who for decades sought to make all Americans home owners through excessive implicit and explicit subsidies. One law forced banks to lend to sub-prime poor borrowers. Legislators created Fannie Mae and Freddie Mac, government-sponsored entities that bought or underwrote four-fifths of all US mortgages, and enjoyed exemption from normal regulations. Politicians repeatedly rejected stiffer regulation despite Greenspan's warning that these under-regulated giants posed huge risks. Next, tax regulators. All major countries had regulators for banking, insurance and financial/ stock markets, but these were asleep at the wheel. Critics today demand more regulations, but these will not thwart the next crisis if regulators remain asleep. A 90% tax might keep them awake. Next, tax all banks and mortgage lenders. Instead of keeping mortgages on their own books, lenders packaged these into securities and sold them. So, they no longer had incentives to thoroughly check the creditworthiness of borrowers. Lending norms were constantly eased. Ultimately, banks were giving loans to people with no verification of income, jobs or assets. Next, tax all existing and former employees of investment banks. Once famous for providing financial services such as underwriting and wealth management, these institutions recently began trading on their own account. Deservedly, all five top investment banks have disappeared. But their former employees are still around, so why not expropriate them? Next, tax all staff of the rating agencies. Moody's and Standard and Poor's failed to spot the rise in risk as bank leverage skyrocketed. They allowed BBB mortgages to be laundered into AAA mortgages. Next, tax all finance ministers, central bankers and economists who created the Basle rules for banks across the world. Basle-II rules allowed banks to use credit ratings and historical models to lower the risk-ratings of many securities. This dilution of norms led to excesses everywhere. Iceland's banks went bust holding loans/securities totalling 10 times its GDP. Next, let's tax all US consumers. They used to save 6% of disposable income some time ago, but recently that fell to zero as they went on a huge borrow-and-spend spree. This fuelled the asset bubbles, and also created huge, unsustainable trade deficits. Next, tax China, OPEC and all other Asian countries that undervalued their currencies to stimulate exports and create large trade surpluses with the US. They accumulated trillions in forex reserves, and put these mostly into dollar securities. This depressed US interest rates, fuelling a borrowing binge there. Finally, let's tax everybody. People in all countries and markets were delighted when housing prices boomed, stock markets boomed, and credit became cheap and easily available. Bubbles inflated in full public view, but neither politicians nor the public wanted to stop the party. They all loved easy money and rising asset prices, and this trumped prudence across the world. Of course, there is not the slightest chance that politicians will tax all those responsible, including themselves. It is far simpler to blame the bania, who is, after all, not blameless. Yet, economics has a way of providing rough justice of its own. To tackle the global recession, countries across the world are running huge budget deficits. These are now being financed by printing trillions of dollars worth of currency. This tsunami of money now helps combat the recession, but will in a few years produce a monetary overhang that fuels high global inflation. Inflation is the tax that we will all pay, as the penalty for our own part in creating bubbles that we loved until the day they burst. |
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