OUR CREDULITY AND THEIR CREDIBILITY

A  WIDE  CANVAS

OUR CREDULITY  AND  THEIR CREDIBILITY!

Dependence on Institutions

The common man has to depend on some public institutions and arrangements in day to day life. The govt and its administrative machinery, the educational system, the judiciary, the medical set-up (can we really call it health care?) are some of these. We can add others, like the newspapers, the religious arrangements and organisations etc. But these latter are not indispensable, nor are they without alternatives. But the former categories are indispensable, and we have simply no alternatives, in the normal course. 

In regard to the govt and its direct machinery, we know and experience how inefficient, indifferent and corrupt they are; we have not only no alternative,but there is an element of compulsion or force in them- indeed, a large element of hidden violence. For instance, the Income Tax dispensation now insists on on line filing of returns and providing your mobile phone number. Is it their job to collect taxes or tell us how we must file our returns or what kind of phone we must have? What is the logical connection between income tax and mobile phone? What if someone doesn't choose to have a mobile phone or on line connection? But the Income Tax dept is sarkar within sarkar and few people will dare to take them on. 

Banking - is it bunkum?

Banking is one such modern arrangement  for which most of us have no alternative. We put our savings (if any) in the banks. Yet, how safe are the banks? How safe is our money there?

There is one easy way in which the banks cheat us. The banks give us interest on our deposits. But this interest is lower than the rate of inflation. So that while we get a nominal interest, our principal is losing its value. This can be easily corrected by indexation- directly relating both the value of our deposits and the rate of interest to the rate of inflation, so that the depositor may always get his whole real deposit, and  a 'positive' rate of return ie something above the inflation, as an incentive for saving which is a sacrifice- voluntarily foregoing present consumption and material satisfaction. But our finance ministers and their babu advisers are no more than clerks- petty or glorified - and they do not think of benefiting the savers. And they are ready to slap tax on the nominal interest income too! Are not our finance ministers the biggest robbers in the country? They neatly cut your pocket- the best pickpockets ever! One former Chancellor of the Exchequer said in England that his job in taxation was to 'pluck the quills of the goose making it squeal the least'. But the modern finance ministers know better- they are smarter. They keep smiling and let the inflation do the job! As our poet Majrooh Sultanpuri sang somewhere:

Khud kaate gale subke 
Isse kehtein  business.

We may add;

In maha choron ka hain
Vittha mantri yahan naam!

This is one way our money in banks is not safe.

Taken from: www.caac-iitd/blog/wp.

Banks are inherently unsound!


But there is an even more serious problem, which few people realise- even the educated ones.

Banking activity in India starts with deposits. Deposits are a liability for the banks, on which there is interest burden. They have to be repaid on a definite date or on demand. Banks can pay interest and repay the deposit only if they earn. They earn by lending or investing- ie by creating assets. But these assets are always unsafe and uncertain! The loans cannot be recalled at will, or are not repaid on time,always, sometimes not fully,or not at all. The investments cannot be encashed at will, or at full value, sometimes not at all. The banks publish their balance sheets once a year in audited form. But that is a picture, like a still photograph as on a particular day, and is subject to heavy manipulation. One simple way is this: if on that accounting day, a big loan is not repaid,  the bank will 'reschedule' the loan, or give a new loan to enable the borrower to repay an instalment of the old loan, so that it escapes the label of 'default'. If strict standards are applied, the assets of no bank will fully match its deposit liabilities on any day, leave alone the day of the balance sheet.  If a bank is assessed as a 'gone concern', no balance sheet will stand scrutiny! The balance sheet is really no more than bull shit.

We should understand that banking is inherently unsound.

There are some good, simple souls who ask: will it not be better for the govts to own all the banks, so that there is no possibility of failure? The point is: ownership by govt. will not change the nature of banking! The tiger will be a tiger, in a private circus or a govt zoo! Govt,ownership will not change its stripes.The private circus can at least be held accountable, but no one can force accountability on the govt.

Please understand: I am not blaming any particular finance Minister or govt. I am pointing out some basic features of the system, which are normally obscured by jargon and not understood.  On paper, govt ownership of banks may appear to make the system safer, but it renders the problem worse. And it makes even more victims. The very fact of govt ownership dilutes professional standards and sound management, and leaves the field open for political interference and misdirection. There is lot of back-seat driving, The big govt is always the unseen "boss". No finance minister, or his bureaucratic minions, has been sensible enough to distance ownership from management. Those who extract honey cannot help licking their own hands! No chief executive of a public sector bank in India has had the courage to stand up to even a deputy secretary in the govt.( But they do wait upon  him, ready to please him, for their very appointment is dependent upon the minion's pleasure!)

Just consider what happens in the Indian public sector banking. These banks incur loss. Periodically, govt rescues them by infusing more money. But this is not the money of the Finance Minister or his grandfather. This is money from the tax payers! That is, the govt is using innocent tax payers' money to rescue loss-making banks and their inefficient managements!

Banking- any  banking- is inherently unsound, totally unbalanced ab initio. Let an expert speak:

.....banks, as presently set up, are always technically insolvent. They are technically insolvent from the day they open.Why? Because they accept deposits many of which must be paid back on demand, but then lend money without usually having a comparable right to get it back on demand. The result: on any given day, depositors can "break" the bank by demanding all their money back at once.

This is one of the reasons why "mark-to-market" accounting for banks makes little sense. A literal and rigorous application of it would bankrupt any bank even in normal times. When times are tough, it guarantees that the entire banking system will fail.

From: Hunter Lewis, 'Where Keynes Went Wrong', chapter 15, Axios Press, 2009.

Photo: By Hunter Lewis. CC BY-SA 3.0 creative commons via wikimedia commons.









Central Banks are the problem!


Some knowledgeable persons may honestly ask: do we not have the central banks- the Federal Reserve in the US, the Bank of England, the Reserve Bank of India? Are they not supposed to regulate and supervise the banking system? Yes on paper, no in practice. What the central banks are supposed to do is to act as 'the lender of the last resort'. They provide funds to the banks to enable them to tide over temporary difficulty.

Sealing of the Charter of the Bank of England, 1694.
Public domain via wikimedia commons.

But this should be understood carefully. The 'difficulty' may arise due to ''liquidity" or "solvency" problems. A liquidity problem may be temporary, but the solvency problem is systemic and structural.  It usually is indicative of unsound professional judgement and unsound, even dishonest management. If for instance a bank has lent money against unsound assets, or the assets have deteriorated in quality or turned unrealisable, no central bank can rescue them. No money can rescue a bank from unsound  management or professional policies or decisions or practices. What the central banks are now expected to do is to open up a tap of resources to unsound and failing banks. Because the authorities fear that a banking crisis and failure will spill over to the entire economy or society.

  This reminds us of what we see in Hindi movies. The hero at last has the villain at gun-point. The villain laughs, and coolly points out " Look". When the hero turns to look, he beholds his entire family- mother, wife or beloved, children - kidnapped and held captive by the villain's henchmen. The gun drops automatically from the hero's hands! This is what exactly happens to the banking system. The unsound banks are saved, villains in the banking system are saved, because the authorities fear that the society at large may suffer if the banks are booked. So where does the buck stop?


Alibaba and  the Forty!

 The old story's very title is instructive: "Alibaba and  Forty Thieves" - not 'Alibaba against Forty Thieves'. Alibaba is somehow part of the system.

 So, the central banks are part of the system- in fact they are part of the problem, not the solution! The central bank does not prevent a bank from lurching, especially if it is a govt. owned bank; it ensures that all banks shall lurch equally, so that everyone is in good company and no one is singled out and punished or booked! If one student misbehaves in a class, he can be booked for misbehaviour; but if the whole class misbehaves, it is not called misbehaviour at all! And it won't be surprising if the teacher is blamed for being 'too strict' and precipitating the problem!


Too big to fail? 

In the US, there is a notion- "Too big to fail". If a small bank fails, they can merge it or even let it close.But if a big one fails, it impacts so many others, so there is a blind belief that the bigger banks will not be allowed to fail. And it has happened: big American banks like the Citicorp, Bank of America,  Fannie Mae. Freddie Mac,or even Goldman Sachs have received federal funding- ie tax payers' money , in spite of all their atrocious practices.

Day 40 of Occupy Wall Street campaign, New York, 25 October,2011.
By David Shankbone (Own Work) CC BY-SA 3.0 creative commons via Wikimedia Commons.

This is typical of modern thinking; they cannot apprehend and deal with the extremists but they suspect every citizen (the potential victims) and impose restrictions on them! What must be the level of audacity and arrogance of the American authorities when an Indian Defence Minister or even a former President is subject to body search? ( Leave alone the diplomats)

In practice,it is extremely difficult, almost impossible, for a bank to recover the value of its assets, especially from the big borrowers. The legal system is such that it will take years for the case to be decided. Almost every big loan, and so called consortium loans have been problematic.

Every big bank is a rogue!

 The deposits are a definite, concrete liability. The assets are notional, their value affected by every market development, and their realisation subject to many practical difficulties.It is totally beyond any one's control or decree. The depositors' interest is secured by the quality of the assets, but this is just notional and impossible to guarantee.The so called reserve requirements are a minor safeguard but these are progressively lowered. Contrary to popular opinion, the bigger the bank, the greater the violations and misdeeds, greater their power to hide truth and defy authorities, and less the force of supervision and control over them. If strict accounting norms are applied honestly without compromise, almost every single bank will go bust! ALMOST EVERY  BIG BANK -PUBLIC OR PRIVATE- IS A ROGUE ESTABLISHMENT.

And just glance at the newspapers to see all the controversies and misdeeds about our educational set-up, the judiciary, the police dept, the Lok Ayukta, the sports bodies, the dysfunctional parliament, the big hospitals and their nexus with the drug companies, etc. Is anything clean any more in this country, including the Ganga?

Thus in the end, all the systems on which we depend prove to be undependable. It is our helplessness which sustains them. It is our credulity which lends them credibility!

NOTE:

A fair deal for the saver?

Sukhamoy Chakravarty.
Picture from The Telegraph. July 1, 2013

In the  mid-eighties, before the reforms were initiated, the Sukhamoy Chakravarty Committee (appointed by Reserve Bank) on Monetary System noted the importance of linking interest rates with inflation, and ensuring that savers got a 'positive' rate of return on their savings. Throughout the 60s and 70s Indian savers were hit both by savage rates of taxation, and rates of interest consistently below the rates of inflation. The Reserve Bank too made appropriate noises. But it is a toothless tiger even on paper, and a mere vassal of the finance ministry. The govt only manipulates the figures of inflation and does not approach the issue of interest rates openly, honestly , fairly or even intelligently. The savers are in the lurch, as ever, helped neither by the Reserve Bank, nor by its boss, the finance ministry. What does the finance ministry and its bureaucrats know about how people suffer due to inflation? Their salaries and perks are insulated against inflation. 

Goody-goody fellows are good for nothing!

There is some further irony here. The Sukhamoy Chakravarty committee was appointed when Man Mohan Singh was the Governor of the Reserve Bank. The committee appointed by the RBI cut no ice with the govt or its bureaucrats, who are a law unto themselves. Later, Man Mohan Singh became the Finance Minister. Still later, he became the Prime Minister. But he did nothing- absolutely nothing! This is the regard these people have for the public.

Malum kya kisiko, dard e nihal hamara?- Sahir Ludhianvi.


POSTSCRIPT: 1 August, 2015.

Please read the section above, on 'Banks are inherently unsound'.

The above was posted on 25 July. We have the news today 1 August, that the govt is planning to infuse Rs. 70,000 cr. to recapitalise the public sector banks over the next four years. (Times of India, Bangalore edition, p.21) The Finance Minister says that the govt in the past  were "talking" and that he is now implementing! The previous govt  had a different disposition, but  this FM  from a different political outfit merely continues those old policies. So, whichever party comes to power, some old habits will continue! Because, it is the same old bureaucrats who rule!

 Previously, the dog barked; now it is biting- but it is biting the wrong people! He is taking tax-payers' money to rescue habitually loss-making govt owned banks! Throwing good money after bad money, and on bad managements! No one in this country is questioning the ethics of this arrangement.

The reason given by the FM shows how silly reasoning can get! He says that the banks are grappling with mounting bad debt and so are going slow on sanctioning loans. He is helping them out. This is the classic  liquidity- solvency problem and what can one say about the wisdom of the ministers and bureaucrats who cannot handle this, except by doling out the tax-payers' money!

 The more honest and sensible arrangement to rescue the banks would be to let the banks seek funds through the market, from the public direct. That will show how "public" these govt banks are! And if the public do not come forward to rescue the 'public' sector banks, why should the govt pour tax-payers' money into this bottomless pit? For whose sake is the govt continuing to own these loss-making banks?

The report also says that Governor of the Reserve Bank told reporters that "it is a good beginning". I said above that Central Banks are part of the problem! It seems that we now have two Ali Babas to rescue the Forty. There is none to take care of the interests of the lakhs of tax payers.