The published piece has a few minor edits.
Mervyn King, the Bank of England chief has had a tough few weeks. Critics have decried his lack of timely action leading to the bailout situation with Northern Rock. On the other side of the Atlantic, Ben Bernanke has done more to cheer marketmen than anyone else. He too has his critics though. Many consider his rate cutting action as providing a lifeline to large American financial firms, considered amongst the most irresponsible in the world.
Noted investment guru, Jim Rogers has gone to the extent of calling the decision makers at the Fed clowns. Had Bernanke not done what he did, he would have faced the wrath of another Jim, the loquacious Cramer of CNBC and “thestreet.com”. Either way, there are both critics and backers.
So how do you decide if the decision is good or not, especially if the decision is that of a bailout as it seemed to be in the case of Northern Rock. Noted Economist Larry Summers has defended bailouts. Writing recently in the Financial Times he says
“A competent lender of last resort –one who lends freely at a penalty rate against good collateral – actually turns a profit, as the IMF did in its response to the financial crises of the 1990s.”
However another noted economist and Summers’ Harvard colleague, Gregory Mankiw has a different take
“The fact that this particular bailout was profitable ex post is, however, scant evidence that it was wise ex ante.”
In fact, individual decisions could be well thought through and be a failure or vice versa.
Take the case of Misbah-ul-Haq in the T20 final. His decision to go for the “Ashraful” (as Michael Slater calls the flick over fine leg – though it was actually Zimbabwe’s Douglas Marillier who actually played this shot for the first time in an international match) proved to be a failure, though the process of shot selection could not be faulted. Fine Leg was up and the shot was clearly on. Several batsmen (except for, maybe, Gautam Gambhir) had played it successfully and to good effect. The only flaw in the choice probably lay in the fact that he had not contended for the lack of pace in Joginder Sharma’s bowling. Had the shot come off, Misbah would have been a hero and we may have had crowds vandalizing Joginder’s home back home in India.
In contrast Dhoni’s decision to toss the ball to Joginder is being considered a masterstroke. If you look at it dispassionately, it may not have been so. The first ball in the over was a wide, displaying nervousness on his part (in contrast to Misbah’s calm and collected attitude) and the others balls too were nothing to talk about. In fact the ball that got him the wicket was also a rank long hop. But then, who’s looking at it that way. All that matters is the end result.
So thin is the line between success and failure.
Coming back to the subject of bailouts and moral hazard, Summers’ lays out some general guidelines of when bailouts are fine. He places a strong case for public action if it does not impose costs on taxpayers and the problem has substantial contagion effects. Further, the problem should be that of liquidity alone and not relate to solvency.
On all these counts, the British action to bailout Northern Rock or even the Fed instigated bailout of LTCM a decade ago pass the test. Both these situations did not involve use of public funds (Northern’s deposits have been guaranteed by the British Government, but the guarantee has yet to be invoked. In all probability Northern Rock will be sold to a willing buyer and will not require the use of public funds to ensure its survival.)
The same cannot be said of the decisions that our politicians take, though. We keep bailing out banks, shielding petrol consumers from price rises, showering largesse on our successful cricketers (who after all are only doing their job) all at the cost of taxpayers. And we rarely hear a murmur of protest at these decisions, except for probably from hockey players, who also wish to enjoy the largesse from the government at the expense of the taxpayer.
diversifying deployment of reserves into stronger currencies
