Reserve Bank of India (RBI) Governor Raghuram Rajan said that one of his focuses in the last few months was to force the promoters of large companies to absorb losses if their companies failed.
“One of our attempts here is to make sure that the system is even-handed, that the large guy also repays, or if he or she cannot repay, the debt holders have strong recovery rights. Now that’s work in progress. But it is extremely important to make the system legitimate,” said Dr. Rajan in an interview with New York Times , which was published on Friday.
One of the worries about capitalism, according to him, is ‘heads the capitalist wins, and tails the system loses, but the capitalist is O.K. all the time.’
“To get a proper capitalist — or free enterprise system in this country, we certainly need people to have the ability to take risk. But if they do take the risk, they should pay the costs of taking that risk, rather than benefit when that risk pays off, but shove the cost on somebody else when it doesn’t.”
The RBI Governor said that this had been one of his big focuses of the last few months:
“How do we get the big promoter to absorb the losses and not shove it onto the banks? And how do we make sure that the system works for everybody in the same way?”
Market volatilityFurther Dr. Rajan said that there is a need for international system to come together to fix market volatility anywhere in the world.
“There is a need for the international system to come together to fix it (market volatility). You know, I was hoping we would put in place a system anticipating crisis, but if it is post-crisis, at least making sure we can pick up the pieces reasonably efficiently.”
On his worry that central banks have gone too far in cushioning shocks in economies and financial markets, Dr. Rajan said that some market participants were extremely worried about the extent of volatility that can emerge in markets in a very short run, ‘one example being oil prices.’
“This is a very deep market. And overnight, virtually overnight, maybe in a span of a month or two, it has gone from $100 a barrel to $50. …… Was $100 too high? Is $45 too low? Or is there such a range of possibilities? And then if you think, this asset can move so much, (and of course the dollar has moved) - could we see enormous volatility in asset prices going forward?”
“That is a concern, and it is a concern I have been expressing for some time. That is, have central banks suppressed volatility through these policies,” he added.
Effectively, he said, every time prices move considerably, some central bank or the other provides fresh liquidity. “We essentially offer a put option to the markets…..Now it’s the universal central bank put. Have we, he asked, in an attempt to banish volatility ……..created the danger of much more volatility.”
Bond-buying programmeFor greater coordination by central banks and restraint in quantitative easing (QE) – large bond-buying programmes by central banks in industrialised countries that are seeking to rekindle economic growth even as interest rates and inflation approach zero, Dr. Rajan said “my sense is that industrial countries are looking inwards so much that expecting international cooperation for anything other than the crisis of the day is probably wishful thinking.”
In fact, he said many people have come around to the point that additional QE is largely about exchange rates … than really energising a lot of domestic activity. “I think that is now a much more widely held view.”
