Joe Nocera of the New York Times says (with quotes from several top Indian bankers) that the man responsible for Indian banks still being afloat is our “anti-Greenspan”, the “irascible” former Reserve Bank of India governor Y V Reddy.
“He basically believed that if bankers were given the opportunity to sin, they would sin,” said one banker who asked not to be named…
Unlike Alan Greenspan, who didn’t believe it was his job to even point out bubbles, much less try to deflate them, Mr. Reddy saw his job as making sure Indian banks did not get too caught up in the bubble mentality. About two years ago, he started sensing that real estate, in particular, had entered bubble territory. One of the first moves he made was to ban the use of bank loans for the purchase of raw land, which was skyrocketing. Only when the developer was about to commence building could the bank get involved — and then only to make construction loans. (Guess who wound up financing the land purchases? United States private equity and hedge funds, of course!)
Seeing inflation on the horizon, Mr. Reddy pushed interest rates up to more than 20 percent, which of course dampened the housing frenzy. He increased risk weightings on commercial buildings and shopping mall construction, doubling the amount of capital banks were required to hold in reserve in case things went awry. He made banks put aside extra capital for every loan they made. In effect, Mr. Reddy was creating liquidity even before there was a global liquidity crisis.
Did India’s bankers stand up to applaud Mr. Reddy as he was making these moves? Of course not. They were naturally furious, just as American bankers would have been if Mr. Greenspan had been more active. Their regulator was holding them back, constraining their growth!
Read the whole thing. I’m not an expert but if it is even partly true, Mr Reddy deserves our thanks and applause. Standing up to the lobbying powers and armtwisting of big businesses in India cannot be any easier than it is in the United States. But unlike Mr Greenspan, Mr Reddy had clearly not been a devotee of Ayn Rand in his youth.
(By the way, if anyone thinks today’s Greenspan-bashers are benefiting from hindsight, take a look at this 2000 article by Ralph Nader. Also see this recent article by Arianna Huffington, taking apart the “Who could have known?” argument being thrown about by uncontrite regulators and politicians.)