India: Banking Reform & Credit Allocation

Dominant political majorities politicize banking.  In the United States, banks have been regulated to the point of dysfunction.  It continues this way because it serves the policy goals of a dominant political class.  Keeping banks near insolvency isn’t a policy goal, its the unintended consequences (an impact) of a distinct regulatory regime.  Trained economists aren’t taught to discern policy consequences, they’re taught how best to speak the patois of this dominant majority.  It is Wall Street’s job to discern how best to circumvent this regulatory albatross, hence the prominent use of hedging tools.  It is the same with India.

The ideals of ‘the collective’ are intrinsic to Indian society, their are myriad ways to discern the origin of this peculiar mien, whether it be the impact of geography, demography or a constellation of unintended bulwarks; still, Indian civilization is chiefly matriarchal , passive; whose vision is inward.  This is the opposite of western individualized, atomized society that America has become.  Nevertheless, New Delhi’s dominant majority still wishes to hold on to this precious Keynesian authority that animates India’s state owned banking system.  It still fervently believes that IT possesses the specialized knowledge to properly allocate credit.  Hayek had much to say about this kind of hubris.  The arrogance of Marxian shylocks, even if they’re Hindu.

With GDP clipping away at 7.9%, the state owned banking system is perpetuating self-inflicted wounds.  It recently fell to the RBI to mop up this staggering mess; most of these bad loans have been written off.  Still, with international commodity prices at record lows, it will be different for Indian banks to sustain the kind of mining/corporate lending that recently existed.

How does India win?

It must unleash Chicago’s Raghuram Rajan, the governor of the RBI to pursue pro-market reforms, including the privatization of state-owned banks.  The opposition will howl, but the rent-seeking must end.