Who is to Blame?

Is it that the Indian champions of the ‘free- market’ and liberalization-as-magic-wand have disappeared or is it just that I am not reading enough?

One of them, Swaminathan Anklesaria Aiyar, whose column ‘Swaminomics’ has been a byword for the neo- liberal assault in the Indian media for many years, does write on the debacle on the Wall Street, but  blames it on the ‘perils of giving loans to the poor’!

The crisis arose from the bursting of a housing bubble. That bubble was created, fundamentally, by government policies and institutions seeking home ownership for all Americans, including low-income ones. Politicians rooted for such inclusive finance. But this ‘inclusion’ extended finance to ever more borrowers with fragile and low incomes,  causing disaster. This holds lessons for India.

Wall Street investment banks like Lehman Brothers and Merrill Lynch have been pilloried, rightly , for magnifying the bubble. Yet, they did not create it — that job was done by politicians and government-backed institutions.

The biggest Wall Street firms were pygmies compared with two quasi-government entities, Fannie Mae and Freddie Mac. These two held mortgages and other assets totaling $5 trillion, five times India’s GDP.

Indeed. When things go bad, blame it on the poor, or the government. ‘Swami’ Aiyar has merely echoed what is being rhetorically propagated by right wing advocates in the US.

Michael S. Barr, writing in the NYT, contests this and points out that ‘75% of the higher- priced loans during the peak years of the subprime boom were made by independent mortgage firms and bank affiliates that were not covered by the act’. 

The subprime boom was led by investment banks and mortgage brokers, not by government-sponsored enterprises. Fannie and Freddie became unhinged in the middle of this decade when they tried to play catch-up. Their shareholders and managers pushed them to recover the securitization market share they had lost to unregulated investment banks getting absurd AAA ratings for packaging subprime dross. From 2005 to 2008, Fannie Mae purchased or guaranteed $270 billion in loans to risky borrowers — triple the amount in all its earlier years combined.

It is time that the Indian franchisees of Thatcher- Reagonomics woke up, and start coming up with some more original ideas rather than recycling those that have gone bankrupt- literally and metaphorically.

Author: bhupinder singh

an occasional blogger

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