Responses to comments

I haven't had a chance to respond to some of the comments on my posts on investment banks. I thought I would devote a small post to these instead of putting them in the comments section.

1. Jaipm: asks about Alan Greenspan. This is a vast subject, really. But briefly, I am not persuaded that he was wrong in easing monetary policy or that he did it for too long. Easy monetary conditions helped create one of the best economic booms in the world in recent decades and India was among the beneficiaries. The argument is that the boom led to the present bust. I am not sure.

What the central bank can do to head off asset bubbles is not very clear but the answer cannot be something that slows the entire economic- sector-specific responses (such as increasing risk weights for real estate, favoured by the RBI here) are a bette idea. In other words, better regulation could have helped prevent the worst excesses and the ensuing problems. So, I would say Greenspan wasn't very wrong on monetary policy but he did stumble on regulation.

2. Stevie commenting on the RTC says that distressed assets lose value with time. Not true. The earlier RTC during the S&L crisis made money eventually; so did the consortium of banks who bailed out LTCM in 1998. It's a matter of using public resources to ride out a temporary storm.

3. Adorable guy: sees the RTC as injecting capital into the system. No, it erodes capital because banks will take a hit against the assets they sell at a discount. What it does is to put a floor to the hit- before the RTC, it appeared that asset prices would go sink indefinitely. So the RTC will help contain erosion in bank capital and it will also create the conditions for fresh money to come in