Looking back at late 2008

P. Vaidyanathan Iyer has a
great first
draft of history, in the new Sunday magazine that goes with
the Indian Express, telling the story of what happened in
India in late 2008.

This was a difficult period with 6 shocks hitting us in a short
time period:

1. The Lehman failure,
   
2. The crisis on the money market,
   
3. Difficulties at some banks,
   
4. Difficulties in some mutual fund schemes,
   
5. The Bombay attacks, and finally
   
6. The Satyam crisis.
   

Things could have turned out much worse. The individuals at MoF,
SEBI, and RBI really came together and delivered. As India becomes a
more complex economy, it becomes more and more important to bring
top quality skills into policy making. The Indian success of crisis
management in late 2008 is tightly linked to India's success on
the
great conflicts over appointments in 2008.

Reading Vaidy's article made me go back into September and October
2008 on this blog to see what I was thinking and writing at the time:

• On 25 September, I
  did a
  lunch talk on the crisis at DEA.
  
  
• On 29th September evening, murmurs about difficulties at ICICI
  Bank erupted after the Indian market closing time. I remember how,
  late in the night of the 29th, I watched the ICICI ADR trade in the
  US, saw nothing big happening, did some Merton model calculations,
  and thought we were okay. The next morning, I
  wrote this
  blog post on ICICI Bank.
  
  
• This was the first day of
  the 3rd
  Research Meeting of the NIPFP DEA Research Program. Those
  present will remember how the crisis made for a dramatic backdrop
  for the inaugural session and indeed the entire conference.
  
  
• On 6
  October I started seeing the liquidity crisis coming together.
  
  
• On 10 October, I wrote
  about the
  remarkable collapse in the money market which had come
  about. From 13 October onwards, I started doing a series
  of Crisis
  Watch posts.
  
  
• From 10 October onwards, Jahangir Aziz, Ila Patnaik and I started
  writing a paper on what was going wrong and what should be done.
  Our
  paper was emailed out on 14th, we did a meeting at NIPFP to
  discuss it on 18th, and finalised it on 20th.
  
  
• On 26th October, I wrote about the short selling question.
  
  

When I look back, I feel that (of all people) the NIPFP
Macro/Finance Group should have quickly and clearly
understood the
linkages between multinationals and the money market, and how
the collapse of the money market in London in late September would
surely matter greatly to India. We had the building blocks: We truly
get India's high de facto integration into global finance,
and we truly get the rise of Indian multinationals as a game
changer. But we weren't cool enough to connect these pieces and make
the consequent inferences to a surprising conclusion. We only woke
up when it was obvious that the Indian money market had
collapsed.

When I look back, the really hard thing at that time was the `fog
of war' which envelops economic policy thinking. In the best of
times, the Indian statistical system is weak, and at a time like
that, the data was hopelessly out of date. We're being penny wise +
pound foolish in ignoring the informational foundations of the
economy, without which policy makers are forced to fly blind. We do
this by tolerating an
awful statistical
system, and by preventing the financial markets
which produce
vital information.

There was a lot of drama and loud opinions, but it was very hard to
figure out what was actually going on. I was also quite concerned
about Indian CEOs crying wolf in order to get money from the
government, given the long history of Indian CEOs not knowing how to
make an honest living. So I was biased in favour of ignoring the
cries at first.