The 2008 global meltdown revealed the inability of experts to foresee such a situation and act on it. A new study has warned that the situation could well happen again
Professor Mark Stein, the award-winning academic from the University Of Leicester School Of Management, in his award-winning paper-A culture of mania: A psychoanalytic view of the incubation of the 2008 credit crisis-had argued that that the financial world was suffering from collective mania in the two decades running up to the event. The paper was published in the Sage journal Organization.
"Unless the manic nature of the response in the run up to 2008 is recognised, the same economic disaster could happen again," warns Professor Stein, who yesterday was awarded the iLab prize for innovative scholarship.
He adds that, "Observing-but not heeding-the warning signs from the collapse of the Japanese economy in 1991 and the 1998 crisis in south-east Asia, the financial world in the West went into an over-drive of denial, escalating its risky and dangerous lending and insurance practices in a manic response."
Professor Stein defines the manic culture in terms of the four characteristics-denial, omnipotence, triumphalism and over-activity. "A series of major ruptures in capitalist economies were observed and noted by those in positions of economic and political leadership in Western societies. These ruptures caused considerable anxiety among these leaders, but rather than heeding the lessons, they responded by manic, omnipotent and triumphant attempts to prove the superiority of their economies."
He explains that increase in credit derivative deals, industrializing credit default swaps and the removal of regulatory safety checks, such as the repeal in the United States of the landmark Glass-Steagall banking controls were a manic response to the financial crises within capitalism.
According to Professor Stein, this behaviour was also strengthened by 'triumphant' feelings in the West over the collapse of communism. "Witnessing the collapse of communism, those in power in the West developed the deluded idea that capitalist economies would do best if they eschew any resemblance to those communist economies, thereby justifying unfettered financial liberalization and the destruction of the regulatory apparatuses of capitalism. The consequences of this manic response have been catastrophic, with the on-going Eurozone crisis being-in many ways-a result of this."
He adds, "Whether one examines the actions of banks and hedge funds, or the limitations of ratings agencies, auditors, regulators and governments, a more worrying and deeper question emerges concerning why so many parties, more or less simultaneously, were implicated in such unprecedented and extreme risk-taking."
While equity markets are rallying on hopes, copper prices, which signifies actual economic expansion, is subdued – even after China’s rate cut. Should equity markets be worried?
Copper is called the metal with PhD because it is the bellwether for economic activity. The metal is widely used in industrial and infrastructural sectors. Interestingly, while the equity market has rebounded from its depressed state of last week copper has not participated in the ongoing rally. Indeed, while the People’s Bank of China, the Chinese apex central bank, cut borrowing rates for the first time since 2008, by 25 basis points to 6.31%, copper has actually fallen. Meanwhile, Dow Jones Industrial Average shot up for three straight sessions and the Sensex is up by 1,000 points from its low of Monday. Markets are rallying on both the news and anticipation of monetary easing.
The recent price of copper, an indicator of real demand, is actually falling despite the euphoria in equity markets. According to Businessweek magazine, China’s biggest producer of the metal, Jiangxi, is considering halting exports to LME warehouses after prices declined. China forms 40% of the world’s copper demand.
The interest rate cut of China comes amidst a raft of gloomy news, mostly dire economic statistics from the United States, which particularly its poor employment figures—is a crucial indicator for its economic recovery. Spain has got its sovereign rating cut by Fitch to two notches above junk rating. And there are rumours that Greece will be headed for the European Union exit. However, the European Central Bank and the Federal Reserve have opted to keep rates unchanged, with the latter denying another round of monetary easing. Equities are rallying on hopes that a solution will be found to all these problems. But only copper prices—based on actual demand growth—will tell us that economic activity is indeed expanding as equity markets are anticipating.
While fears of high inflation, lower GDP growth and political compulsions had restricted the government from hiking diesel prices so far, the need to keep diesel prices regulated, even as subsides keep mounting, is also being increasingly questioned
Ratings agency CRISIL has said that additional taxes on diesel cars and utility vehicles will not help bring down petroleum subsidy significantly and the government will rather have to hike diesel prices to lessen the burden.
"To bring about a sustainable reduction in the subsidy burden, the government will have to hike diesel prices, and ensure that in future also, diesel prices move in accordance with crude oil prices," CRISIL Research said in a report.
"Within petroleum subsidies, diesel alone takes up about 60%. Under-recoveries on diesel are at an all-time high of Rs14 per litre at current prices. Thus, hiking petrol prices alone will not make any difference to the petroleum subsidy burden of the government," it added.
CRISIL said, while fears of high inflation, lower GDP growth and political compulsions had restricted the government from hiking diesel prices so far, the need to keep diesel prices regulated, even as subsides keep mounting, is also being increasingly questioned.
Globally too, petrol and diesel prices do not vary much. In most countries within the EU and in the US, diesel and petrol prices are similar-the difference between the two is not more than 15%. By contrast, in India today, petrol prices are close to two times higher than that of diesel, reflecting both higher subsidies and higher taxes on petrol. Taxes on petrol in India are at about 45% of the selling price as compared to less than 20% on diesel, CRISIL added.
In the 2012-13 Union Budget, the government had set stringent targets to contain its subsidy bill, of which petroleum subsidies form a third, it said.
The options being considered include imposition of a one-time tax on new diesel cars and utility vehicles (UVs) sold or an annual usage-based levy on existing diesel cars and UVs, which are aimed at reducing the preference for these vehicles and thereby bringing down diesel consumption.
"...These options will not bring down the subsidy significantly or will be difficult to implement. Furthermore, diesel cars and UVs account for just over a tenth of the diesel consumption," the report added.
The report further pointed out that other vehicles like trucks and buses, which consume more diesel, remain untaxed.
"Of the total diesel consumed in 2011-12, cars and UVs used up only 12%, a third of what trucks and buses consumed," it said.
The research firm said it had derived the share of diesel used by cars and UVs, based on an estimated population of 3.6 million diesel cars in India as of March 2012.
This formed about 23% of the total population of cars and utility vehicles. Of this, it has been estimated that 47% of the cars are for personal use and the remaining for commercial use.
The report said the recent Rs5-plus hike in petrol prices has again turned the spotlight on petroleum subsidy, which accounted for nearly a third of the Rs2.20 lakh crore subsidy bill in 2011-12.
It pointed out that in 2011-12 petroleum subsidies shot up by almost 80% to Rs68,000 crore as crude oil prices rose and the rupee weakened. In the Budget 2012-13, the government had targeted to contain its petroleum subsidy bill at Rs43,600 crore, about 40% lower than in 2011-12, it added.
Calling for a hike in diesel prices, the report said: "To contain under-recoveries on diesel at last year's level of Rs9 per litre, the government would need to hike diesel prices by at least 10-15%."
Increasing diesel fuel prices by 10%-15% would reduce petroleum subsidies by about 25% in 2012-13, and also curb the rising share of diesel in petroleum subsidies, CRISIL said, however, adding such a hike in diesel prices would also stoke inflation.
"...biting the deregulation bullet and ensuring that diesel prices moves in line with crude oil prices would bring about a sustainable reduction in the subsidy burden, which will also provide the government funds for other development activities," it added.
Discouraging diesel consumption by imposing additional taxes on private and luxury diesel vehicles would only minimally cut down petroleum subsidies, the report said.