Sanjeev Sabhlok's blog

Thoughts on economics and liberty

Proposed leadership aspirations for the Freedom Team of India


This is a leadership aspirations proposal for FTI to consider. I'm drafting it directly on the internet, using my blog as a wiki tool – I will continually change the content till I get it 'right'. Please provide feedback to help achieve a sensible (ambitious, realistic, doable) aspiration for FTI (Sanjeev, 28 January 2009).

If FTI is to guarantee the quality of leaders it offers to the people of India, we must all become good leaders, and that includes being team players. Our personal failures to improve our leadership skills and work as a team can cost millions of lives in the future. On the other hand, with good leadership (the 'servant leadership' concept comes to mind), we can deliver the world to India today and in the future.

The kind of leader FTI is looking for is an ordinary, SOVEREIGN, citizen-leader who refuses to 'kow-tow' towards anyone within our outside FTI or any other organisation. Equally, team member must be committed to working collaboratively with others to achieve the society he/she wants.

The team has set itself ambitious goals for personal leadership development. When we learn karate, we must ultimately aim to become 9 Dan masters, or as in Richard Bach’s ‘Jonathan Livingston Seagull’ – enter a realm of consciousness where we see the world from a 'higher' perspective (say, of 50,000 years) but deal with all the necessary detail today, to make that outcome, 50,000 years later, happen.

Level 4 or 5 leadership (cf. Jim Collins)
Similarly, FTI members could aim for level 5 leadership (just a concept, without getting too bogged down by what it means) in the end. In particular, hubris or arrogance comes naturally to all of us – humans that we are – so we need to doubly ensure we keep ourselves really low on the ground at all times! [I found these slides (650KB) on the internet and have kept them on my website – I acknowledge the author of these slides though I don't know the person!]

But level 5 is virtually impossible for most of us, requiring a level of self-awareness, self-control, calmness, critical thinking, sharp memory, and knowledge that we could barely hope to achieve without lifelong practice. Level 4 leadership is therefore an excellent intermediate step to aim, for most of us. Out of that may arise level 5 leadership. That will mean contributing to the success of India (not the team alone, which is only an instrument of that goal) as best as we can, without holding any expectations from anyone but ourselves alone, or even any expectation of success. As Newt Gingrich calls it in his book, 'Real Change', it is all about being citizen leaders and doing the right thing with 'cheerful persistence'. This is in keeping with many other wise teachings of a similar sort, like that of Krishna in the Gita, that doing the right thing is its own reward.

Flowing on from this team leader concept, we don't need any one or more leaders. Except for one occasion (1921) when Gandhi (a level 5 leader by most accounts) was the President of Indian Congress Congress he wasn't interested in nor bothered about these ceremonious roles. Yet, the Congress was almost entirely guided by his views for another 25 years. Similarly, when India became independent, he moved back into private citizenship for the most part, but remained a critical voice in India because of his moral leadership. Gandhi's example tells us a few things which we can seek to imbibe (without justifying everything Gandhi did or said)

a) Sincerity (do what you ask others to do)

b) Humility (never impose; be willing to listen)

c) Moral and philosophical leadership (elaborate on the bigger goals for each citizen and the world; aim not for a petty position for oneself, even the position of Prime Minister of India)

One of the great shortcomings of Gandhi was his failure to develop leaders. We can overcome this problem by ensuring a culture which generates leaders.

An organisational culture for FTI to aim for

"Organisation-free" organisation
We want a culture of equal independence and joint commitment to our common causes than a culture rather that values hierarchy in any way. We are goal focused, not title-focused. Therefore, FTI is a team of equals without (at least currently) any 'core group' or 'secretaries' or 'president'. Yes, we need a Trust to help us manage funds properly, and we can have 'office secretaries' and the like to keep things clean and tidy, but we don't need any Presidents, Secretaries, and such high-flown designations on FTI.

Why so?

a) We are equals
FTI is a flat 'pyramid' with no 'pointy top' of a single leader. We are all citizen-leaders and team players. Everyone on FTI is a citizen-leader. Hence we don't need a single leader (or a 'core group' of leaders).

b) Leadership challenge and development
FTI is all about leadership development. Each FTI member should – on his/her own – be sufficient to transform India. As Guru Gobind Singh said of the Sikhs he was prepating to be leaders – "Sava lakh se ek ladaun". Even one Gandhi is enough. We are asking for at least 1500 Gandhis, so India never has to be short of good leaders again.

c) We can contribute wherever we contribute best without formal titles
Members could aim to work as a team (each with their own independent opinions, which are always welcome) and take the lead on projects where they can contribute most. Of course, we can choose to play different roles (and hence exercise different levels of influence through persuasion). We can select/elect 'team leaders' for various teams or tasks, or (better still) nominate ourselves as 'team leaders' by volunteering to lead certan tasks. But we don't want (for the most part) any official designations and 'organsational structures'.

Similarly, local groups at constituency level we will need to help mobilise support. These groups (and should) function as enirely non-hierarchical 'families' and 'teams', not as formal bodies. We are friends working together, not 'high command' vs. the 'ordinary member'. All citizen-leaders.

Thus FTI aims to be an "organisation-free" organisation that requires high levels of commitment, understanding and a minimal ego on the part of each of the "team/family" members.

d) Formal roles can aggravate competitions and caus neeless conflict
Having 'offices' is also divisive, at least until the organisation is deeply bedded down in a culture of freedom and democracy. These 'offices' often distract from the main purpose and become a source of conflict. We should aim to avoid them until we have 1500 genuine (at least level 3 or 4) leaders with us. The public wants results, and doesn't want anyone fighting over utterly useless 'positions' which don't add any value to society.

We may ultimately have office bearers
It is not that FTI will never need 'office bearers' – in some contexts these may be relevant. When FTI really star
ts organising, some such things may be useful for as a public face. But these are indicidental, not critical to our goals. Even if FTI were to elect people to certain roles (say, a spokesperson), that would not make them anything 'above' the rest of the team. Everyone on FTI must always remain equally free, sovereign citizens.


Level 3: Good at one’s work and proficient in getting things done. Intent on short term results. People trust the leader and take him by his word. Works well as a team member and engages respectfully with others but not yet focused on developing others, the institution, or the country because limited by personal ego and over-sensitivity to other’s comments. Example: Most people on this group today (including me)

Level 4: Level 3 + able to show many people the bigger picture about India’s future and bring about a shift in perspective among many people including those on on FTI. Works as a democratic decision-builder, builds consensus, challenges people to grow out of their personal limitations while keeping them focused on the main goal. Able to generate consensus and common strategy which leads to significant achievements for India. However, intent on medium term results. Emphasis on developing leaders but not yet interested in succession planning because of limited time horizon. Example: Rajaji/Masani.

Level 5: Level 4 + able to show the world a new and more effective way of thinking, able to gain consensus across the world and deliver significant global change + focused on leadership development and succession: intent on long term results. Zero personal ego (in terms of personal aggrandisement) with 100% focus on results for India and the world. Example: Lincoln/ Gandhi (not completely level 5, though, possibly 4.5).


Here's an attempt to point out some of the required characteristics of an FTI leader – any and every FTI member. These traits are listed in no particular order:


  • Top most priority to one's own mental and physical health, and family relationships

  • Paying significant importance to one's inner world; self-awereness. Knows that if the inner world is lost, the outer world cannot be 'conquered'.

Inner qualities

  • Strategic: always focused on the goal/ on results. Not distracted by low priority issues

  • Strong sense of proportion: never 'sweats the small stuff'

  • Optimism (including 'learned optimism)

  • Enthusiasm; confidence that one will successfully contribute.

  • Ability to overcome adversity (in all its forms), e.g. ability to lose – repeatedly – and yet maintain focus and enthusiasm

  • Ability to remain calm in otherwise stressful situations

Dealings with others

  • Lots of (infinite) patience, including ability to explain the same thing again and again and again

  • Forbearance: willingness to ignore other's minor flaws knowing that no one (including oneself) is perfect

  • Respect for others on the team (and humane behaviour towards everyone more generally).

  • No lust for 'position', i.e. ablity to work as a team member without a formal role

  • Aware: sensitive to others' perceptions

  • Pleasant; delightful: never throws his weight around

  • Excellent communicator: both written and verbal

  • Values driven: truthful: doesn't hesitate from speaking the truth (subject to a sense of discretion; and of time and place)


  • Critical thinking: constant application of the rational mind; constantly asking questionsExtensive reading and knowledge (knowing that knowledge is never enough)

  • Humility to know that no one knows or can know everything

  • Learner: Committed to life long learning.

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Press release of the Freedom Team of India, 26 January 2009

As a member of FTI I'm posting this press release for wider dissemination:

On the important occasion of the Republic Day, the Freedom Team of India has released its new website ( and an eight page brochure.

The Team, established in 2008, aims to provide a forum for policy, strategy, and leadership development. It aims to find at least 1500 outstanding leaders in India to contest elections in the coming years under the banner of freedom and world-best policy.

The forty leaders and observers currently on the Team used this occasion to call upon all potential leaders across India to come together to achieve real freedom for India. Doing so will involve launching a systematic assault on bad governance through the democratic channel of elections.

As a Team member said, “It is perhaps high time that our educated classes finally woke up from their deep slumber of sixty years. If America can re-invent itself even after 230 years, then surely India, a much younger country – but with the wisdom of eight thousand years of civilisation – can do much better. We have the capacity and power to change India so no that one has to ever sleep hungry, or feel discriminated or disenfranchised. We want an India where, in the words of Tagore, ‘the mind is without fear and the head is held high’”.

The Team’s approach differs from that of others in three distinct ways. One, the Team is focused purely on equal freedom as a philosophical stance. Thus, no half-way compromises with freedom are acceptable, such as reservations and caste-based preferences of any sort, or subsidies for religious occasions or religious organisations. This clarity of philosophy does not allow any bad policies. For instance, the Team does not accept socialism, casteism, or mixing religion with politics, unlike most existing political formations in India.

Second, everyone on this Team is an equal. We do not have official roles like President or Secretary. Members work as a team (each with independent opinions, which are welcome) and take the lead on projects where they can contribute most.

Finally, FTI members will (mostly) not contest elections until they are fully prepared and organised for it, with sufficient time devoted to the communication of the Team’s message to the people. The Team will, in this way, guarantee high quality candidates under the banner of freedom at the hustings in the coming years.

If you can’t join us at the moment, then please support us by passing this media release around.

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Building a monetary and financial system for a free society

By Sanjeev Sabhlok, published in Freedom First, Mumbai, January 2009.

For a wealth-destroying event of the magnitude of the global financial crisis (GFC) to have taken place despite celebrated economists running Western economies tells us that ‘standard’ economics has failed at a most fundamental level, like theories which said the earth is flat. Instead, the ideas of thinkers like Ludwig von Mises and Friedrich Hayek (the economics Nobel prize winner of 1974) of the Austrian school of economics, who repeatedly warned about the dangers of state-induced distortions in money markets, have been fully vindicated.

Unfortunately, the economics taught today continues to ignore these great economists’ insights. Current economics is more inclined to side with Marx who dreamt of state-controlled credit in the hands of a national bank. It is time the world asks these ‘standard’ economists the blunt question: why must free societies have Marxian central banking?

Unfree financial markets
People exchange goods and services in the free market at a mutually agreed price. The unit and medium of exchange, money, is also created by these markets. For instance, notes issued by private banks in medieval Europe, being commitments to pay specified amounts of gold to the bearer of these notes, were readily accepted as money. This system of money creation and banking, based on the ‘gold standard’, arose spontaneously from freedom.

However, in 1694, the British government, in financial distress, found a convenient way to produce money from thin air by giving sole rights to produce money to the newly established (private) Bank of England, and receiving an advance of £1.2 million in return. This anti-competitive distortion of previously free money markets became very popular among later governments. Some enlightened governments did allow free banking for a while: for instance, in Sweden between 1830 and 1902. Indeed, this (Swedish) free banking episode eliminated booms and busts and dramatically reduced bank failures. But Sweden soon abandoned free banking because it demands great discipline from governments which would rather follow Robert Mugabe’s inflationary footsteps, instead.

The free market also ordinarily determines the price of money, which is the interest rate that this money commands in a competitive marketplace. This market-based interest rate perfectly matches the society’s time preference of consumption. But central banks are established exclusively to interfere with this free determination of interest rates by distorting money supply and fixing the price of money. Naturally consumers and entrepreneurs are confused in these economies.

We can see why Americans save so little and borrow so much. By deliberately preventing the time preference of society from being disclosed through the market, and by (often) forcing interest rates to fall below their market rate, people are motivated to consume more and save less. Sensible persons won’t save when their savings don’t earn much interest or even earn a negative interest after inflation and taxes. They would rather borrow at low interest rates and consume in excess. Americans are quite rational; it is their politicians and central bankers whose heads need a check up.

Betrayal of freedom
Like other socialist planners, central banks are prone to imagine that the solutions to the world’s problems lie inside their presumably super-intelligent but in reality deeply flawed and ill-informed brains (we are all similarly endowed: that is the basic truth about human frailty). Fatal conceit afflicts them as they try to ‘fine tune’ the economy by randomly tinkering with money supply and its price. Alan Greenspan (whom the great philosopher of freedom, Ayn Rand, erroneously considered as her disciple) wrote in the 1960s that the US Federal Reserve (Fed) had ‘nearly destroyed the economies of the world’ in the 1920s, and that ‘a free banking system stands as the protector of an economy’s stability and balanced growth’. This was, no doubt, good thinking.

But strange things happened between 1987 and 2006. As Chairman of the Fed, Greenspan changed colours. Not only did he not liberate the money markets, he kept interest rates artificially low, particularly between January 2001 and June 2004. Had he recalled the Austrian trade cycle theory (which Ayn Rand endorsed) he would have realized the great dangers of administering the price of money. His artificially low interest rates persuaded entrepreneurs worldwide to build things like houses and car factories in great excess, leading to the same over-investment that led to the roaring 20’s and thence to the Great Depression. Greenspan thus did exactly what he had earlier decried. Freedom was betrayed by the man once considered its great votary. It is now time to stop this stupidity of having a controlled product (money) in otherwise frees societies. Central banking, the illegitimate child of mercantilist monarchs and communist utopians, must be abolished. We must get free banking, instead: based on the gold standard.

US government’s socialist interventions
These massive failures of the Fed were greatly exacerbated by American welfare socialism. Nationalised Fannie Mae was created in 1938 to funnel federal funds into home loans, artificially boosting the demand for housing. It was (notionally) privatised in 1968 but remained guaranteed by the US government. Freddie Mac was later created in 1970 to allegedly provide Fannie Mae with competition. American welfare socialism worsened with Jimmy Carter’s 1977 Community Reinvestment Act which required all banks to give loans to people without income or on low income, over-riding good lending practices. Fannie May and Freddie Mac (FMFM) were thereafter ‘leaned upon’ by successive US governments to buy the sub-prime mortgages issued by banks. Then started what can only be (in polite terms) termed as government-supported fraud. FMFM started guaranteeing sub-prime loans issued by Bear Stearns and also directly sold such debt to foreigners.

Catching and punishing those who make false or misleading claims about a product is a primary function of the government, but the US Office of Federal Housing Enterprise Oversight (charged with supervising FMFM) did nothing to block these falsehoods. Activities of a similar nature were also unfolding in the private marketplace in relation to financially engineered products. For instance, Credit Suisse Group Sellers misled markets about the risks of its securities by touting the AAA ratings it got (bought?) from Standard & Poor’s. Self-regulation dramatically failed in the financial sector.

In addition, urban planning laws in many parts of the USA prevented urban boundaries from expanding even though thousands of new housing loans had been issued. This caused house prices to skyrocket. All these bad policies, together with low interest rates, fuelled a major housing bubble which has now burst. The main lesson we can draw from the GFC is that economic booms and busts are always created by government interference, mismanagement, and incompetence; not when markets are free and held to account.

I fear that worse things may be in store for the USA, including the possible collapse of the US dollar by about 2018 given its massive unfunded social security and medicare obligations (the only way to save USA would be for other countries to follow even worse policies!). After destroying and socialising its financial system, the USA government has now started throwing its taxpayers’ money at failing companies. In a free society each business or company must take responsibility for its own decisions; if it becomes insolvent it must declare bankruptcy as part of its accountability. If any value is still left over, private investors will buy it out. Using taxpayer funds to bail out companies that no one wants to touch, amounts to theft of taxpayers’ hard-earned money. Also, by rewarding incompetents, it creates disincentives for prudential management.

Lessons for India
Despite being founded under the banner of liberty, America has never been completely free. But its badly regulated money and financial markets, coupled with its socialist response to the GFC, shows that it is no longer fit to talk about freedom. This makes it even more important for India to show the way.

India’s Reserve Bank should get out of the business of creating money and fixing the price of money. It should become an independent regulator of a private money and banking system. Its current functions should be unbundled: coins and notes should be issued only by private banks; the lender of last resort function should be performed by private insurance companies. Reforms on these lines will disclose the market’s true interest rate, and price risks transparently, thus enabling uninterrupted economic growth. Good fiscal policy would have to accompany such reforms, including policies to minimise inflation, but I’ll touch upon these related policies in a separate article.

The Freedom Team of India
India needs leaders urgently to take it to freedom. I’d like to request you to consider joining the Freedom Team ( to lead India. The task is clearly becoming more urgent than ever before.


Addendum 13 June 2009. A sensible article by Paul Kelly in The Australian today. Fix it, Don’t Break it.

Addendum:Recession is ‘cleansing’, Corbett says‘, 15 May 2009 by Nine MSN.

Addendum: Eight centuries of financial folly and counting, 23 April 2010. Public Sector Development Blog

Addendum: Copy of the entire article by Paul Kerin (“There should be less government intervention, not more”, published in The Australian, 14 Sept. 2009):

MANY claim that the global financial crisis has slain the most important economic theory of the last half-century — the efficient markets hypothesis (EMH) — and, therefore, that much more government intervention in financial markets is necessary.

In fact, the GFC didn’t even give the EMH a flesh wound. At least in Australia, there should be less intervention — not more.

Kevin Rudd blames the EMH for engendering the “belief in the superiority of unregulated financial markets” that he holds responsible for the GFC. Even my excellent MBS colleague Ian Harper — member of the 1997 Wallis Inquiry into Australia’s financial system — says the GFC had “blown efficient markets theory out the water”. Other doubters include ASIC chairman Tony D’Aloisio and Warren Buffett, justifiably the world’s most admired investor.

EMH critics either don’t understand what it is or (in Harper’s case) refer to one particular corollary, on which doubts are most defensible. In 1965, Eugene Fama — who fathered the EMH — defined an “efficient market” as one in which individual security prices “fully reflect all available information”.

Critics often cite economist Robert Shiller, author of the best-seller Irrational Exuberance, which was published just before the dotcom crash. Shiller agrees with the famous “Samuelson dictum” — that financial markets are micro-efficient, but may not be macro-efficient. That is, markets price individual securities well, but overall market levels may not reflect reality. Nobel Prize winner Paul Samuelson propounded his dictum in the midst of the dotcom boom and soon after the Asian financial crisis.

The entire rationale for light regulation rests on financial market’s micro-efficiency, not macro-efficiency.

In 2005, Shiller concluded: “Substantial evidence vividly illustrates the truth in Samuelson’s dictum for the US stockmarket since 1926.” His key reason is that substantially more information is available on the drivers of individual firms’ cashflows (hence their intrinsic values) than on the overall market’s drivers (such as future macro-economic growth).

Even the world’s best-known EMH advocates recognise that macro-inefficiency may exist. Six months before the 2007 market peak, Burton Malkiel (author of A Random Walk Down Wall Street) questioned in The Wall Street Journal whether the market was exhibiting “irrational complacency”, given that macro-economic indicators were already slowing.

Critics also mock assumptions that they claim the EMH makes. Even the otherwise sensible Lindsay Tanner wrote: “The efficient markets theory and the assumption that people act rationally are under intellectual siege.” But Fama explained in 1965 that this and other assumptions — if true — were sufficient for the EMH to hold, but not necessary. Those assumptions probably don’t hold in the banana market either, but it works pretty well.

If critics cite any micro-inefficiency examples, they’re the usual suspects: the Dutch tulip and South Sea “bubbles”. The tulip case actually reflected a government-supported change in trading rules and a ban on short-selling. As tulip bulbs cannot be uprooted between October and May, the large price rises between November 1636 and February 1637 were on futures contracts, which obligated buyers to pay the contracted price for next season’s bulbs. But from November 1636, the Florists Guild had been moving to give buyers the right to avert this obligation by paying a small fee — and for this change to apply retrospectively to all contracts made from that time.

That is, the market knew that “futures” contracts may become “options” contracts from November. The likelihood of this happening kept rising until it was mandated in February 1637. As that likelihood rose, buyers willingly agreed to higher prices because they were less likely to have to pay them. The “crash” in February 1637 simply reflected the fact that, in any market, options trade at a small fraction of futures prices. “Tulipmania” claimants are comparing the prices of apples and bananas. Indeed, UCLA’s Earl Thompson concluded that “Tulipmania” was actually a “remarkable illustration of market efficiency”.

The South Sea fiasco didn’t reflect market inefficiency. Market prices can only reflect available information. Instead, it highlights the dangers in governments granting monopolies to private companies. After the crash, fraud by South Sea directors and corruption in the British Cabinet was exposed. The chancellor of the exchequer was jailed.

While macro-inefficiency may be possible, stockmarket crashes do not “prove” it. We often und
erestimate the impact that new information can have on estimated intrinsic values. The intrinsic value of a share paying $1 a year dividend with expected annual growth of 5 per cent and a 10 per cent cost of equity is $21. Suppose a “shock” (subprime crisis, say) raises investors’ risk premium by 1 per cent and makes them expect a 30 per cent dividend cut to 70c a share for the next three years, before 5 per cent annual dividend growth is restored. Rational investors would cut their estimated intrinsic value fall by 49 per cent — about how much our market dropped by.

While most EMH tests are of micro-efficiency, there is even some evidence supporting macro-efficiency. A 2008 study by Australian researchers Jae Kim and Abul Shamsuddin of sharemarket indices (like the Nikkei) before and after the Asian financial crisis found they were efficient in relatively developed markets, such as Hong Kong and Japan. Market efficiency was strongest in nations with business cultures and regulatory arrangements conducive to transparent corporate governance (such as good disclosure rules).

In questioning the EMH, D’Aloisio cited the collapse of various unlisted managed investment schemes and debenture issues. But no EMH advocate has ever claimed it applies to these over-the-counter products, for good reason. Investor prices (on both buy entry and exit) are set by issuers, not by a free, competitive, transparent market. In the latter, sophisticated investors and arbitrageurs work to keep security prices sensible; they cannot do so with the products D’Aloisio cites.

And D’Aloisio was wrong in claiming that the Wallis Inquiry said “there shouldn’t be capital requirements” on issuers of these products due to “the efficiency of the market”. The Wallis committee didn’t recommend capital requirements because they were unnecessary to protect financial system stability — those products, in total, represent too tiny a share of total financial assets to pose any significant systematic risk. Wallis instead emphasised the need for good disclosure requirements, which ASIC is now moving to strengthen.

The very best protection for retail investors is free, competitive, transparent securities markets, because prices are then most likely to reflect intrinsic values. Governments should certainly ensure transparency by mandating good disclosure and punishing rumour-mongering and insider trading. But interventions like short-selling bans actually inhibit market efficiency — putting retail investors at more risk, not less.

It is also important to distinguish between macro-inefficiency in financial markets versus the real economy. Samuelson once said that the real economy’s business cycle “like herpes, has always been with us”. A Keynesian, he supports activist macro-economic policies to keep that disease in check — but not activism in financial markets. The Federal Reserve’s 1929 intervention to prick what it saw as a stockmarket bubble — and the Great Depression that followed — demonstrates the danger.

My big worry is that our Prime Minister will overreact. Rudd had advocated “constraining excessive expansion of derivatives markets” and a “fundamental regime change” to “social capitalism” — “a system of open markets, unambiguously regulated by an activist state”. Activism can be taken far too far.

Politicians may think markets overreact, but never look in the mirror. At least markets soon correct themselves. Politicians rarely do.

Paul Kerin is Professorial Fellow, Melbourne Business School

Here’s an excellent article: “Milton Friedman and the Case against Currency Monopoly” by Selgin, George; Cato Journal, Spring-Summer 2008, v. 28, iss. 2, pp. 287-301 (EconLit with Full Text) – Crisis puts nails back in Keynesian coffin, by Michael Stutchbury, Economics editor From: The Australian June 15, 2010 (Fiscal time bomb yet to explode, Tim Colebatch The Age, 15/6/2010)  It is never going to be easy to kill such panics. Considered infrastructure funding is hard, mindless throwing away of taxpayer funds is easy. This is an article with much useful information to add to fiscal policy debates.

See this blog post at Marginal Revolution: Research shows that “The Fed’s full history (1914 to present) has been characterized by more rather than fewer symptoms of monetary and macroeconomic instability than the decades leading to the Fed’s establishment”

A debate at:

Housing: Too Good to be True: June 04, 2004 by Mark Thornton

The myth of deregulation being a cause of the GFC.

How much did Fannie and Freddie cause the financial crisis? [A nice piece on one of the causes of the US housing debacle]


MURRAY AND BIER: Avoiding a lost decade: Obama on course to repeat Japan’s errors of the 1990s {one of the best articles on the subject}

Gary Becker says:

The widespread demand after the financial crisis for radical modifications to capitalism typically paid little attention to whether in fact proposed government substitutes would do better, rather than worse, than markets.

Government regulations and laws are obviously essential to any well-functioning economy. Still, when the performance of markets is compared systematically to government alternatives, markets usually come out looking pretty darn good.

Also see this blog post for a clear rebuttal of false claims by Steve Horwitz:

Here’s a nice summary of what went wrong:

(The turning point was the spring and summer of 2004. Fannie and Freddie had kept their exposures low to loans made with little or no documentation (no-doc and low-doc loans), owing to their internal risk-management guidelines that limited such lending. In early 2004, however, senior management realized that the only way to meet the political mandates was to massively cut underwriting standards.)

ADDENDUM 18 June 2014

The Virginian 2 hours ago

I would fully endorse the Justice Department criminally pursuing the people who did the bad deeds.  But, they instead have chosen to treat the banks as piñatas and a ready source of cash to fund U.S.  government operations.

These large fines don’t do anything to the people who did the deeds – they just reinforce the belief that it’s a cost of doing business.

Instead, they wreak tremendous damage on stockholders, which are primarily American citizens, their pension funds and insurers.

Let’s not forget that most of the ‘bad deeds’ began by the exhortations of:
1) Barney Frank (a famous US Congressman who was the Chairman of the House Financial Services Committee), who pushed U.S. banks to loan money to poor people who couldn’t qualify for mortgages as part of his belief in social justice … and who famously  said “I want to roll the dice a little bit more in this situation toward subsidized housing.”
2) the Federal Reserve, which pressured the banks to buy the companies that often did the bad deeds in order to save the U.S. financial system and, by extent, the world economy as the economic crisis deepened.  (The most famous example is Bank Of America’s purchase of Countrywide, which actually made the bad loans BAC is being punished for.)

There is plenty of blame to go around … but, much of it is directly attributable to the U.S. Government Congress, both political parties, and our vaunted regulatory agencies which aggressively enforced the political clamor to make mortgage loans to poor people so they could own homes, regardless of their ability to repay).

Hypocrisy is an elemental part of the political process and we see it every day in our government.  I just want it to finally be moderated here so that us stockholders can regain our savings and fund our retirements … and so that our banks are again willing to make the loans necessary to grow our economy.

Right now, the U.S. government is actively sabotaging all three of these necessary requirements through their extended bleeding of Bank America, Citigroup, JP Morgan, and other banks.



An alterantive view (which I don’t find persuasive): The housing bubble: Perceptions and reality – Scott Sumner. My comment:

This article is off the mark.

That the steep decline in the Fed funds rate in 2002-2004 set off a housing bubble is clearly vindicated by looking at this chart of house prices:

This bubble was purely created by loose monetary policy. That doesn’t mean everyone has to start defaulting in their payments immediately. It would be a mistake to default if your house price is increasing in value.

However, in the US, most mortgagees can walk out of their mortgage once the property goes below its purchase price. So AFTER the bubble burst (due to many factors – all bubbles burst sooner or later), the default rate THEN shot up. The buyers who had bought high, walked out, setting off a chain reaction, making it attractive even for those who could pay, to default.

The problem with Erdmann’s spurious argument is his assumption (2):

“2) As rates rose, low income households with unsustainable ARM mortgages couldn’t afford their mortgage payments. Delinquencies started to pile up.”

No one in his right mind said that. See my January 2009 article in which I refer to the HOUSING BUBBLE (not delinquencies) and a range of socialist policies as the driver of the GFC.

Even a Harvard professor understands that government caused the Global Financial Crisis:

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An autobiographical essay (1996)

I found this short essay (below) among my papers today. It may interest no one, but a blog is a place for one's own notes: matters which interest me, whether they matter to others or not.

This 1996 essay interests me on two grounds: (a) I cite Schumacher as an influence, which is no longer true, and (b) I was reminded that since 1990 I had worked towards a manifesto for a political party to be launched in Assam.

My disillusionment with existing political parties had clearly started by then, and I was looking for solution: what would a good party do was the question I asked. If I find a copy of that initial manifesto of 1990, I'll put it up on my blog for whatever it is worth! Just memories to me, if nothing else.

In any event, that thought – of writing a manifesto – re-emerged in 1998 and led to the Victory of India Party and then to the India Policy Institute. This essay also reminded me that I never budged from my early aim (since about 15, I think) to be philosophically self-sufficient and to lead life the way I see fit.

There is a conflicting element in this essay: so, why was I preparing a manifesto in 1990 if I did not intend to join real politics (as I wrote in the essay)? I suspect I was not sure of my goals then; these things take time to evolve. But by February 1998, I had no doubt that I should join active politics, in a systematic manner. That aim remains good even today: though I had a setback in 2005, and I am only now recovering my interest in this goal, again.

Sanjeev, 7 Jan 2009


(submitted as part of an application for the USC College of Arts and Sciences Pre-doctoral Merit University Fellowship on 22 January 1996)

My family background has been relatively exceptional in terms of Indian norms. Though my parents are Hindus, they are extremely liberal, and did not interfere in my attempts to determine my own opinions through a vast reading of Western and Indian philosophy from the age of 12. Despite not being too well off, my father encouraged me to purchase any amount of second-hand books that I could lay my hands on. When I declared at 13 that I was not a Hindu, and began to offer various proofs of my atheistic contentions, I was not curbed in my expression of dissent. I have considered humanism as my religion since the age of 16. Later, I worked out stern ethical principles for my own reference, and attempted to write a book on philosophy at the age of 19. The book is far from completion (a hand-written 3000-page first draft was penned down in 1979-81), but the two years of work put into it opened my eyes to the complexity of issues involved, and enabled me to leap headlong into public service from the age of 22 with a determination to do something positive for my fellow human beings who were relatively under-privileged. Voltaire, Bertrand Russell, R.W.Emerson, Vivekananda, M.K.Gandhi and E.F. Schumacher have been some of the key influences in my intellectual development. In many ways I therefore represent a modern, liberal, independently thinking human being who could be found anywhere on the globe.

Today, I am thirty-six years old – an age when it is rather uncommon, at least in India, to be reverting to university education for one’s personal development. I have extensive financial pressures living in USA, which will get worse as both my wife and I attempt to complete a Ph.D. degree here. The salary back home will stop in August, 1996, as I move to extra-ordinary leave, and there will be a steep drop in funding available to my wife. I also have important commitments of time to my family with two children – with a daughter being born only 25 days ago, on the 29th of December, 1995. It was therefore definitely not necessary for me to have returned to higher study, or, having taken a break of two years to study for a Masters degree, to attempt a Ph.D. program. Back home, the challenging job, power, prestige, large house, servants, chauffeur driven cars, and other perquisites, are sufficient to prevent most IAS officers from leaving India for a student life. In terms of job satisfaction, also, my work was very fulfilling. But by 1989, I had began to realize that personal hard work and dedication were of not much avail if economic policies were “defective” in the first place. This meant a re-consideration of many of the economic premises which I functioned under.

It would be necessary to mention in this context that I have always taken a deep interest in politics. I have seen the political system at very close quarters in India and I believe that ultimately I must contribute to its betterment. Since 1990, I have been preparing a draft manifesto for the launch of a new political party in Assam along with a few active friends. But I soon realized that it is very difficult to work out a set of consistent humanitarian policies for political action, in the absence of immense knowledge of economics. In 1993, therefore, I considered the necessity of a trip to a good university in USA to fill up these gaps in my knowledge and thinking. I have not reached anywhere near the level of confidence I think I need to begin to sort out the issues involved. Hence the need to go beyond the Masters degree. I must state here that I have no intentions of joining active politics, however. My interest remains purely academic and intellectual – at the policy level.

The overall style of my life is therefore moving, as I planned it, in the direction of participation in events of real life, while retaining sufficient distance from them, to be able to look back and deliberate on the broader issues of life and philosophy. I would be happiest as a writer of normative philosophy and economic policy. I would like to be able to sit back and write on issues which I believe are of long-term interest to human beings everywhere. A Ph.D. degree in Economics would be just the right thing for my vision to be established on sound academic principles.

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