Looking back at late 2008

by Ajay Shah.

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.
  
• On 10 October, 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.
• We watched the Satyam crisis unfold with horror [Anticipation, Maytas, Worsens].
• Here is the 7 December 2008 picture of macro policy.

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 quite concerned about Indian CEOs crying wolf in order to get money from the government, given the long history of Indian CEOs not standing on their own feet. So I was biased in favour of ignoring the cries at first.