Swamy Vs Raghuram Rajan: Both Are Off The Mark But The Latter Less So

How does one read into Subramanian Swamy’s demands for firing RBI Governor Rajan? Does his claim of “killing the patient to bring down the temperature” have any merit? If otherwise, should Rajan be given a second term?

First, both Swamy and Rajan are considered “free market” economists – at least by the fairy-tale definition of “free markets” in India. Of course, if you ask any economist of the Austrian school, neither would be considered one.  That said, Rajan is decidedly closer than Swamy to the position of the Austrian School in a relative sense.

The figure below is a good summary of the four dominant economic schools of thoughts. An overwhelming fraction (perhaps greater than 90%) of the economists we see today belong to the neo-Keynesian school (which is to the left of shown Keynes’s position on economic issues). The reasons are not hard to fathom – these economists advocate ever greater role for governments in economic activity and the government rewards them with positions of power and influence – a genuinely symbiotic relationship that has proliferated over the decades. A better understanding of the figure below can be obtained by reading my article “Saving India from the Keynesians”

The root of the issue between Swamy and Rajan arises because Swamy is a Keynesian (perhaps, the Samuelson influence?), while Rajan’s position is closer to that of the Monetarist – after all, he is from the Chicago school.

So who is right on their monetary stance?

Of course, both are wrong. Though Swamy is far worse than Rajan. A Swamy or his ilk as an RBI Governor would be a disaster for the country at this stage. How getting the wrong dogma between the ears during the formative years is clearly demonstrated by Swamy. For all of his obvious intelligence, Swamy believes prosperity and growth comes out of a printing press. What more needs to be said.

Besides, Swamy has never demonstrated any great intelligence on the monetary side of economics. He was pretty much silent prior to the 2008 crisis (at least, I have not been able to come across any papers published prior to 2008) and to me that is always the litmus test. The 2008 crisis was in the making for years and any economist who had not forecast it well ahead of time is simply not worth listening to. They are subjected to the classical Keynesian blindspot and will always explain away these crises as six-sigma events that cannot be forecast. And I presume, 75+ is too late a stage in life to start with Ludwig von Mises and Murray Rothbard – even if he wants to, that is.

Rajan is obviously different. He could clearly see through the easy money policies under Alan Greenspan and Ben Bernanke and to him, the US housing bubble was the “elephant in the room”. This makes him much better prepared for the role of a Central Banker that Swamy can ever fathom.

So should Rajan get a second term?

To start with, I presume he is open to one. Easily, he is the best RBI Governor we have ever had. Almost all “illustrious predecessors” have been found wanting even in their basic understanding of economics (like blaming inflation on growth, justifying subsidies, freebies, not encouraging governments to move towards a more market-oriented system etc). Besides, the others did not even understand the rationale for the cash reserve ratio (CRR) and that it’s really not an instrument of monetary policy. Rajan was perhaps the only RBI Governor in recent years who left CRR untouched in his entire tenure. Also, he has been the first to point out the pitfalls of the sovereign gold bond scheme and how the centre has to provide for the risk of price increases in its balance sheet. So far so good.

So what’s my beef with Rajan? Clearly, Rajan thinks it’s the role of governments to run monetary policy and hasn’t even remotely indicated as to why decisions on interest rates are best left to free markets. After all, interest rates are the price of money and there’s no reason that the judgment of a few sitting in Mumbai would be better than the combined decisions of a billion borrowers and savers.

The other event that will hang like a “Sword of Damocles” over his head is his decision to lease 1,000 tons of RBI gold to the Bank of England. For all practical purposes, it’s gone the way of the Bundesbank gold – gone forever, though RBI can continue to claim ownership on paper. When the fractional reserve ownership of gold gets exposed over the next few years, the RBI is going to be left holding useless pieces of paper in lieu of the gold leased.

My guess, and its pure speculation at this point in time, is that his training in the monetarist school makes him quite oblivious to the role of gold in the world economy. That makes him a gullible participant in the machinations of the Rothschilds and the BIS.  But my guess, and again pure speculation, is that his heart is in the right place and given sufficient time and evidence, he is the one that is best placed to bridge the gap from what he knows to where he needs to be. For almost all others in the “patriotic cabal”, it would be a bridge too wide.

Unless, of course, the saffron brigade decides to go in for a Jim Grant! But then, if I were making such outlandish wishes, then I might as well hope that Swamy takes a liking to Rothbard!