ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Two 'Wizards'

With a Paul Volcker in Mint Street, high finance now wants a Ronald Reagan in South Block.

Money is perhaps more a matter of faith than of value, even at a time when its value is at stake. Perhaps that partly explains the irrational expectation, indeed, belief of the financial markets and the commercial media in the wizard-like qualities of the new governor of the Reserve Bank of India (RBI). Of course, wizards are really in desperate short supply these days; even Greenspan’s reputation stands deflated. His successor at the United States Federal Reserve (the Fed), Ben Bernanke, sprung a pleasant surprise on 18 September when he decided not to begin reducing (“tapering”) the Fed’s “quantitative easing” (QE) – its programme to reduce long-term interest rates by purchasing massive amounts of long-term US government bonds. Wall Street celebrated – the Dow Jones Industrial Average and the S&P 500 index reached new highs. Indeed, if anybody doubted the reality of financial globalisation, on 19 September the Bombay Stock Exchange’s Sensex rallied 685 points and the currency strengthened by Rs 1.61 against the dollar. On that day it was widely expected in financial circles that the new RBI governor, Raghuram Rajan, would do what it required to cut short-term rates, not raise them. But, in effect, the following day, 20 September, he did the opposite, and the markets fell.

Bernanke said he did not do what he said he would – on 19 June 2013 he said that the Fed would scale back its bond purchases from $85 billion to $65 billion a month on 18 September – because he wanted to bring down the rate of unemployment. But, frankly, what concerned him most was the negative effect that tapering would have on the financial markets. If expectations of a gradual end to tapering were to get transformed to a more sudden one, financial and real estate prices would plummet. After all, with the deepening financialisation of the US economy, the employment of money capital in the financial markets and, more generally, in speculation, to make more money, bypassing the route of commodity production, has increasingly become the name of the game. 

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