How to Trick Your Brain

waise toh indian kanjoos hotey hi hai phr bhi !!

“Born to Spend? How Nature and Nurture Impact Spending and Borrowing Habits, is  a report newly from chase .

If you’ve been making excuses for your lack of financial resolve, science may have your back: Believe it or not, researchers have identified a gene that could determine whether you’re good or bad with money. Specifically, the discovery has to do with self-control—or how some people are better able to resist temptation to make sound financial decisions.

According to a new report from Chase Blueprint, “Born to Spend? How Nature and Nurture Impact Spending and Borrowing Habits,” a specific section of the human brain lights up when we face a choice, such as, say, spending on something that we know we shouldn’t.

“Only 25% of us are born with the ‘good’ variant of that gene,” says report author Dr. Hersh Shefrin, a professor in the finance department at the Santa Clara University Leavey School of Business. “Some people are simply better than others at self-control, and neuroscientific studies have shed light on why this is the case.” (Note: These annoying people are also more immune to office birthday cake and mid-afternoon candy binges.)

But before you run off to get your gray matter tested, you should know that research also shows that, in this arena, nurture trumps nature—every time. In other words, there are proven ways that you can trick your brain into being smarter about money. Not convinced? Test out a few scientifically proven strategies to be a better financial version of yourself than you ever thought possible.

Adopt a New Mantra

How It Works: For this exercise, you’ll be using the help of a fancy scientific term known as a “heuristic,” which is essentially a rule of thumb that you live by to make decision-making easier. You probably already have many money heuristics that you abide by every day—whether you’re conscious of them or not.

Some examples: “I only buy used cars,” “always take your tax return to the bank” and “I deserve to shop online after a hard day at work.” As you can see, some heuristics are better for your finances than others.

Why It Works: If you’re conscious about adopting helpful heuristics, they can be powerful enough beliefs to override bad money behavior. Case in point: “Banking raises, if it becomes a habit, helps us avoid being tempted to spend the money, when we’d rather save it,” says Dr. Shefrin.

If you have bad money habits that you’d like to improve—from getting zinged by bank fees to overspending on gifts—come up with a specific heuristic to help you combat each one. Psychologists have found that we tend to feel poorly about ourselves for breaking the rule, even if we created it. Weird, but helpful.

Make Saving a No-Brainer

How It Works: In an experiment called Save More Tomorrow, employees were asked to save more for retirement by signing up for a 401(k), then voluntarily increasing contributions by a set amount every few months. The results? Over the course of 28 months, the average participant’s savings rate jumped from 3.5% to 11.6%.

Why It Works: By having the money come directly out of their paychecks, before it hit their bank accounts, the participants never missed the money. Essentially, they bypassed the portion of their brains that loves temptation and activated the slow-thinking region that promotes self-control.

While they could opt out of upping their contributions at any time (so they didn’t feel trapped), what happened instead was a phenomenon called “status quo bias.” In layman’s terms, it’s a tendency to keep doing what we’ve always done. In this case, it benefited the people in the experiment because they continued to participate in the plan.

You, too, can apply this bit of trickery to any savings goal. Simply pick a start date, set calendar alerts for set times when you want to up your contributions, and then sit back and watch your balance grow. Certain banks and brokerages will even automate the process for you by letting you program a percentage amount by which you can increase your contributions over time.

Pick a Plan and Stick to It

How It Works: Have debt to pay off? There’s a way to outsmart your brain here too. In another experiment called Borrow Less Tomorrow (it came to be after Save More Tomorrow was such a smashing success), people with debt were put on a three-pronged program to help them pay down their balances.

First, they met with a member of the program’s staff who advised them on several different repayment strategies, including “accelerated” plans that would up the amount that they paid off by a little each month. Then they corralled a buddy (or three!) who’d send them monthly reminders to keep them on track. At the end of 12 months, 51% of the people who’d adopted a debt repayment plan were on track—and 41% of them had used an accelerated plan to pay down their debts faster.

Why It Works: Researchers chalk the success up to three factors: choosing a particular plan, committing to the idea of allocating a certain amount to repayment each month and engaging peer support (read: those telephone or email reminders from friends). Once again, effort trumped any underlying genetics: “Good habits do end-runs around the parts of our personality that give in to temptation,” explains Dr. Shefrin. It’s easy to emulate this on your own: LearnVest’s Money Center allows you to set a financial goal and then calculate how long it will take to reach it, depending on how much you put toward that goal each month.

Spend on Your Best Self

How It Works: To make your money behave the way you want it to, you need to first decide who you are and then make your budget obey that identity. Perplexed? Let us explain.

It can be hard to just “save” blindly or “not spend so much” when you don’t have a larger goal driving you. But if you’re someone who believes that providing for your children is important (like this mom, who says paying for her daughter’s college is her ultimate financial goal), you’ll be a lot more likely to make financial decisions align with your principles.

Accomplishing this is a cinch: You can break down your budget into three essential categories based on the 50/20/30 rule—but you have free will when it comes to creating and naming the folders that describe your saving and spending. So if owning a house is important to you, designate a “dream home” savings folder. If being physically fit is your top priority, christen an exercise savings folder to reflect that goal.

Why It Works: “If we identify ourselves as responsible, and take pride in living up to the virtues associated with that identity, then we activate reward centers in the brain associated with goal achievement,” says Dr. Shefrin.

The other helpful factor: Humans have a desire to see themselves in a certain light, and we’ll reject anything that conflicts with that reality. It’s a phenomenon known as identity reinforcement theory. In other words, you can override bad money behavior by adopting good habits that reflect the person you really want to be.

Capital banks

There is an active debate on how much capital banks should have.




Yet establishing an 'optimal' level of bank capital is more art than science. Any conclusion is model-specific and contains a degree of judgement. The purpose of this column is to contribute to the debate by offering one more benchmark.
Basel III imposes on banks an equity-to-risk-weighted-assets ratio (risk-weighted capital) of between 8 and 12%. This is comprised of the 4.5% basic ratio, 2.5% conservation buffer, 2.5% countercyclical buffer (in upturns), and up to 2.5% surcharge on systemic banks. Some countries have higher capital requirements. Singapore imposes a 2% surcharge over Basel; the Vickers proposals in the UK call for a 3% surcharge; and Switzerland requires that its international banks hold extra 6% capital, bringing total capital requirements to 18-19%.
Historically, banks held more capital than they do today. In the early 20th century the leverage (equity-to-total-assets) ratio for US and UK banks was around 8-12% (Miles 2011). To convert leverage ratio into risk-weighted capital, the rule of thumb is to multiply it by 2; the average risk weight is 0.5 (King 2010, La Lesle and Avramova 2012). So the 8-12% leverage could correspond today to 16-24% risk-weighted capital. However that period is of limited guidance as banks were less diversified and did not have access to a well-developed safety net or deposit insurance. Leverage ratios for US and UK banks in 1950-70s were about 6.5%, corresponding to 13% risk-weighted capital. This is close to the Basel III targets.
It is hard to quantify precisely the recent, pre-crisis evolution of bank capital, because banks understated risk weights and held many exposures off-balance sheet. But a number of major global banks had leverage of only 3%, which under average risk weights would correspond to 6% risk-weighted capital. This is about a half of where they should be to satisfy Basel III.
In the academic community, many argue that banks may need significantly more capital. In a 2010 letter to Financial Times, signatories suggested that “if a much larger fraction, at least 15%, of banks’ total, non-risk-weighted, assets were funded by equity, the social benefits would be substantial.” This target is high; 15% leverage corresponds to 30% risk-weighted capital.

An exercise based on losses in past crises suggests up to 18% capital

Figure 1 plots the distribution of non-performing loan ratios in banking crises in OECD countries, according to Laeven and Valencia (2012). In most events, ratios were modest; the median is 6%. Including more extreme events, to comprise 85% of episodes (24 out of 28), gives non-performing loans of up to 19%. Episodes with even higher non-performing loans represent extreme, twin (banking-currency) crises, i.e. Korea in 1997, Turkey in 2000, and Iceland in 2008. Twin crises are rare in advanced economies; their risk can be reduced by controlling currency mismatches in banks and corporations. So we can take 19% as a historic upper bound for non-performing loan ratio in non-twin banking crises in advanced economies.
Figure 1. Non-performing loan ratio during banking crises in OECD countries

To obtain loan losses, the non-performing loan ratio should be adjusted for loss given default. There is little systematic data on loss given default. We use the estimate of Schuermann (2004) that the mean loss given default on senior secured debt in US over 1970-2003 was on the order of 50%. This means that 19% non-performing loan ratio corresponds to 9.5% loan losses. Around 1% of that can typically be absorbed by earlier provisioning. (In Spain, dynamic provisioning was able to achieve buffers of 1.5%; Saurina 2008.) This leaves loan losses net of provisions of 8.5%.
Bank equity may need to be somewhat higher than 8.5% when system-wide average losses are asymmetrically distributed among banks (i.e. some banks realise higher losses), or because banks need extra capital to continue operating after absorbing the losses. But there is also a powerful argument why equity could be somewhat lower; equity reduces bank risk-taking incentives, so well-capitalised banks are less likely to engage in strategies that lead to severe banking crises in the first place.
On balance, with a margin of safety, one could suggest that a 9% equity-to-total-assets ratio (leverage), corresponding to 18% equity-to-risk-weighted-assets ratio (risk-weighted capital) would offer banks enough capital to fully absorb most asset shocks of magnitudes observed in banking crises in OECD countries over the last 50 years.
We emphasise that this is a conservative estimate. For example, if one believes that higher bank capital has strong incentive effects, the appropriate capital target could be lower, say, 15%.
The estimate can be seen as good news. While conservative, it is not too far from the Basel III’s highest 12% ratio. It is very close to the Swiss capital requirements. And it suggests that more extreme proposals – such as those of 30% risk-weighted capital – are overkill.
It is useful to note some caveats.

• As with any estimate, there is significant model uncertainly. Losses in past crises can be a poor predictor of future losses, as bank risks can increase or decrease due to financial innovation.
• The estimate is based on losses on loans, not on the rest of bank balance sheet. 'The rest' today comprises about 50% of assets of an average large bank, half in trading assets and securities and half in cash and interbank claims (King 2010). Trading securities can have larger losses, while cash and interbank claims be safer than loans during crises. One could refine the analysis to arrive at a more precise estimate of capital needs by modelling bank asset structure with associated crisis losses and risk weights in more detail.
• We base the estimate on data for OECD countries (relevant for advanced economies). Historic losses in banking crises in emerging and developing economies were larger, due to weaker resolution tools and legal environment.
• We assume that all absorption capacity has to be provided by bank capital – equity. In practice, some can be provided by contingent capital – a debt security that contractually converts into equity well ahead of bank distress. Some recent policy initiatives focus on 'bail-inable' debt, which the government can haircut during crises (Zhou et al. 2012). But haircutting bank debt risks exacerbating a crisis, so it is unclear whether relying on the absorption capacity of bail-inable debt is optimal from an ex ante perspective.
• The estimate is a target for bank capital at the peak of the cycle. When the economy is slow or contracting, bank capital requirements could be lowered to facilitate lending and recovery.

Overall, we hope that notwithstanding these caveats this simple calculation may provide a useful benchmark for thinking about optimal capital levels.

The costs of higher capital are modest in steady state, but adjustment is a challenge

If one uses the losses in past crises as a gauge for 'optimal' bank capital, what would be the cost associated with higher capital levels?
There are two ways to calculate the effect of higher capital on the bank’s cost of funding. One is to keep the costs of bank’s debt and equity exogenous. Assume that the required return on bank equity is 15%, and the cost of bank debt is 5% (3% net of tax shield). Then an increase in the bank’s risk-weighted capital ratio by one percentage point, equivalent to a shift of 0.5% of funding from debt to equity (given the average risk weight of 0.5), would increase the weighted average cost of capital by six basis points. This type of analysis is used by Elliott 2009 and BCBS 2010; it produces the highest possible costs.
Another way is to base on the Modigliani-Miller proposition that the banks’ overall cost of funding should not increase with higher equity (as equity and debt become safer and cheaper; Admati and Hellwig 2013), except for the tax shield effect. Then – under similar assumptions – an increase in the bank’s risk-weighted capital ratio by one percentage point would increase the weighted average cost of capital by just one basis point. Under additional departures from Modigliani-Miller, the cost can be somewhat higher: Kashyap et al (2010) suggest up to 2.25 basis points for a one-percentage-point increase in risk-weighted capital.
Thus, the costs of higher bank capital in steady state are modest. An increase in bank capital requirements by six percentage points from the Basel’s 12% to our very conservative 18% would increase the banks’ cost of funding (and hence the lending rates) by about 13.5 basis points under the Kashyap et al (2010) estimate. And in the case where Modigliani-Miller does not hold (exogenous costs of debt and equity) the increase would be 36 basis points.
While the high level of bank equity is not prohibitively costly in steady state, the costs of raising bank capital quickly may be substantial. Issuing new equity has underwriting and adverse selection costs. Reducing dividends to boost retained earnings may lead to declines of bank capitalisation and weaken confidence. But the main risk is that banks can increase capital ratios by cutting lending. Aiyar et al (2013) show that about a half of banks’ short-term response to an increase in capital requirements occurs through a contraction of balance sheet. This means, for example, that an increase in capital requirements from 10% to 11% (by one percentage point, equivalent to 10%) could reduce lending associated with the highest risk weights (e.g. non-financial corporate lending) by as much as 5%. So the adjustment cost cannot be neglected.
This suggests that banks should increase their equity over a period of time, backloaded to the time when economic growth accelerates. For Europe, this may be another argument for the European Stability Mechanism support to banks in distressed countries (Dell’Arricia et al 2013).
Author's note: The views expressed are those of the author and do not represent those of the IMF. I thank Charles Calomiris, Stijn Claessens, Luc Laeven, Srobona Mitra, and others for helpful comments. All errors are mine.

References

Admati, A and M Hellwig (2013), The Bankers' New Clothes: What's Wrong with Banking and What to Do about It, Princeton University Press.
Aiyar S, C Calomiris and T Wieladek (2013), "Does Macro-pru leak?" Journal of Money, Credit and Banking, forthcoming.
BCBS [Basel Committee on Banking Supervision] (2010), "An assessment of the long-term economic impact of stronger capital and liquidity requirements".
Dell’Ariccia G, R Goyal, P Koeva-Brooks and T Tressel (2013), "A Banking Union for the Eurozone", VoxEU.org 5 April.
Elliott, D J (2009), "Quantifying the effects on lending of increased capital requirements", Brookings Institution Working Paper.
Kashyap A K, J C Stein and S Hanson (2010), "An analysis of the impact of substantially heightened capital requirements on large financial institutions", Working Paper, Harvard University.
King, M R (2010), "Mapping capital and liquidity requirements to bank lending spreads", BIS Working Paper 324.
La Lesle, V and S Avramova (2012), " Revisiting risk-weighted assets", IMF Working Paper 12/90.
Laeven, L and F Valencia (2012), "Systemic Banking Crises Database: An Update", IMF Working Paper 12/163.
Miles, D (2011), "What is the optimal leverage for a bank?", VoxEU.org, 27 April.
Saurina, J (2009), "Loan loss provisions in Spain. A working macroprudential tool", Revista de Estabilidad Financiera 17, 11-26.
Schuermann, T (2004), "What do we know about loss given default?" Federal Reserve Bank of New York.

Telangana

Telangana has been backward for centuries. It never came under the British
but was ruled by the Nizam of Hyderabad. He did set up a few factories and
a textile mill in Warangal in collaboration with the French.  However,avenues
of employment were few and exploitation abounded, owing to the nature of 
feudalism in the region.The most crucial infrastructure element, an irrigation 
system, was never developed systematically in Telangana,although both the
Krishna and theGodavari flowed through it. By contrast, the coastal Andhra
region aggressively lobbied for and got a garland of canals that took river 
waters deep into the east and west Godavari districts. The Telangana region
became a stronghold of the Communist Party of India and it was here that 
armed struggle first cameup in India.In 1956, when Fazal Ali presented his
report on the linguistic reorganisation of states, Telangana (called Hyderabad 
state) first refused to integrate and then negotiated long and hard on the terms
on which it would become a part of Andhra Pradesh (AP). What Nehru called 
a “gentleman’s agreement” was drawn up, in which Telangana would be recog-
nised as “virtually” a separate state.

This didn't happen and the movement for a separate state continued to simmer.
M Channa Reddy cynically fanned the flames of a separate Telangana 
movement in the late 1960s and 1970s that led to bloody riots but ensured 
a permanent stranglehold of  the Congress over AP. When N T Rama 
Rao founded the Telugu Desam, the Congress found itself turfed out 
of coastal Andhra but retained its base in Telangana and Rayalaseema.The
Telangana Rashtra Samiti was formed by K Chandrasekhar Rao in the 
winter of 2001. Rao quit as deputy speaker of the Assembly and resigned
 from the TDP. In the 2001 local body elections in AP, the TRS took off so 
strongly that the TDP got just 10 of the 20 zilla parishads. On this, the 
Congress quickly struck a deal with the TRS for the Lok Sabha elections.
In the 2004 Lok Sabha and Assembly elections, which the TRS fought in 
alliance with the Congress, the party bagged 26 assembly and five Lok Sabha 
seats. When it found the Congress equivocating on the issue of Telangana,
 the TRS broke away from the alliance. However, the base of the TRS had 
shrunk. Now, the eye of the Congress is on that base, which it hopes to 
get with the announcement of a new state, believing it has elbowed out the TRS

Bengal Famine by Amit kumar

The year 2013 marks the 70th anniversary of the Bengal Famine which resulted in the death of an estimated 1.5 to 3 million children, women and men during 1942-43. A constellation of factors led to this ega-tragedy, such as the Japanese occupation of Burma, the damage to the aman(kharif) rice crop both due to tidal waves and a disease epidemic caused by the fungus Helminthosporium oryzae , panic purchase and hoarding by the rich, failure of governance, particularly in relation to the equitable distribution of the available food grains, disruption of communication due to World War II, and the indifference of the then U.K. government to the plight of the starving people of undivided Bengal. Famines were frequent in colonial India and some estimates indicate that 30 to 40 million died out of starvation in Tamil Nadu, Bihar and Bengal during the later half of the 19th century. This led to the formulation of elaborate Famine Codes by the then colonial government, indicating the relief measures that should be put in place when crops fail. The Bengal Famine attracted much attention both among the media and the public, since it occurred soon after Mahatma Gandhi’s “Quit India” call to the British in 1942. Agricultural stagnation and famines were regarded among the major adverse consequences of colonial rule. I wish to narrate the impact of the twin developments, namely, Bengal Famine on the one hand, and the “Quit India” movement on the other, on the minds of students like me. I was studying at the University College, Thiruvananthapuram, during 1940-44, when gruesome pictures of starving children, women and men on the streets of Kolkata and in other parts of Bengal appeared in The Hindu , the Statesmanand other newspapers. The goal of my University education was to get into a medical college and equip myself to run a hospital in Kumbakonam left behind by my father, M.K. Sambasivan, who died at a young age in 1936. The transformational factor was procurement of food grains from farmers at a minimum support price fixed on the basis of the advice of the Agricultural Prices Commission. A small government programme titled “High Yielding Varieties Programme” became a mass movement owing to the enthusiasm generated among farm families both by the yield revolution and the opportunities for assured and emunerative marketing. Wheat production has continued to rise since 1968 and has now reached a level of 92 million tonnes. A third important factor was the synergy brought about among scientific know-how, political do-how and farmers’ toil, often referred to as the “green-revolution symphony”. While we can be legitimately proud of our progress in the production of wheat and rice and other cereals and millets leading to the commitment of government of over 60 million tonnes of foodgrains for implementing the provisions of the MAY  2013 Food Security Bill, there is no time to relax since dark clouds are gathering on the horizon.There would be three threats to the future of food production and our sustained capacity to implement the provisions of the Food Security Bill. First, prime farmland is going out of agriculture for non-farm purposes such as real estate and biofuels. Globally, the impact of biofuels on food security has become an increasing concern. A High Level Panel of Experts on Food Security and Nutrition (HLPE) of the World Commission on Food Security (CFS), which I chair, will be submitting a report shortly on Biofuels and Food Security. In this report, we are pointing out that if 10 per cent of all transport fuels were to be achieved through biofuels in the world, this would absorb 26 per cent of all crop prduction and 85 per cent of the world’s fresh water resources. Therefore, it will be prudent for all countries to accord food security the pride of place in the national land use policy. On the occasion of the 70th anniversary of the Bengal Famine, we should derive strength from the

fact that we have so far proved the prophets of doom wrong. At the same time, we need to redouble our efforts to help our farmers to produce more and more food and other commodities under conditions of diminishing per capita availability of arable land and irrigation water. This will be possible if the production

techniques of the evergreen revolution approach are followed and farmers are assisted with appropriate public policies to keep agriculture an economically viable occupation. This is also essential to attract and retain youth in farming. If agriculture goes wrong, nothing else will have a chance to go right. From the very beginning it has been taken  for granted that industrialisation is the only panacea for development. Our  economic policies were so designed that agriculture was categorised as ‘unskilled labour’. Urban areas and industrial enterprises received huge government  subsidies, at the cost of agriculture. As a consequence, small farmers and  rural labour suffered the inevitable impoverishment. The Green Revolution, sponsored by big industry, was imposed on India. Under the regime, ‘improved’ seeds were produced that survived only on a strong  dose of chemicals, fertilisers and pesticides. During a study on wheat  production in five states, including Madhya Pradesh, it was revealed that the  average cost of production per hectare, which was Rs 561 in the decade  19811990, has risen to a whopping Rs 7,673.70. As a result, traditional farming suffered  an untimely demise; agriculture became a ‘for markets, (controlled), by  markets’ enterprise. Small farmers got trapped in debt, and easily cultivable  and nutritious coarse pulses and oilseeds became unpopular. Modern, mechanised forms of farming made a huge population of rural labour redundant. Now there is the scourge of a Second  Green Revolution in the form of contract farming and ‘industrial-farming’. In  this age of biofuel, cane, corn and other such produce are being intensively cultivated  for fuel purposes only. Agriculture is being controlled by MNCs and large  corporations. How can food security be guaranteed by grabbing natural resources  like water and land from small, vulnerable farmers for the purpose of handing  them over to big industries? The National Food Security Bill serves only to register the fact that hunger is a real cause for concern, as in its present form, the bill is not adequately endowed with a vision to address the structural causes of India’s food and nutritional insecurities. Three basic issues need to be highlighted. First, the bill dwells on targeting vis-à-vis universalisation, re-invoking the contentious BPL-APL issue (‘priority’ and ‘non-priority’ households). Intended benefits will be provided to people based on these categories. It is a well-known fact that successive governments have failed to identify the poor. As a result, a large part of the country’s population continues to struggle with hunger in various forms. In such a grim scenario, the government should be talking about universalisation, which is an integral part of the fundamental right to life. Second, the bill provides for the supply of 7 kg of subsidised foodgrain per person per month to ‘priority’ households, whereas a person needs 14 kg a month to fulfil her basic food requirements. Third, the proposed entitlements do not deal with the problem of nutritional insecurity. People in India suffer undernourishment mainly due to protein and fat deficiencies. To cope with this problem, the government should have included pulses (to compensate for protein) and edible oil (to replenish fat). The preamble of the bill says: “…the Supreme Court of India has recognised the right to food and nutrition as integral to the right to life…” Today development is understood only in the narrow sense of economic growth and GDP. Successive governments have not stepped out of this familiar paradigm to address improvements in living standards and enhancement of people’s wellbeing. How can weServices programme with a plan to spend Rs 80,000 crore in the next five years; the midday meal scheme is already in place. We have a 17 crore under-6 child population, 45% of which is undernourished. But we barely spend Rs 1.62 per child per day on their growth and nutrition. The fact of the matter is that the private food market will lose out on profits due to this legislation, and there will be a control over inflation. The market finds this unacceptable Take the example of the second and third quarter of 2011-12. While the growth rate came down to 6.8%, food inflation also declined from 16% to 1.7%. There is an argument that it would be better for the government to focus on productivity enhancement rather than on doling out subsidies at the expense of taxpayers. But these two things are not mutually exclusive, they are complementary. India is not a food-deficit country; we produce surplus foodgrain, we throw it in the sea, we export it. But, for various reasons, it does not reach our hungry people. Part of this discussion is linked to public procurement and a minimum support price. If the government stops subsidising agriculture, profit-makers will benefit and consumers will have to pay high prices. Take the example of pulses. We pay Rs 36 per kg as the minimum support price to the farmer for tur dal, but the market price was Rs 110 some time ago. There is an urgent need to ensure maximum public procurement, and this can only be done and applied through the public distribution system. The second aspect deals with policy. For the last 20 years, per capita food production in India has been stagnant at around 460 grams per person per day. Although pulses are a key source of protein, their availability has gone down from 70 grams per day in the 1960s to 42 grams in recent times. We adopted new technologies — hybrid seeds, chemical fertiliser and pesticides — in order to increase agricultural production. Punjab sacrificed its community techniques and blindly used chemicals resulting, finally, in steep declines in soil fertility.The important point is that while  our budget grew 5,000 times its inaugural size, food production grew by a measly  400% over the same period. In rural India today, 23 crore people are  under-nourished,

and 50% of children fall victim to malnutrition. Every third  Indian in the age-group 15-49 years is feeblebodied. The government is presently  grappling with the target of 22.8 crore tonnes of grain production; it needs to  reach a target of 25-26 crore tonnes by the year 2015. The situation is so grim that today every fourth malnourished global citizen is an Indian. While countless Indian citizens are condemned to sleep on empty stomachs, crores of tonnes of foodgrain rot in the country’s godowns. India has the capacity to store 415 lakh tonnes of grain in its godowns, yet 190 lakh tonnes are stored outside under thin plastic

sheets. Speedy distribution of this grain could feed many hungry Indians. Despite instructions from the Supreme Court to distribute 35 kg of foodgrain per person, only 20- 25 kg per capita is being distributed. This shortfall can be addressed by proper utilisation of grain rotting out in the open. Only lack of political and administrative will can be blamed for such debilitating ennui. Will food security bill take the targeted approach or one aimed at universalisation of food security?  If food security is considered an integral part of the fundamental right to life, how can the targeted approach even be considered? When exclusion and caste/class/ gender discrimination have been key to social, political and economic structures, how can any targeted approach address the hunger and food insecurity situation in our country  today? The present crisis of food insecurity  is due to the consistent exploitation and negligence of agriculture and the rural  sector. Even in this age of breakneck urbanisation, two-thirds of our population depend on agriculture whereas its total contribution to India’s GDP is a  dismal 17%. At the other end of the spectrum, private enterprises that are a  minuscule 1%, stake their claim to one-third of our GDP. Real food security can only be achieved through an entirely new form of polity. So, we can only hope that this National Food Security Bill will led us to Hunger to Food Security.

Jagoinvestor

Basics with bit details

CRR - The Cash Reserve Ratio

CRR is that proportion of a bank’s Net Demand and Time Liabilities (NDTL) that it has to keep as cash deposits with RBI. Cash deposits do not mean physical cash, but a credit balance in a current account that every bank maintains at RBI.
This proportion is specified by RBI and could change from time to time. Currently (on the date this piece is being published), CRR is 4.75%.
CRR is governed by the provisions of Section 42 of the Reserve Bank of India Act, 1934.
There is no minimum level of CRR. We could go upto zero CRR (negative values are of course absurd). Similarly, there is no maximum. In theory, CRR can go upto 100%, which would mean RBI impounding the entire NDTL as a cash reserve.
Until the RBI Act was amended in 2007, the minimum value of CRR was statutorily fixed at 3% and the maximum was fixed at 20%. Both these limits (lower and upper) were removed by the amendment which came into effect in early 2007.

SLR - Statutory Liquidity Ratio

SLR is that proportion of a bank’s Net Demand and Time Liabilities (NDTL) that it has to maintain as investments in certain specified assets. SLR is governed by the provisions of Section 24 of the Banking Regulation Act.
There is no minimum stipulation on SLR (earlier there used to be a minimum stipulated SLR of 25% - but this was removed with an amendment to the Banking Regulation Act in 2007).
However, SLR can not exceed 40%.

Net Demand and Time Liabilities

It is quite apparent that to arrive at CRR or SLR we need to first calculate NDTL.

What constitutes NDTL?

As the name suggest there are three broad components to NDTL.

• Demand Liabilities
• Time Liabilities; and
• A Netting Amount that is reduced from the Demand and Time Liabilities.

Additionally Demand and Time Liabilities (DTL) are further broken up into

• DTL to the banking system;
• DTL to Others; and
• Other DTL.

RBI has been empowered to decide on what kind of liabilities fall under DTL. In case of doubt, banks are advised to get a clarification from RBI.

NDTL Base for CRR and SLR

Is CRR and SLR maintained on the same base - viz NDTL?
The short answer is, No.
While the NDTL calculation is broadly the same, there are some important differences when it comes to it’s use to compute CRR and SLR.
Some items are exempt for CRR purposes and so, the base on which CRR is to be maintained is not the same as the base on which SLR is computed. We shall look at these differences in the base a little later.

Demand Liabilities

Demand Liabilities of a bank are liabilities which are payable on demand. These include

• current deposits;
• demand liabilities portion of savings bank deposits;
• margins held against letters of credit / guarantees;
• balances in overdue fixed deposits;
• cash certificates and cumulative/recurring deposits;
• outstanding Telegraphic Transfers (TTs);
• Mail Transfer (MTs);
• Demand Drafts (DDs);
• unclaimed deposits;
• credit balances in the Cash Credit account; and
• deposits held as security for advances which are payable on demand.

Time Liabilities

Time Liabilities of a bank are those liabilities that are payable other than on demand.
These include

• fixed deposits;
• cash certificates;
• cumulative and recurring deposits;
• time liabilities portion of savings bank deposits;
• staff security deposits;
• margin held against letters of credit, if not payable on demand;
• deposits held as securities for advances which are not payable on demand; and
• gold deposits.

Other demand and time liabilities (ODTL)

ODTL includes:

• interest accrued on deposits;
• bills payable;
• unpaid dividends;
• suspense account balances representing amounts due to other banks or public;
• net credit balances in branch adjustment account;
• Cash collaterals received under collateralized derivative transactions.

Any amounts due to the banking system which are not in the nature of deposits or borrowing are also to be included in other demand and time liabilities. Such liabilities may arise due to items like (i) collection of bills on behalf of other banks, (ii) interest due to other banks and so on

Inter Bank Assets

Assets with the banking system include

• balances with banks in current account;
• balances with banks and notified financial institutions in other accounts;
• funds made available to banking system by way of loans or deposits repayable at call or short notice of a fortnight or less; and
• loans other than money at call and short notice made available to the banking system.

Any other amounts due from banking system which cannot be classified under any of the above items are also to be taken as assets with the banking system.

Liabilities not to be included in DTL / NDTL calculation

The following liabilities are not be included in the DTL calculation for purposes of maintaining CRR and SLR

• Paid up capital, reserves;
• Any credit balance in the Profit & Loss Account of the bank;
• Amount of any loan taken from the RBI;
• Amount of refinance taken from Exim Bank, NHB, NABARD, SIDBI;
• Net income tax provision;
• Amount received from Deposit Insurance and Credit Guarantee Corporation (DICGC) towards claims and held by banks pending adjustments thereof;
• Amount received from ECGC by invoking the guarantee;
• Amount received from insurance company on ad-hoc settlement of claims pending judgment of the Court;
• Amount received from the Court Receiver;
• The liabilities arising on account of utilization of limits under Bankers Acceptance Facility (BAF);
• District Rural Development Agency (DRDA) subsidy of Rs.10, 000/- kept in Subsidy Reserve Fund account in the name of Self Help Groups;
• Subsidy released by NABARD under Investment Subsidy Scheme for Construction/Renovation/Expansion of Rural Godowns;
• Net unrealized gain/loss arising from derivatives transaction under trading portfolio;
• Income flows received in advance such as annual fees and other charges which are not refundable;
• Bill rediscounted by a bank with eligible financial institutions as approved by RBI;
• Provision not being a specific liability arising from contracting additional liability and created from profit and loss account.

NDTL Computation

Computation of NDTL is a multi step process as follows :

• Compute Demand Liabilities to the banking system
• Compute Time Liabilities to the banking system

Take the sum of the above two to arrive at “DTL to the Banking System” - (A)

• Compute Demand Liabilities to others
• Compute Time Liabilities to others

Take the sum of the above to arrive at “DTL to Others” - (B)
Compute Other Demand and Time Liabilities - (C)
Calculate Assets to the banking system - (D)
Compute Net Inter Bank DTL by subtracting Assets to the Banking System from DTL to the banking system - (A-D)
If the Net Inter Bank DTL so calculated is negative or zero, it is ignored.
Thus NDTL is given by
NDTL = (A-D)+(B+C) if A-D is greater than zero,
NDTL = B+C if A-D is less than or equal to zero.

CRR Maintenance

Items on which CRR maintenance is exempt:
Banks are exempted from maintaining CRR on the following liabilities:

• Liabilities to the banking system in India.
• Credit balances in Asian Clearing Union (US$) Accounts.
• Demand and Time Liabilities in respect of their Offshore Banking Units (OBU)

For CRR purposes, NDTL should not include inter-bank term deposits / term borrowing liabilities of original maturities of 15 days and above and up to one year. Similarly banks should exclude their inter-bank assets of term deposits and term lending of original maturity of 15 days and above and up to one year for calculating inter bank assets (which is used to net off DTL and arrive at NDTL). The interest accrued on such deposits should also not be included.
As a consequence of the above, CRR is not maintained on

• Net Inter Bank DTL;
• Non Resident Deposits (NRE and NRNR);
• FCNR (B) - Short term and Long term;
• Exchange Earner’s Foreign Currency (EEFC) accounts;
• Resident Foreign Currency Accounts;
• Escrow Accounts by Indian Exporters;
• Foreign Credit Line for Pre-Shipment Credit Account;
• Overseas rediscounting of bills;
• Credit Balances in ACU (US dollar) Account;

The nitty gritty of CRR maintenance

Banks maintain CRR on a fortnightly average basis.
Say, a bank has NDTL of 100 crores and CRR is 5%.
The bank will thus have to maintain 5 crores as cash balance in its account with RBI. This 5 crores is calculated on a fortnightly average basis and the exact modality of how this is done is explained below.

Reporting Friday and Reporting Fortnight

To understand how this fortnightly average system works, we need to first understand the concept of reporting fortnight and reporting Friday.
Every alternate Friday is a reporting Friday. As I write, the last reporting Friday was March 23, 2012. So the next reporting Fridays would fall on April, 6, April 20, May 4 and so on. In case the reporting friday happens to be a holiday, the last previous working day is taken as the relevant reporting friday.
The 14 day period beginning on the Saturday immediately following a reporting Friday is called a reporting fortnight. A reporting fortnight therefore begins on a Saturday and ends on the reporting Friday.
As the name would suggest, banks report their business numbers (deposits, advances, investments etc.) to RBI as on these reporting Fridays.
For purposes of maintaining CRR and SLR, banks have to calculate their NDTL on every reporting friday.
However, the actual CRR and SLR maintenance happens with a lag of one fortnight.
So if the NDTL of a bank was 100 crores on March 9, 2012 and (assuming CRR is 5%) the bank would have to maintain an average cash balance of 5 crores in the reporting fortnight which begins on March 24.
This reporting and maintenance cycle is repeated over.
The situation can be better understood in the depiction below

Assume A, B and C are dates on a timeline that fall on alternating Fridays. Also, let’s say these are reporting Fridays.
Let’s also say that a bank calculates its NDTL on A and it turns out that the NDTL is equal to 100 crores.
If the CRR is 5%, the bank has to maintain an average cash balance of 5 crores over a fortnight. However, banks are given one fortnight’s time before they start maintaining these CRR balances.
So, for NDTL of 100 crores on A, the bank would have to maintain an average cash balance of 5 crores during the reporting fortnight ‘BC’.
To implement this, banks maintain CRR by the fortnightly product method.
Once again, it is easier to understand this with an example.
Let’s take our previous example:
If the bank has to maintain 5 crores on an average over the fortnight (14 days) it effectively has to maintain a product of
5 x 14 = 70 crores
Banks also have to maintain at least 70% of their stipulated CRR average as cash balance with RBI on every day of the reporting fortnight. This means that the bank in our example has to maintain
0.70 x 5 = 3.5 crores as cash balance on every day of the fortnight.
Let’s say for e.g. that the bank maintains the following cash balances on the first seven days of the fortnight.

• Day 1 : 4 crores
• Day 2 : 4.5 crores
• Day 3 : 3.5 crores
• Day 4 : 7 Crores
• Day 5 : 6 crores
• Day 6 : 5.5 crores
• Day 7 : 6.5 crores

Effectively the bank has maintained a product of

4 + 4.5 + 3.5 + 7 + 6 + 5.5 + 6.5 = 37 crores in the first 7 days.

(To calculate the product we multiply the amount maintained by the number of days the amount is maintained as balance. Since we are taking daily amounts we simply multiply the amounts by a factor of 1)
This means that the bank now needs to maintain only 70-37 = 33 crores as product in the second week of the reporting fortnight.
The minimum 70% stipulation means that banks can maintain neither too low a cash balance nor too high a cash balance on every day of the fortnight. If they maintain too high a cash balance during the initial days of the fortnight, it may so happen that the product build up is rapid and the bank may need to maintain a significantly lower cash balance during the last few days of the fortnight. This condition could lead to a breach of the minimum 70% rule which could incur penalties.
Banks thus have to be diligent in the calculation and maintenance of their fortnightly product.
Until this 70% rule was brought in sometime in 2002, banks were free to maintain any amounts, with the result that volatility in the money market was high, as banks’ requirement of funds varied sharply depending on their product build up during the reporting fortnight.

Penalties

From the fortnight beginning June 24, 2006, penal interest will be charged as under
In case of default in maintenance of CRR requirement on a daily basis which is presently 70 per cent of the total CRR requirement, penal interest will be recovered for that day at the rate of:

Bank Rate + 3% per annum on the amount by which the cash balance actually maintained falls short of the prescribed minimum on that day.
If the shortfall continues on the next succeeding day/s, the penal interest levied is at the rate Bank Rate + 5% per annum.

In cases of default in maintenance of CRR on average basis during a fortnight, penal interest will be recovered as envisaged in sub-section (3) of Section 42 of Reserve Bank of India Act, 1934. Under this section,The penal interest for default is:
if the average daily balance held at RBI by a bank during any fortnight is below the required average balance for CRR purposes, penal interest will be charged at the rate of

Bank Rate + 3% per annum

on the amount by which the balance falls short of the requirement.
If during the next succeeding fortnight the daily average balance is still below the required amount, the penal interest liable to be charged is

Bank Rate + 5% per annum

for each subsequent fortnight during which the bank defaults on maintaining the minimum required balance.
In addition to the above if the default on maintaining CRR continues for more than two fortnights meaning then any director, manager or secretary who knowingly and wilfully is a party to such defaults are liable to be fined a princely sum of five hundred rupees for every fortnight where such default occurs.
More tellingly if such a default on CRR continues for more than two fortnights, RBI has the power to prohibit the bank from accepting any fresh deposit.
The relevant clause in the RBI Act also says that if the bank contravenes this stipulation of not accepting any fresh deposit, then any manager, director or secretary who wilfully and knowingly is a party to such an action shall be fined a princely sum of five hundred rupees.
Of course, we know that RBI can take drastic action under other laws and these small fines (of five hundred rupees) stipulated in the RBI Act carry little meaning in the real sense.

SLR Maintenance

As has been discussed above, SLR is that proportion of NDTL that the bank has to maintain in certain specified assets.
It should be noted that for SLR purposes NDTL is calculated slightly differently.
Firstly, all inter bank liabilities and assets are to be included for SLR purposes (unlike CRR wherein liabilities with original maturity between 15 days and one year were excluded)
Secondly, there are no exemptions (items on which no SLR is to be maintained) - unlike CRR where some items are exempt.

Specified Investments

The specified investments that are eligible for SLR purposes are

• Cash
• Gold valued at a price not exceeding the current market price
• Investment in the following instruments which will be referred to as "Statutory
• Liquidity Ratio (SLR) securities":
• Dated government of india securities
• Treasury Bills of the Government of India;
• State Development Loans (SDLs) of the State Governments issued from time to time under the market borrowing programme; and
• Any other instrument as may be notified by the Reserve Bank of India.

Of the above, any securities which are encumbered in any way can not be included for SLR purposes. This also includes situations wherein the security may have been submitted to RBI as collateral under the daily liquidity adjustment facility (the commonly understood RBI repo window).
Unlike CRR which is maintained as an average over the entire fortnight, SLR has to be maintained on all the days of the relevant fortnight.
The relevant fortnight and NDTL are however the same as in the case of CRR.
SLR is therefore maintained on the NDTL as on the reporting Friday of two fortnights ago.(just like in the case of CRR).

Penalties

If a bank fails to maintain the required amount of SLR, it shall be liable to pay to RBI in respect of that default, penal interest for that day at the rate of three per cent per annum above the Bank Rate on the shortfall.
If the default continues on the next succeeding working day, the penal interest may be increased to a rate of five per cent per annum above the Bank Rate for the concerned days of default on the shortfall.

Footnote :

In my opinion, the bank rate continues to exist only because of the penalty provisions on default in maintenance of reserve requirements.
Had these penalty provisions not been linked to the bank rate under the law, we would have possibly seen the demise of the bank rate as an instrument of monetary policy.
Under the current situation doing away with the bank rate would require amending the RBI Act and the Banking Regulation Act - something that only the Parliament can do. Amending laws take significant effort, and therefore we might have to live with the bank rate for some more time.
RBI has anyway made the bank rate irrelevant by equating it to the rate at which it lends money under the marginal standing facility (MSF). MSF is currently pegged at one percent above RBI’s repo rate.

BLIP

For all of measurable human history up until the year 1750, nothing happened that mattered. This isn’t to say history was stagnant, or that life was only grim and blank, but the well-being of average people did not perceptibly improve. All of the wars, literature, love affairs, and religious schisms, the schemes for empire-making and ocean-crossing and simple profit and freedom, the entire human theater of ambition and deceit and redemption took place on a scale too small to register, too minor to much improve the lot of ordinary human beings. In England before the middle of the eighteenth century, where industrialization first began, the pace of progress was so slow that it took 350 years for a family to double its standard of living. In Sweden, during a similar 200-year period, there was essentially no improvement at all. By the middle of the eighteenth century, the state of technology and the luxury and quality of life afforded the average individual were little better than they had been two millennia earlier, in ancient Rome.
Then two things happened that did matter, and they were so grand that they dwarfed everything that had come before and encompassed most everything that has come since: the first industrial revolution, beginning in 1750 or so in the north of England, and the second industrial revolution, beginning around 1870 and created mostly in this country. That the second industrial revolution happened just as the first had begun to dissipate was an incredible stroke of good luck. It meant that during the whole modern era from 1750 onward—which contains, not coincidentally, the full life span of the United States—human well-being accelerated at a rate that could barely have been contemplated before. Instead of permanent stagnation, growth became so rapid and so seemingly automatic that by the fifties and sixties the average American would roughly double his or her parents’ standard of living. In the space of a single generation, for most everybody, life was getting twice as good.
At some point in the late sixties or early seventies, this great acceleration began to taper off. The shift was modest at first, and it was concealed in the hectic up-and-down of yearly data. But if you examine the growth data since the early seventies, and if you are mathematically astute enough to fit a curve to it, you can see a clear trend: The rate at which life is improving here, on the frontier of human well-being, has slowed.
If you are like most economists—until a couple of years ago, it was virtually all economists—you are not greatly troubled by this story, which is, with some variation, the consensus long-arc view of economic history. The machinery of innovation, after all, is now more organized and sophisticated than it has ever been, human intelligence is more efficiently marshaled by spreading education and expanding global connectedness, and the examples of the Internet, and perhaps artificial intelligence, suggest that progress continues to be rapid.
But if you are prone to a more radical sense of what is possible, you might begin to follow a different line of thought. If nothing like the first and second industrial revolutions had ever happened before, what is to say that anything similar will happen again? Then, perhaps, the global economic slump that we have endured since 2008 might not merely be the consequence of the burst housing bubble, or financial entanglement and overreach, or the coming generational trauma of the retiring baby boomers, but instead a glimpse at a far broader change, the slow expiration of a historically singular event. Perhaps our fitful post-crisis recovery is no aberration. This line of thinking would make you an acolyte of a 72-year-old economist at Northwestern named Robert Gordon, and you would probably share his view that it would be crazy to expect something on the scale of the second industrial revolution to ever take place again.
“Some things,” Gordon says, and he says it often enough that it has become both a battle cry and a mantra, “can happen only once.”
Gordon assumed his present public identity—as a declinist and an accidental social theorist, as a roving publicist of depressing PowerPoints—last August, when he presented his theory in a working paper titled “Is U.S. Economic Growth Over?” He has held a named chair at Northwestern for decades and is one of the eminent macroeconomists of his generation, but the scope of his bleakness has given him, over the past year, a newfound public profile. It has been a good time to be bleak, and Gordon, bleaker than everyone else, commands attention. “Very impressive,” the former Treasury secretary Larry Summers wrote Gordon from his iPad the day after the paper appeared. Ben ­Bernanke, the Federal Reserve chairman, delivered a commencement address this spring considering the paper’s implications, and the financial press has weighed in vociferously for and against.
Gordon has two predictions to offer, the first of which is about the near future. For at least the next fifteen years or so, Gordon argues, our economy will grow at less than half the rate it has averaged since the late-nineteenth century because of a set of structural headwinds that Gordon believes will be even more severe than most other economists do: the aging of the American population; the stagnation in educational achievement; the fiscal tightening to fix our public and private debt; the costs of health care and energy; the pressures of globalization and growing inequality. Over the past year, some other economists who once agreed with Gordon—most prominently Tyler Cowen of George Mason University—have taken note of the recent discoveries of abundant natural-gas reserves in the United States, and of the tentative deflation of health-care costs, and softened their pessimism. But to Gordon these are small corrections that leave the basic story unchanged. He believes we can no longer expect to double our standard of living in one generation; it will now take at least two. The common expectations that your children will attend college even if you haven’t, in other words, or will have twice as rich a life, in this view no longer look realistic. Some of these hopes are already outdated: The generation of Americans now in their twenties is the first to not be significantly better educated than their parents. If Gordon is right, then for all but the wealthiest one percent of Americans, the rate of improvement in the standard of living—year over year, and generation after generation­—will be no faster than it was during the dark ages.
Gordon’s second prediction is almost literary in its scope. The forces of the second industrial revolution, he believes, were so powerful and so unique that they will not be repeated. The consequences of that breakthrough took a century to be fully realized, and as the internal combustion engine gave rise to the car and eventually the airplane, and electricity to radio and the telephone and then mass media, they came to rearrange social forces and transform everyday lives. Mechanized farm equipment permitted people to stay in school longer and to leave rural areas and move to cities. Electrical appliances allowed women of all social classes to leave behind housework for more fulfilling and productive jobs. Air-conditioning moved work indoors. The introduction of public sewers and sanitation reduced illness and infant mortality, improving health and extending lives. The car, mass media, and commercial aircraft led to a liberation from the narrow confines of geography and an introduction to a far broader and richer world. Education beyond high school was made accessible, in the aftermath of World War II, to the middle and working classes. These are all consequences of the second industrial revolution, and it is hard to imagine how those improvements might be extended: Women cannot be liberated from housework to join the labor force again, travel is not getting faster, cities are unlikely to get much more dense, and educational attainment has plateaued. The classic example of the scale of these transformations is Paul Krugman’s description of his kitchen: The modern kitchen, absent a few surface improvements, is the same one that existed half a century ago. But go back half a century before that, and you are talking about no refrigeration, just huge blocks of ice in a box, and no gas-fired stove, just piles of wood. If you take this perspective, it is no wonder that the productivity gains have diminished since the early seventies. The social transformations brought by computers and the Internet cannot match any of this.
But even if they could, that would not be enough. “The growth rate is a heavy taskmaster,” Gordon says. The math is punishing. The American population is far larger than it was in 1870, and far wealthier to begin with, which means that the innovations will need to be more transformative to have the same economic effect. “I like to think of it this way,” he says. “We need innovations that are eight times as important as those we had before.”
There are many ways in which you can interpret this economic model, but the most lasting—the reason, perhaps, for the public notoriety it has brought its author—has little to do with economics at all. It is the suggestion that we have not understood how lucky we have been. The whole of American cultural memory, the period since World War II, has taken place within the greatest expansion of opportunity in the history of human civilization. Perhaps it isn’t that our success is a product of the way we structured our society. The shape of our society may be far more conditional, a consequence of our success. Embedded in Gordon’s data is an inquiry into entitlement: How much do we owe, culturally and politically, to this singular experience of economic growth, and what will happen if it goes away?
here are some people, scattered around this planet, for whom the question of economic growth many years hence is urgently important, for whom it seems to blot out all other matters. Economists, and think-tankers, and environmentalists concerned with climate change, and the dreamier kind of CNBC host, yes. But also ordinary people—liberals alarmed about their children’s student debt or conservatives outraged about the national deficit—who are not convinced that we will grow rich enough to pay these bills in the future, who hold ambient anxieties that things are getting not better but worse.
Among growth-worriers, there is a ­science-fiction streak. To be possessed by nightmares about the future requires that one be dreaming about the future in the first place. I don’t think I have had a single conversation about long-term economic growth that did not involve a detour into the matter of robots. Not robotization, but robots: how their minds worked, their strategies when engaged in a game of chess. Very strong and well-defended opinions about the driverless car are held. People in this camp are open to the possibility that the future could be very different from the present, and so robots, ­evocative of a wholly transformed world—perhaps for good, perhaps not—are of special interest. One leading theorist in the Gordon camp urged me to read a Carter-era text called The Zero Sum ­Society, which suggests a grim dystopia that emerges once economic growth hits zero point zero, at which moment to gain anything requires that you take it from somebody else. “Once you start to think about growth,” the Nobel laureate Robert Lucas has said, “it is hard to think about anything else.”
Earlier this year, Gordon flew out to Long Beach to give a TED talk detailing his theory and its implications. TED’s audience is so primed for optimism about the future that Gordon, a rebuker of futurists, knew before he began that he’d lost the room—not in a Seth MacFarlane–at–the–Academy Awards way, but in a Bill O’Reilly–at–Al Sharpton’s–political–group kind of way, as a matter of tribal identity. TED had invited MIT’s Erik Brynjolfsson, an expert in the economics of technology and a known optimist about future breakthroughs, to give the counterpoint address. Gordon (short, round, and earnest) projects a donnish air; Brynjolfsson (tall, redheaded, bearded), the kind of cocky casualness that in Silicon Valley scans as cool. Gordon gave his account; introduced his graph; emphasized the abject poverty of life at the turn of the twentieth century; demonstrated how each American deficiency in education, inequality, demographics limited how much our economy might grow—and then, sensing that the crowd was not all that much moved, sat back to watch Brynjolfsson make the case against.
Brynjolfsson let a long beat elapse. “Growth is not dead,” he said casually, and then he grinned a little bit, and the audience laughed, and the tension that had lingered after Gordon’s pessimism dissipated. Brynjolfsson had the aspirational TED inflection down cold: “Technology is not destiny,” he said. “We shape our destiny.”
The second industrial revolution itself, he said, proved the point. After factories were electrified, Brynjolfsson explained, “the amazing thing is productivity didn’t increase in those factories for 30 years—30 years!” It sometimes take a while for humans to figure out how to use innovations, he said, and perhaps we are just now beginning to comprehend the full possibilities of computerization. In Brynjolfsson’s view, we are now in the beginnings of the new machine age, an extended moment of revolution in artificial intelligence. “A child’s PlayStation,” he said, is more powerful than a military super­computer from 1996; a chess program contained on a cell phone can defeat every grandmaster. Brynjolfsson pointed out that Watson, the IBM AI project, having successfully amassed enough everyday knowledge to defeat the grand champions on Jeopardy!, was “now applying for jobs at call centers, and getting them. In finance, and in law, and getting them.”
Economists often note that even experts are very bad at predicting the world to come and constantly underestimate it. Optimists like Brynjolfsson say that though productivity gains from computer technologies have declined since 2004, that’s no reason to expect the decline to continue. They see prospects. A recent ­McKinsey report detailing economic sectors that might grow found, for instance, great possibilities in intelligent machines: trillions of dollars in the so-called Internet of Things, for instance, and 3-D printing.
I called Brynjolfsson at his office at MIT to try to get a better sense of what a ­roboticized society might look like. It turns out the optimist’s case is darker than I expected. “The problem is jobs,” he said. Sixty-five percent of American workers, Brynjolfsson explained, occupy jobs whose basic tasks can be classified as information processing. If you are trying to find a competitive advantage for people over machines, this does not bode well: “The human mind did not evolve to multiply triple-digit numbers,” he told me. The robot mind has. In other words, the long history of Marx-inflected pleas, from ­“Bartleby” through to Fight Club, that office work was dehumanizing may have been onto something. Those jobs were never really designed for the human mind. They were designed for robots. The existing robots just weren’t good enough to take them. At first.
At opposite ends of the pay scale, there are jobs that seem safe from the robot menace, Brynjolfsson said—high-paying creative and managerial work, and non-routine physical work, like gardening. (The smartest machines still struggle to recognize an ordinary kitchen fork if it is rotated by 30 degrees.) As for the 65 percent of us who are employed in “information processing” jobs, Brynjolfsson said, the challenge is to integrate human skills with machine capacities—his phrase is “racing with machines.” He mentioned a biotech company that relied on human workers to refine the physical shapes of synthetic proteins, jobs at which the most sophisticated algorithms remain hopeless. I expressed some doubts about how many jobs there might be in endeavors like this. “The grand challenge is: Can we scale them up?” Brynjolfsson said. “We haven’t seen that yet. Otherwise, employment would be going up rather than down.”
Even among the most committed stagnation theorists, there is little doubt that innovation will continue—that our economy will continue to be buttressed by new ideas and products. But the great question at the center of the growth argument is how transformative those breakthroughs will be, and whether they will have the might to improve human experience as profoundly as the innovations of a century ago. One way to think about economic growth is as a product of human capital and technology: At moments like this, when human capital is not growing much (when the labor force is unlikely to grow, when it is not becoming more educated), all of the pressure rests on technology. For this reason, some economists who think Gordon greatly understates the potential of computers still agree that it will be hard for technology to sustain the growth rates we’ve become accustomed to. “We’re not going to get to 2.25 percent GDP growth—that’s way out on the tail,” Dale Jorgenson of Harvard told me. “There’s going to be a slowdown. It’s not a secular stagnation. It’s a change in demography. And this is a watershed event.”
Provoked by Gordon’s paper, Daniel Sichel of Wellesley and a team of collaborators have worked out a model by which future U.S. growth might match the rates it has historically achieved. It was not a science-fiction scenario, Sichel explained to me; it required a faster rate of improvements in microprocessor technology, and new computer technologies to be adopted quickly by sectors (education, health care) that have tended to move more slowly. But this is Sichel’s optimistic model; his median projection—his sense of what is most likely to happen—isn’t much more hopeful than Gordon’s. That we might continue to experience the kind of growth we’ve enjoyed for the past several decades remains a defensible possibility. But so does Gordon’s idea, that something great is gone.
In 2007, Mexicans stopped emigrating to the United States. The change was not very big at first, and so for a few years it seemed like it might be a blip. But it wasn’t. In 2000, 770,000 Mexicans had come across the Rio Grande, but by 2007 less than 300,000 did, and by 2010, even though violence in Mexico seemed ceaseless, there were fewer than 150,000 migrants. Some think that more Mexicans are now leaving the United States than are coming to it. “We’re never going to get back to the numbers we had in the late nineties,” says Wayne Cornelius, a political scientist at UC–San Diego who has spent the past 40 years studying this cross-border movement. A small part of this story is the increase in border protection, but the dominant engine has been the economic shifts on both sides of the border—it has become easier for poor Mexicans to improve their quality of life in Mexico and harder to do so in the United States. Because migrants from a particular Mexican village often settle in the same American place, they provide a fast conduit of economic information back home: There are no jobs in construction or housing. Don’t come. The Pew Hispanic Center has traced the migration patterns to economic performance in real time: a spike of migration during 1999 and 2000, at the height of the boom; a brief downturn in border crossing after the 2001 stock-market crash followed by a plateau; then the dramatic emptying out after the housing industry gave way in 2006. We think of the desire to be American as a form of idealism, and sometimes it is. But it also has something to do with economic growth. We are a nation of immigrants to the extent that we can make immigrants rich.
These hingelike mechanisms, in which social changes depend upon the promise of rapidly escalating well-being, are studded throughout the aftermath of the second industrial revolution. The United States did not really become a melting pot until the 1880s, when the economy was beginning to draw on the breakthroughs of electricity and the engine and attract migrants from Southern and Eastern Europe. The labors that housework required in the nineteenth century were so consuming that housewives in North Carolina walked 148 miles a year carrying 35 tons of water for nonautomated chores. It took until the fifties for household appliances to decline so much in price that they were ubiquitous; the next decade was the one of women’s liberation. The prospects for African-American employment increased most dramatically during World War II and in the period just after: 16.4 percent of black men held middle-class jobs in 1950; by 1960 it was 24 percent; by 1970, 35 percent. Progressives will often describe the history of social liberation by quoting Martin Luther King Jr.’s line that the arc of the moral universe bends toward justice; the implication is that metaphysics are somehow involved. But this history has also taken place during unique economic times, and perhaps that is not coincidence.

GOLD

Byron Wien’s 20 Rules of Investing & Life

Lessons Learned in His First 80 Years
1. Concentrate on finding a big idea that will make an impact on the people you want to influence. The Ten Surprises, which I started doing in 1986, has been a defining product. People all over the world are aware of it and identify me with it. What they seem to like about it is that I put myself at risk by going on record with these events which I believe are probable and hold myself accountable at year-end. If you want to be successful and live a long, stimulating life, keep yourself at risk intellectually all the time.
2. Network intensely. Luck plays a big role in life, and there is no better way to increase your luck than by knowing as many people as possible. Nurture your network by sending articles, books and emails to people to show you’re thinking about them. Write op-eds and thought pieces for major publications. Organize discussion groups to bring your thoughtful friends together.
3. When you meet someone new, treat that person as a friend. Assume he or she is a winner and will become a positive force in your life. Most people wait for others to prove their value. Give them the benefit of the doubt from the start. Occasionally you will be disappointed, but your network will broaden rapidly if you follow this path.
4. Read all the time. Don’t just do it because you’re curious about something, read actively. Have a point of view before you start a book or article and see if what you think is confirmed or refuted by the author. If you do that, you will read faster and comprehend more.
5. Get enough sleep. Seven hours will do until you’re sixty, eight from sixty to seventy, nine thereafter, which might include eight hours at night and a one-hour afternoon nap.
6. Evolve. Try to think of your life in phases so you can avoid a burn-out. Do the numbers crunching in the early phase of your career. Try developing concepts later on. Stay at risk throughout the process.
7. Travel extensively. Try to get everywhere before you wear out. Attempt to meet local interesting people where you travel and keep in contact with them throughout your life. See them when you return to a place.
8. When meeting someone new, try to find out what formative experience occurred in their lives before they were seventeen. It is my belief that some important event in everyone’s youth has an influence on everything that occurs afterwards.
9. On philanthropy my approach is to try to relieve pain rather than spread joy. Music, theatre and art museums have many affluent supporters, give the best parties and can add to your social luster in a community. They don’t need you. Social service, hospitals and educational institutions can make the world a better place and help the disadvantaged make their way toward the American dream.
10. Younger people are naturally insecure and tend to overplay their accomplishments. Most people don’t become comfortable with who they are until they’re in their 40’s. By that time they can underplay their achievements and become a nicer, more likeable person. Try to get to that point as soon as you can.
11. Take the time to give those who work for you a pat on the back when they do good work. Most people are so focused on the next challenge that they fail to thank the people who support them. It is important to do this. It motivates and inspires people and encourages them to perform at a higher level.
12. When someone extends a kindness to you write them a handwritten note, not an e-mail. Handwritten notes make an impact and are not quickly forgotten.
13. At the beginning of every year think of ways you can do your job better than you have ever done it before. Write them down and look at what you have set out for yourself when the year is over.
14. The hard way is always the right way. Never take shortcuts, except when driving home from the Hamptons. Short-cuts can be construed as sloppiness, a career killer.
15. Don’t try to be better than your competitors, try to be different. There is always going to be someone smarter than you, but there may not be someone who is more imaginative.
16. When seeking a career as you come out of school or making a job change, always take the job that looks like it will be the most enjoyable. If it pays the most, you’re lucky. If it doesn’t, take it anyway, I took a severe pay cut to take each of the two best jobs I’ve ever had, and they both turned out to be exceptionally rewarding financially.
17. There is a perfect job out there for everyone. Most people never find it. Keep looking. The goal of life is to be a happy person and the right job is essential to that.
18. When your children are grown or if you have no children, always find someone younger to mentor. It is very satisfying to help someone steer through life’s obstacles, and you’ll be surprised at how much you will learn in the process.
19. Every year try doing something you have never done before that is totally out of your comfort zone. It could be running a marathon, attending a conference that interests you on an off-beat subject that will be populated by people very different from your usual circle of associates and friends or traveling to an obscure destination alone. This will add to the essential process of self-discovery.
20. Never retire. If you work forever, you can live forever. I know there is an abundance of biological evidence against this theory, but I’m going with it anyway.

investing errors

1. Understand Your Own Cognitive Errors

 2. Avoid the Narrative (stick with data) 


3. Passive Investing avoids emotional decisions (Unlike Active)
4. High Fees Are a Huge Drag on Returns

5. Avoid Forecasts: The Future is Inherently Uncertain


6. Your Asset Allocation Decisions Matter More than Stock Picking

7. Be aware of Randomness
8. Never Confuse Past Performance with Future Returns

9. Allow Compounding to work for you


10. You Are Your Own Worst Enemy  

Shadow Banking - Extending the Perimeter of Regulation

Shadow banking is credit intermediation involving entities and activities outside the regular banking system. The pre-crisis regulatory architecture and regulatory culture provided a fertile ground for a thriving shadow banking sector to emerge. Regulators focussed on securing the safety of banks, but it was that exclusive and straitjacketed focus on banks that opened up opportunities for regulatory arbitrage in the form of shadow banks which mushroomed and proliferated without the shackles of regulation. Banks also found out that it was possible to transfer risky businesses and assets to the balance sheets of the shadow banks without transgressing any regulations. But shadow banks were a crisis waiting to happen because of their low capital base, high leverage, interconnection with banks and risky business models. According to an estimate by the Financial Stability Board (FSB), the global shadow banking system, as conservatively proxied by ‘other financial intermediaries’, grew rapidly before the crisis, more than doubling from USD 26 trillion in 2002 to USD 62 trillion in 2007.
The Financial Stability Board (FSB) issued a consultative document in November 2012 on ‘Strengthening Oversight and Regulation of Shadow Banking’ focusing on areas where policy intervention is warranted to mitigate the potential risks associated with shadow banking. The FSB, working with the BCBS and the International Organisation of Securities Commissions (IOSCO), has focused on five specific areas: (i) mitigating the spill-over effect between the regular banking system and the shadow banking system; (ii) reducing the susceptibility of money market funds to “runs”; (iii) assessing and mitigating systemic risks posed by other shadow banking entities; (iv) assessing and aligning the incentives associated with securitisation; and (v) dampening risks and pro-cyclical incentives associated with secured financing contracts such as repos, and securities lending that may exacerbate funding strains in times of “runs

How have We, in India, Responded?
Do we have shadow banking in India? In a sense yes, in the form of Non-Banking Finance Companies (NBFCs) which perform bank like financial intermediation. But what distinguishes our NBFCs from shadow banks is that unlike shadow banks which emerged and expanded outside of regulatory oversight, India’s NBFC sector has always been regulated, although less tightly than the banking system. 
It is important in this context to note that our non-bank financial sector is very large, diverse and complex. Some of it is in the corporate sector, but much of it is in unincorporated. Different segments are regulated by different regulators. Some of the deposits raised by these companies are legal, some are illegal. In the wake of the recent melt down of a few finance companies in parts of the country, in the process destroying the entire life savings of millions of low income households, there is need to review the regulatory oversight of this sector keeping in view the mandatory and relative comparative advantages of the financial sector regulators. While tightening regulation is important, it is not sufficient. What is to be noted is that much of the fraud in the non-bank sector happens through unlawful and fraudulent schemes which should not be operating. This reinforces the importance of surveillance and enforcement, especially by the state governments.    

THE GREAT SLUMP OF 1930 By JOHN MAYNARD KEYNES

The world has been slow to realize that we are living this year in the shadow of one of the greatest economic catastrophes of modern history. But now that the man in the street has become aware of what is happening, he, not knowing the why and wherefore, is as full to-day of what may prove excessive fears as, previously, when the trouble was first coming on, he was lacking in what would have been a reasonable anxiety. He begins to doubt the future. Is he now awakening from a pleasant dream to face the darkness of facts? Or dropping off into a nightmare which will pass away?
He need not be doubtful. The other was not a dream. This is a nightmare, which will pass away with the morning. For the resources of nature and men's devices are just as fertile and productive as they were. The rate of our progress towards solving the material problems of life is not less rapid. We are as capable as before of affording for everyone a high standard of life—high, I mean, compared with, say, twenty years ago—and will soon learn to afford a standard higher still. We were not previously deceived. But to-day we have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the working of which we do not understand. The result is that our possibilities of wealth may run to waste for a time—perhaps for a long time.
I doubt whether I can hope, in these articles, to bring what is in my mind into fully effective touch with the mind of the reader. I shall be saying too much for the layman, too little for the expert. For—though no one will believe it—economics is a technical and difficult subject. It is even becoming a science. However, I will do my best—at the cost of leaving out, because it is too complicated, much that is necessary to a complete understanding of contemporary events.
First of all, the extreme violence of the slump is to be noticed. In the three leading industrial countries of the world—the United States, Great Britain, and Germany—10,000,000 workers stand idle. There is scarcely an important industry anywhere earning enough profit to make it expand—which is the test of progress. At the same time, in the countries of primary production the output of mining and of agriculture is selling, in the case of almost every important commodity, at a price which, for many or for the majority of producers, does not cover its cost. In 1921, when prices fell as heavily, the fall was from a boom level at which producers were making abnormal profits; and there is no example in modern history of so great and rapid a fall of prices from a normal figure as has occurred in the past year. Hence the magnitude of the catastrophe.
The time which elapses before production ceases and unemployment reaches its maximum is, for several reasons, much longer in the case of the primary products than in the case of manufacture. In most cases the production units are smaller and less well organized amongst themselves for enforcing a process of orderly contraction; the length of the production period, especially in agriculture, is longer; the costs of a temporary shut-down are greater; men are more often their own employers and so submit more readily to a contraction of the income for which they are willing to work; the social problems of throwing men out of employment are greater in more primitive communities; and the financial problems of a cessation of production of primary output are more serious in countries where such primary output is almost the whole sustenance of the people. Nevertheless we are fast approaching the phase in which the output of primary producers will be restricted almost as much as that of manufacturers; and this will have a further adverse reaction on manufacturers, since the primary producers will have no purchasing power wherewith to buy manufactured goods; and so on, in a vicious circle.
In this quandary individual producers base illusory hopes on courses of action which would benefit an individual producer or class of producers so long as they were alone in pursuing them, but which benefit no one if everyone pursues them. For example, to restrict the output of a particular primary commodity raises its price, so long as the output of the industries which use this commodity is unrestricted; but if output is restricted all round, then the demand for the primary commodity falls off by just as much as the supply, and no one is further forward. Or again, if a particular producer or a particular country cuts wages, then, so long as others do not follow suit, that producer or that country is able to get more of what trade is going. But if wages are cut all round, the purchasing power of the community as a whole is reduced by the same amount as the reduction of costs; and, again, no one is further forward.
Thus neither the restriction of output nor the reduction of wages serves in itself to restore equilibrium.
Moreover, even if we were to succeed eventually in re-establishing output at the lower level of money-wages appropriate to (say) the pre-war level of prices, our troubles would not be at an end. For since 1914 an immense burden of bonded debt, both national and international, has been contracted, which is fixed in terms of money. Thus every fall of prices increases the burden of this debt, because it increases the value of the money in which it is fixed. For example, if we were to settle down to the pre-war level of prices, the British National Debt would be nearly 40 per cent. greater than it was in 1924 and double what it was in 1920; the Young Plan would weigh on Germany much more heavily than the Dawes Plan, which it was agreed she could not support; the indebtedness to the United States of her associates in the Great War would represent 40-50 per cent. more goods and services than at the date when the settlements were made; the obligations of such debtor countries as those of South America and Australia would become insupportable without a reduction of their standard of life for the benefit of their creditors; agriculturists and householders throughout the world, who have borrowed on mortgage, would find themselves the victims of their creditors. In such a situation it must be doubtful whether the necessary adjustments could be made in time to prevent a series of bankruptcies, defaults, and repudiations which would shake the capitalist order to its foundations. Here would be a fertile soil for agitation, seditions, and revolution. It is so already in many quarters of the world. Yet, all the time, the resources of nature and men's devices would be just as fertile and productive as they were. The machine would merely have been jammed as the result of a muddle. But because we have magneto trouble, we need not assume that we shall soon be back in a rumbling waggon and that motoring is over.

We have magneto trouble. How, then, can we start up again? Let us trace events backwards:—
1. Why are workers and plant unemployed? Because industrialists do not expect to be able to sell without loss what would be produced if they were employed.
2. Why cannot industrialists expect to sell without loss? Because prices have fallen more than costs have fallen—indeed, costs have fallen very little.
3. How can it be that prices have fallen more than costs? For costs are what a business man pays out for the production of his commodity, and prices determine what he gets back when he sells it. It is easy to understand how for an individual business or an individual commodity these can be unequal. But surely for the community as a whole the business men get back the same amount as they pay out, since what the business men pay out in the course of production constitutes the incomes of the public which they pay back to the business men in exchange for the products of the latter? For this is what we understand by the normal circle of production, exchange, and consumption.
4. No! Unfortunately this is not so; and here is the root of the trouble. It is not true that what the business men pay out as costs of production necessarily comes back to them as the sale-proceeds of what they produce. It is the characteristic of a boom that their sale-proceeds exceed their costs; and it is the characteristic of a slump that their costs exceed their sale-proceeds. Moreover, it is a delusion to suppose that they can necessarily restore equilibrium by reducing their total costs, whether it be by restricting their output or cutting rates of remuneration; for the reduction of their outgoings may, by reducing the purchasing power of the earners who are also their customers, diminish their sale-proceeds by a nearly equal amount.
5. How, then, can it be that the total costs of production for the world's business as a whole can be unequal to the total sale-proceeds? Upon what does the inequality depend? I think that I know the answer. But it is too complicated and unfamiliar for me to expound it here satisfactorily. (Elsewhere I have tried to expound it accurately.) So I must be somewhat perfunctory.
Let us take, first of all, the consumption-goods which come on to the market for sale. Upon what do the profits (or losses) of the producers of such goods depend? The total costs of production, which are the same thing as the community's total earnings looked at from another point of view, are divided in a certain proportion between the cost of consumption-goods and the cost of capital-goods. The incomes of the public, which are again the same thing as the community's total earnings, are also divided in a certain proportion between expenditure on the purchase of consumption-goods and savings. Now if the first proportion is larger than the second, producers of consumption-goods will lose money; for their sale proceeds, which are equal to the expenditure of the public on consumption-goods, will be less (as a little thought will show) than what these goods have cost them to produce. If, on the other hand, the second proportion is larger than the first, then the producers of consumption-goods will make exceptional gains. It follows that the profits of the producers of consumption goods can only be restored, either by the public spending a larger proportion of their incomes on such goods (which means saving less), or by a larger proportion of production taking the form of capital-goods (since this means a smaller proportionate output of consumption-goods).
But capital-goods will not be produced on a larger scale unless the producers of such goods are making a profit. So we come to our second question—upon what do the profits of the producers of capital-goods depend? They depend on whether the public prefer to keep their savings liquid in the shape of money or its equivalent or to use them to buy capital-goods or the equivalent. If the public are reluctant to buy the latter, then the producers of capital-goods will make a loss; consequently less capital-goods will be produced; with the result that, for the reasons given above, producers of consumption-goods will also make a loss. In other words, all classes of producers will tend to make a loss; and general unemployment will ensue. By this time a vicious circle will be set up, and, as the result of a series of actions and reactions, matters will get worse and worse until something happens to turn the tide.
This is an unduly simplified picture of a complicated phenomenon. But I believe that it contains the essential truth. Many variations and fugal embroideries and orchestrations can be superimposed; but this is the tune.
If, then, I am right, the fundamental cause of the trouble is the lack of new enterprise due to an unsatisfactory market for capital investment. Since trade is international, an insufficient output of new capital-goods in the world as a whole affects the prices of commodities everywhere and hence the profits of producers in all countries alike.
Why is there an insufficient output of new capital-goods in the world as a whole? It is due, in my opinion, to a conjunction of several causes. In the first instance, it was due to the attitude of lenders—for new capital-goods are produced to a large extent with borrowed money. Now it is due to the attitude of borrowers, just as much as to that of lenders.
For several reasons lenders were, and are, asking higher terms for loans, than new enterprise can afford. First, the fact, that enterprise could afford high rates for some time after the war whilst war wastage was being made good, accustomed lenders to expect much higher rates than before the war. Second, the existence of political borrowers to meet Treaty obligations, of banking borrowers to support newly restored gold standards, of speculative borrowers to take part in Stock Exchange booms, and, latterly, of distress borrowers to meet the losses which they have incurred through the fall of prices, all of whom were ready if necessary to pay almost any terms, have hitherto enabled lenders to secure from these various classes of borrowers higher rates than it is possible for genuine new enterprise to support. Third, the unsettled state of the world and national investment habits have restricted the countries in which many lenders are prepared to invest on any reasonable terms at all. A large proportion of the globe is, for one reason or another, distrusted by lenders, so that they exact a premium for risk so great as to strangle new enterprise altogether. For the last two years, two out of the three principal creditor nations of the world, namely, France and the United States, have largely withdrawn their resources from the international market for long-term loans.
Meanwhile, the reluctant attitude of lenders has become matched by a hardly less reluctant attitude on the part of borrowers. For the fall of prices has been disastrous to those who have borrowed, and anyone who has postponed new enterprise has gained by his delay. Moreover, the risks that frighten lenders frighten borrowers too. Finally, in the United States, the vast scale on which new capital enterprise has been undertaken in the last five years has somewhat exhausted for the time being—at any rate so long as the atmosphere of business depression continues—the profitable opportunities for yet further enterprise. By the middle of 1929 new capital undertakings were already on an inadequate scale in the world as a whole, outside the United States. The culminating blow has been the collapse of new investment inside the United States, which to-day is probably 20 to 30 per cent. less than it was in 1928. Thus in certain countries the opportunity for new profitable investment is more limited than it was; whilst in others it is more risky.
A wide gulf, therefore, is set between the ideas of lenders and the ideas of borrowers for the purpose of genuine new capital investment; with the result that the savings of the lenders are being used up in financing business losses and distress borrowers, instead of financing new capital works.
At this moment the slump is probably a little overdone for psychological reasons. A modest upward reaction, therefore, may be due at any time. But there cannot be a real recovery, in my judgment, until the ideas of lenders and the ideas of productive borrowers are brought together again; partly by lenders becoming ready to lend on easier terms and over a wider geographical field, partly by borrowers recovering their good spirits and so becoming readier to borrow.
Seldom in modern history has the gap between the two been so wide and so difficult to bridge. Unless we bend our wills and our intelligences, energized by a conviction that this diagnosis is right, to find a solution along these lines, then, if the diagnosis is right, the slump may pass over into a depression, accompanied by a sagging price-level, which might last for years, with untold damage to the material wealth and to the social stability of every country alike. Only if we seriously seek a solution, will the optimism of my opening sentences be confirmed—at least for the nearer future.
It is beyond the scope of this article to indicate lines of future policy. But no one can take the first step except the central banking authorities of the chief creditor countries; nor can any one Central Bank do enough acting in isolation. Resolute action by the Federal Reserve Banks of the United States, the Bank of France, and the Bank of England might do much more than most people, mistaking symptoms or aggravating circumstances for the disease itself, will readily believe. In every way the more effective remedy would be that the Central Banks of these three great creditor nations should join together in a bold scheme to restore confidence to the international long-term loan market; which would serve to revive enterprise and activity everywhere, and to restore prices and profits, so that in due course the wheels of the world's commerce would go round again. And even if France, hugging the supposed security of gold, prefers to stand aside from the adventure of creating new wealth, I am convinced that Great Britain and the United States, like-minded and acting together, could start the machine again within a reasonable time; if, that is to say, they were energized by a confident conviction as to what was wrong. For it is chiefly the lack of this conviction which to-day is paralyzing the hands of authority on both sides of the Channel and of the Atlantic.