Leaders across the world are under siege as they grapple with the real and headline effects of a poly crisis straddling domestic politics, economic policies and geopolitical threats. The title of the Oscar decorated movie, ‘Everything Everywhere All At Once’ seems to be the leitmotif of our times.
As the world is riveted to the spectacle of hyper volatile uncertainty, as news flow triggers instant angst and anger on touch-screen devices, a few pertinent observations.
Like the author of the cliché ‘a week is a long time in politics’ could well extend the patent to cover financial markets. Events between two Fridays have come to challenge the usage of the words safety and banks in the same sentence.
Like last week this column observed that the Ides of March are knocking at the doors of global markets. Well, this week the debate has shifted from no systemic risk to no contagion! Meanwhile the market capitalization of banks across the world has dropped by nearly half a trillion, or over $ 459 billion – a sum that is greater than the GDP of Singapore and the GDP of over 150 countries.
Like one lesson for regulators is that those who brandished the phrase ‘resilience’ are haunted by the boomerang effect. On March 12, the US Department of Treasury, Federal Reserve and FDIC claimed the “banking system remains resilient and on a solid foundation”. By March 18 three banks were shut down, uninsured deposits got backstops, an emergency programme enabling banks to cash bonds at par was launched to avert runs on banks.
Like even as this was engineered a fourth bank teetered and was propped by 11 banks. The market value of the top ten banks has crashed by $ 233 billion. In Switzerland, Credit Suisse, which survived two world wars, needed a $54 billion lifeline from the Swiss National Bank and seems to be on the verge of a takeover by a rival.
Like on the face of it the combination of backstopping of uninsured deposits in the three banks is expected to quell anxieties. However whether similar protection is available to depositors in other banks is unclear and would depend on case by case determination. As Larry Fink put it this could well morph into a spectre of “slow rolling crisis”.
Like in August 2022 the US Fed Chairman Jerome Powell invoked the concept of ‘rational inattention’ while dwelling on inflation expectations. The concept could well cover the quality of regulation. Unless like Soviet Bloc communists depositors were deemed to be ‘useful innocents’ the migration of deposits as interest rates rose should have been part of the mapping of stress scenarios.
Like the central irony of the crisis is that the crisis was fuelled by excess supply of money and is being addressed by more money. The regime of low interest rates followed by trillions in stimulus led to a rise in inflation triggering rate hikes. Higher rates prompted migration of deposits and higher cost of money upended zombie investments. As on March 15, banks borrowed a record $ 153 billion from the Fed’s discount window, effectively half the amount withdrawn via quantitative tightening.
Like inflation continues to haunt the world. So the big question now is how the US Fed balances financial stability with inflation control. This week at the European Central Bank Christine Lagarde came out all guns blazing with a 50 bps hike in rates. Opinion is divided between a 25 bps hike and no hike. The possibility of a pause has rekindled memories of 1980 when Paul Volcker blinked and fears of a longer stickier inflation and higher hikes. That has ominous implications for developing nations like India.
Like it is said there is no economics without politics or geopolitics. One of the causatives of higher inflation has been the disruption in energy and food supplies. All attention is on Moscow as Russian President Vladimir Putin receives Chinese President Xi Jinping on Monday. There is speculation about Xi Jinping discussing a peace deal with Putin and then with Ukrainian President Volodymyr Zelensky.
Like there is also the expected declaration of cementing of the “new era” of ties, of international relations not defined by the US. That this meeting comes in backdrop of a much discussed spring campaign by Russia on Ukraine merits attention. Escalation or de-escalation of war has implications for the global economy.
Like you would expect politicos in India to be concerned about what is transpiring in the global economy and geopolitics. But for that the Parliament has to function. The Congress wants a JPC on the Adani affair and the BJP wants an apology from Rahul Gandhi on his utterances in the UK. Parliament is in a grid lock of expectations rooted in politics as parties use the session to dress up their campaign for the upcoming assembly elections.
Like finally it is worth noting that crises often upend the state of hubris. Movies often have instructive moments. In the era of hype and hyperbole accelerated on social media, what Michelle Pfeiffer tells Al Pacino in Scarface is useful: ‘don’t get high on your own supply’.
Shankkar Aiyar
Author of The Gated Republic, Aadhaar:
A Biometric History of India’s 12 Digit
Revolution, and Accidental India
shankkar.aiyar@gmail.com