My op-ed on toxic assets and the bailout appears in Mint today. You can read it here. The full text is also reproduced below.

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The financial crisis is largely a result of toxic assets held by banks. However, bailouts, originally designed to buy these toxic assets, are now trying to eliminate the liquidity crisis —but that’s only a symptom. The real problem is solvency.

Now in English.

Imagine that the string of monthly loan instalments one has to pay for a mortgage—the security for the loan—is akin to a string of pearls.

Banks dismantle entire necklaces, the pearls mixed up, repackaged into beautifully designed earrings or bracelets and sold to other banks. Let’s call them securitized mortgages. These new designs ensure high prices for pearl jewellery, often more than the value of the original pearl necklaces.

But some people offer fake pearl necklaces as a loan’s security. When the necklaces are dismantled, the fake pearls are mixed up with the real pearls and distributed across new pearl jewellery. Initially, no one knows that only part of their jewellery is real, but soon there are complaints regarding fake and missing pearls. Consequently, all the new pearl jewellery becomes suspect. Let’s call these toxic assets. Soon there is panic.

Since no one trusts the mixed- up pearls any more, the “fake pearl scandal” leads banks to stop lending money for home loans. Further, since banks raised cash by selling pearls, the banks have no money to pay people because the pearls have plummeted in value and banks are facing losses. This is our liquidity crisis.

In response, the government announces it will buy the fake pearls and will give banks money in return to continue their usual business. This is a bailout, or a substantial injection of capital.

Under the Term Asset-Backed Securities Loan Facility (Talf), the US government’s idea was to buy toxic assets from the banks with some private investors and sit on these suspect jewels for as long as it took for them to recover some value.

This is where the glitch began. The crisis was caused because banks could not assess the value of the pearl jewellery. The government faces the same problem: It has no idea how much it should pay for these toxic assets. Since the banks and the government don’t agree on prices, the government directly infuses capital into banks.

But more importantly, what makes these assets toxic? It is the prices at which pearls are currently trading—they are low enough to leave gaping holes in banks’ balance sheets.

This price reflects many things: if the pearl is fake, the level of risk and uncertainty in the pearl market, or other information.

So, are these “toxic asset prices” a good thing? Nobel Prize-winning economist F.A. Hayek would certainly think so. According to Hayek, the “most significant fact about this (price) system is the economy of knowledge with which it operates, or how little the individual participants need to know in order to be able to take the right action… Therefore, in abbreviated form, by a kind of symbol, only the most essential information is passed on and passed on only to those concerned.”The price of the pearls is more than just what is on the sticker. Prices give away millions of small bundles of information to millions of individuals. If these prices are manipulated, or fixed by the government, they will distort the knowledge given by the prices.

Currently, banks want the fake pearls to be expensive: They want these assets to be priced higher in the bailout so that others believe them to be valuable and they receive more money. The government, even more wishful in its thinking, believes that buying fake pearls for enormous sums of money will give the banks the money required to trade in pearls again.

On the one hand, the government wants to take the toxic assets off bank balance sheets in exchange for money to be used to keep the bank afloat. But on the other hand, it tells the banks to trade with other banks with questionable solvency caused by the very same toxic assets. More importantly, banks have no ability to distinguish good assets from toxic ones, which merely means that the presence of liquidity does not solve the banks’ problem regarding lack of solvency, which can only be solved by the market.

What would happen if the government did not intervene? In this case the toxic assets would be valued in the market, leading to insolvency of many banks. On the one hand, the nature and cause of the insolvency will be exposed and the banks that are not facing the greatest threat will come to the forefront. This kind of information can only be gained in the market once the toxic assets and the banks’ balance sheets are correctly valued. The bailout, on the other hand, overvalues these assets in the hope that if they believe it is highly valued long enough, it will come true.

Therefore, the bailout money is a complete waste. It doesn’t get the toxic assets off the balance sheets. It involves the government directly running the banks. It does not tell banks anything about the nature, risk or uncertainty of the assets they hold. Nor does it solve the problem of solvency caused by the very same toxic assets. It only takes money from taxpayers and uses it for directly running banks, which then have a greater incentive to declare more assets toxic to get more taxpayer money.

My piece on the Indian Constitution endorsing socialism in the Wall Street Journal Asia appears today. You can read it here. The full text is also reproduced below.
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India is a democracy, but according to the Supreme Court it’s less democratic than you might think. The justices recently shot down a challenge to Indira Gandhi’s 1970s-era ploy to stamp her economic policies on the country in perpetuity. At issue: Does the word “socialism” belong in the Indian Constitution? And is every political party required to be socialist even if such a requirement is antithetical to free speech?

The Good Governance India Foundation, a small think tank, had petitioned to remove “socialism” from the Constitution’s preamble. The text currently opens with: “We, the people of India, having solemnly resolved to constitute India into a Sovereign Socialist Secular Democratic Republic. . . .” The foundation argued that this wording conflicts with the original intent and the “basic structure” of the Constitution. The court disagreed, choosing to believe that “socialism” has many meanings and its inclusion in the preamble is not antithetical to open debate.

It’s more than a question of semantics. Following the preamble’s lead, the election law, the Representation of the People Act, requires every political party to aver its commitment to socialism. And they do mean “require.” SV Raju’s application to form a free-market party called the Swatantrata Party was rejected by the Election Commission when he refused to include “socialism” as one of the principles of his party. He’s been petitioning to overturn that decision since 1996. The Supreme Court has at least asked the government and Election Commission to reconcile this outcome with the principle of free speech.

India’s Constitution as originally ratified in 1950 didn’t include any mention of socialism, although the idea was proposed. The man who would become the country’s first prime minister, Jawaharlal Nehru, was as socialist as they come in his economic policies. But he was also a political liberal, and he felt that forcing his personal ideology on all Indians through the preamble would be contrary to the broader spirit of the Constitution. Other founding fathers, notably B.R. Ambedkar, agreed.

Sentiments changed in the 1970s. The declaration of a State of Emergency in 1975 gave Nehru’s daughter, Indira Gandhi, a convenient opportunity continue her agenda of nationalization, repaying support from the socialist parties, while expanding her own power. Amid a raft of Constitutional amendments she pushed through parliament to enhance her authority, she included one adding “socialism” to the preamble. She did this despite the Supreme Court’s finding barely three years earlier that the preamble was part of the “basic structure” of the Constitution and thus not subject to amendment. The succession of socialist-leaning governments in subsequent years meant few people were interested in challenging this provision.

Instead, Indira Gandhi’s successors made it worse. Her son, former Prime Minister Rajiv Gandhi, amended the Representation of the People Act in 1989 to require all political parties to include socialism in their party platforms to align with the values espoused in the Constitution’s preamble. Mr. Raju’s new party has run afoul of this provision.

Since the early 1990s, India has been gradually liberalizing its economy. The results are palpable — an average 8% annual growth rate the past few years is just one. But the country’s political underpinnings haven’t kept pace. The Supreme Court has passed up a good opportunity to right a wrong inflicted on Indian politics 30 years ago. Parliament can still fix this mess, but no party is likely to take up the cause because in political circles capitalism and profit are, like Nehru said, “bad words.” India could use the same kind of competition in the ideological sphere that’s starting to work for the economy.

Ms. Rajagopalan is an Erasmus Mundus Scholar pursuing her masters in law and economics at the University of Ghent.

Indira Gandhi also imposed emergency when Justice Sinha declared her election “null and void”. And we all know what followed.

Mush is doing EXACTLY the same thing.

Has he learnt nothing from the past?

My piece in today’s Wall Street Journal Asia on the Broadcasting Bill here (subscription required).

I have reproduced the piece below.

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When Richard Gere kissed Shilpa Shetty, the star of Britain’s “Big Brother” program last year, India’s moral police professed shock, and many called for media censorship. What they didn’t say was that New Delhi’s policy makers were already well on their way to doing just that.

This November, India’s parliament will consider the Broadcasting Services Regulation Bill, the country’s most sweeping attempt yet to infringe on free speech. The proposed law is the result of a Supreme Court decision that came down in 1995, when the court mediated a dispute over telecasting rights of a live cricket match. The justices deemed India’s airwaves a scarce resource and “public property” which should not be monopolized by the government or private broadcasters but regulated for national interest. It recommended that New Delhi create an independent statutory body — an oxymoron in itself — to act as the custodian of airwaves.

That bill ignores decades of evidence that government control over the airwaves just doesn’t work in a democracy. Britain may have created the British Broadcasting Service in 1922, ostensibly an independent body to regulate media, but it was later stripped of that role and the British media market opened to competition. The United States created the Federal Communications Act of 1934 to monitor against private monopolies and also regulate content and coverage in public interest. This relic has also undergone dilution over the years and given way to the somewhat less restrictive Telecommunications Act of 1996.

No matter; the Indian Ministry of Information and Broadcasting intends to replicate their peers’ mistakes decades later. The Broadcasting Services Regulation Bill 2007 sets out a comprehensive policy on broadcasting that is concerned with both carriage and content. It proposes to set up the Broadcasting Regulatory Authority of India (BRAI) which will ostensibly be an independent authority; establish an independent content code; and develop the system for censorship and certification.

If the bill passes — which is likely under a left-leaning Congress Party coalition — the government’s powers will be greatly extended. The legislation prohibits any person from broadcasting any channel or program without a license from an authority designated by the government. The proposed agency isn’t really an independent authority and would be run by bureaucrats handpicked by the government. Thus the government would be able to arm-twist the media through the BRAI medium of licensing and registration, which allows it to mandate content as well as impose severe penalties on unlicensed broadcasters. The bill requires all shows to be broadcast only if they are in the greatest interest of the general public — a judgment that will be made in New Delhi.

Policy makers also propose to free ride off of the profitable parts of the private sector. The bill makes it mandatory for every cable or satellite service to provide two government-owned channels: “Doordarshan,” the long-running national government broadcaster, and one regional channel for the respective state government. The government also proposes to force private broadcasters to share live telecasting rights of any sporting event of national importance with the state-owned channels.

Just in case anyone objects to these repressive rules, the bill requires every channel to register with the BRAI — which may refuse registration if it is of the considered opinion that the content of the channel is likely to “threaten the security and integrity of the State,” “threaten peace and harmony or public order,” or “threaten relations with foreign countries.” The central government has also reserved the power to prevent a broadcast or revoke the license of a broadcaster in case of external threat or in “exceptional circumstances.” In a pluralistic democracy like India, which has every conceivable kind of moral and religious police, whose ideas of what’s proper would prevail?

The man best positioned to answer these questions is the minister for information and broadcasting, Priyaranjan Dasmunshi, who is responsible for this legislation. After the Gere-Shetty kiss was aired, Mr. Dasmunshi declared that he felt the media had been “irresponsible” for showing the image many times over, offending sensitivities with “frivolous news”; thus making a case for stringent regulation of news channels. So would Mr. Gere’s affectionate embrace of Ms. Shetty be deemed an “exceptional circumstance”?

While the minister’s views are cause for alarm, they pale in comparison to the “content code” drafted by the ministry. The code stipulates, for example, that broadcasters shall not present the figure of a woman as mere “sexual objects.” Noble as the idea may be, it’s scarcely a good reason for censoring the press, especially when pornographic material is already banned in its entirety. Similarly, the code prevents broadcasters from distorting religious symbols or practices in a derogatory manner.

The government has called the code a “roadmap for self regulation” whereby the broadcasters will follow the guidelines and manage their content accordingly. But the government’s track record in regulating content doesn’t inspire confidence.

This July the government banned an underwear advertisement for being vulgar and suggestive; oddly enough, no one was wearing underwear or appearing nude and it only showed a woman doing her husband’s laundry. In January, the Ministry banned AXN, a cable network, for two months for airing a show called World’s Sexiest Commercials. In May, the same policy makers banned Fashion TV, another cable channel, for a show called Midnight Hot, on grounds that it violated public decency.

Both shows were aired after 11 p.m. and the channels are considered mainstream everywhere else in the free world. But Mr. Dasmunshi responded to criticism of the bans by saying, “If out of 75 complaints we banned only two channels, why the hue and cry?”

The larger design of this government is to control political free speech. This legislation, if passed, will come down heavily on channels conducting “sting operations” to expose corrupt government officials or scams. This seems ominous given the ban last week on Live India for conducting a “fake” sting operation exposing an alleged prostitution racket. The Ministry of Information and Broadcasting banned the channel for a month as it aired material which “incited violence and contained content against maintenance of law and order.”

Media censorship was seen last during the 1970s, when Indira Gandhi imposed emergency rule. The suspension of all civil and political rights soon followed, as well as political censorship. It was the only dictatorship that modern India has ever witnessed. While this legislation cannot be compared with the Emergency, the agenda to control free speech is alarmingly similar.

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Ms. Rajagopalan is a lawyer based in New Delhi.

I don’t quite understand India and Indians sometimes. We obsess over freedom and don’t quite value or cherish it. We thank authority when they infringe on our freedoms for “public good” or to “protect us” and so on.

The elections in UP are an excellent example of this. While I applaud the Chief Election Commission for carrying out fair and peaceful elections in a state as difficult as UP with its factionalism; I wonder if they have gone too far.

There are no hoardings, billboards, banners, flags, buntings or mega-size cutouts because of the CEC’s insistence on strict adherence to the Model Code of Conduct.

Are they serious about not allowing posters and banners and free campaigning? What is left of political free speech? Newspaper advertisements in a state where half the people are illiterate?

The rationale is two fold. Posters and banners etc tend to encroach on public and private property and vandalise many spaces that do not belong to the political party or candidate. Secondly, they want to keep the campaign expenditure at a bare minimum because campaign expenditure is apparently “non-productive”.

I disagree on both counts. While unruly election campaigns and vandalism may be a problem, the solution is better law and order and enforcement of election rules, not disallowing posters.

Secondly, limits on campaign expenditure is perhaps the biggest infringement of political free speech. To limit a persons ability to campaign in any way he wants (lawfully) especially financially is limiting his political rights. Also, the campaign finance and expenditure laws are biased against independents and encourage party politics.

I don’t see the logical sense in the argument that we can choose the better candidate if he is frugal with his campaign. Isn’t that what matters at the end of the day?

Kareem, the Egyptian blogger who got jailed for his views on Islam and Women’s rights, was sentenced with four years imprisonment yesterday.

Drew and others in support of Kareem are going to continue protests and work towards an appeal.

Even one day’s imprisonment for speaking one’s mind is unacceptable. Four years for blogging seems like a bad dream from an Orwell novel.

Also, DI has a new member Joe. Afterall in times like this we free-speechers need to stick together.

Link via Drew .

Supreme Court has described the banned Students Islamic Movement of India as a “secessionist movement.” More here.

“You are a secessionist movement. You have not stopped your activities,” a Bench of Justice S B Sinha and Markandeya Katju observed while dealing with the special leave petition filed by SIMI challenging the ban imposed on it.

I was wondering if we must ban an outfit even if it is essentially a secessionist movement. If it is a question of the criminal activities that are carrying out and there is evidence supporting it, then undoubtedly a case may be made for the ban.

But assuming SIMI is peaceful, or that it would turn peaceful, would be still want to ban it just because it is a “secessionist movement”? And should we be allowed to ban it for such concerns? (I am assuming there are peaceful, if they aren’t then my concerns would change.)

Imagine a different outfit which was peaceful with the same beliefs, then how would we react? I think this would severly affect their rights under Article 19(1)(a-c) and Article 25. Essentially free speech and freedom to form associations and the right to religious beliefs.