'India handled the crisis extremely well'

Pulitzer Prize winning author Liaquat Ahamed speaks about the “absurdities” committed by governments throughout history in the wake of financial crises
t may seem ironic to hear a hedge fund manager speak freely about the evils of the financial system, butLiaquat Ahamed speaks with such unerring conviction and precise logic that it’s impossible not to be mesmerised by his arguments. The professional investment manager, who won the 2010 Pulitzer Prize for History for his book Lords of Finance: The Bankers Who Broke The World, has also worked at the World Bank in Washington DC apart from serving as a consultant to several top hedge funds. 

Why do you think the Indian economy – for the most part – has remained immune to the worst of the economic crisis?

India has hardly been affected by the recent financial slowdown. Indian banks weren’t exposed to the kind of mortgages American banks were, they were also reasonably well capitalised. India only got hurt when trade got hit – especially in the case of, say, the IT industry.

What worked for India is that it had built up a nice cushion of foreign exchange reserves which, very smarty, it used at the right time. All said and done, India definitely handled the crisis very well. But, of course, that doesn’t mean India will never have a financial crisis 

What can India do to prevent that?

Well, economic crises have two ingredients. The first one is a bubble or a mania. For example, as anyone who comes to Mumbai can vouch for, it’s ludicrous that real estate prices here are higher than they are in New York or London. That is a recipe for disaster. Secondly, at some point, the bubble will burst. That will lead to far too much borrowing which will in turn lead to banks getting heavily exposed.

Basically, to avoid a crisis, banks, which are essentially the plumbing of the economy, need to remain robust. Whether banks or private or state-owned are irrelevant; what matters is if they’re well-run. The answers lie in, quite simply, lots of capital and more stable sources of funding. This, I believe, is something India has gotten right so far.

You’re famously opposed to the gold standard. What are your reasons for that?

The gold standard system requires you to have gold as the foundation for the financial system. That requires you to have that much gold. Now, if you took all the gold in the world and you piled it up, it would end up forming a two-storey office building the size of a tennis court. That’s not nearly enough to fuel the world economy.

That’s the first problem. The second problem is, if you raised the price of gold so that it could generate that much money, you’d have to raise its price by about 10 times. Furthermore, the biggest problem is that discoveries of gold are growing by say 2% a year, while the world economy is growing by 4% a year and the entire global financial system is growing by 6% a year.

What’s your next book all about?

I’m writing about economic history. I’m going further back in history to the 19^th century to the conflict between the government in Washington and Wall Street. My objective is to show that anti-banker sentiment goes back a long way in the United States.