Executive Interviews: Interview with Lord Meghnad Desai on Government and Business
January 2010 - By Dr. Nagendra V Chowdary

Lord Meghnad Desai
Lord Meghnad Desai, is an Indian-born British economist and Labor politician

• During your very distinguished and illustrious career you would have witnessed several economic crises and for many you would have been consulted. How do you describe the global economy’s mood right now?
  The global economy has had a 15- year growth experience between 1992 and 2007. Now it is in a recession but the recession has not become a depression as many feared. There is a double coincidence of a financial crisis and a real economy slowdown which is unusual. Since the war, we have had a crisis in the 1970s, the 1980s and the early 1990s. The first two were caused by declining profitability plus the oil price rise. The last one was due to the need for restructuring as the world was preparing for globalization.

• What did the recent US financial crisis mean to you and to your profession?
  Nothing much. The profession has been criticized and is divided. Many blame the financial crisis on the economists’ assumption of themarket being able to self-adjust to avoid crises and on rational expectations etc. I myself believe that the Economics profession is neither so naïve as people think nor restricted to macro and finance theorists. The central bankers of USA and UK are both distinguished macro theorists and are in the mainstream.The fact that they have been able to respond magnificently and innovatively shows the power of economics not its failure.

• How do you think India has managed the crisis? Which country do you think has responded / managed the crisis quite remarkably well?
  India has had only a growth slowdown not a serious recession. It had inflation in which it could not manage quickly enough and its rebound from growth is still fragile. Germany and France have managed well.

• What were the prime reasons for US financial crisis that has engulfed global economy forcing everyone to term this crisis as worse than the Great Depression?
  A combination of cheap credit, thanks to the recycling of financial imbalances from China to the US, the risk proneness of financial market institutions which mistakenly thought that the new financial instruments such as CDS and CDOs eliminated risk, and the lack of productive and profitable investment opportunities after the collapse of the dotcom boom which directed the cheap credit to the housing market based on an expectation of continuing price inflation in that market. It is not worse than the Great Depression.

• It is generally believed that globalization is all about interplay between 4Cs – credit markets, capital markets, currency markets and commodity markets. Was the imbalance created between these four markets in some way responsible for the financial crisis?
  See my answer above. The commodity market flared up as the securities market slowed down towards the end of 2007 beginning of 2008. This led to inflationary pressure thanks to the oil price bubble.

•  Who do you think should squarely be blamed for getting the world into such a catastrophic mess – the Wall Street firms with their insatiable desire for ‘derived’ returns, or the regulators or the governments? What was it about the regulatory framework that contributed to the crisis?
  We all enjoyed the boom while it lasted and borrowed money from banks.We are all to blame since none of us stopped to think how long a boom such as this could last. But cheap credit was at the root of the crisis.

• A large section of people believe that the crisis was allowed to become bigger because of policymakers’ (both at the companies and the government) indecision. And the full blown crisis is just a price for indecisive governments and indifferent companies, the argument goes. Do you see any merit in this argument?
  There is always a lag between the problem occurring, the policy makers seeing it, proposing a solution and then the solution having an impact. The policy makers acted swiftly when banks began to have problems as in the case of Northern Rock or Bear Stearns. But they did not foresee the problem of overleveraging and underpricing of risk. Even if they did they were reluctant to say so in case they caused a recession rather than just slowed down a boom. Alan Greenspan confessed to believing that the market will solve its own problems. For a right-wing libertarian this was too much in my view. Even if he did so then he should have opposed any bailouts.