Will State Bank of India end up as Lehman Bro. of India?

I feel the comments of former U.S. Fed Chairman Paul Volcker at the London meet are worth giving for my readers. Please follow it and you will understand how the comments aptly fit our Banking environment also! My remarks added, where they fit.

Never one to mince words, former (successful) Fed Chairman Paul Volcker let loose last month, in Sussex England. He spoke at an exclusive meeting of financial regulators and high-level bankers, saying that there is very little evidence that innovation in the financial markets has had any visible effect on economic productivity.

Then he told the stunned audience that the single most important contribution any of them had made in the last 25 years was the automatic teller machines (ATM) which were at least "useful." Most otherwise are developed only to fleece the helpless depositors. Banks are indulging in criminal methods to eke out every single money from the account holders to make profits! Desire to serve the depositors is waning away. Covert methods introduced under the pretext of modern banking, are closing the gap between a robber and the sincere banker.

In their rush to develop "innovative" new financial products, bankers the world over forgot that they are supposed to be safeguarding depositors money. They also completely ignored the fact that banks are enablers, not risk-takers. And, in doing so, they became part of the "problem."

In reality, we should use banks for three things: 1. Storing reserves, 2. Getting and managing loans and 3. To execute financial transactions; in that sense, banks are more akin to public utilities than profit institutions. Concept of profit has changed over the period considerably and today banks making profit at the expense of depositors has become a common practice. The profit is a residual income after paying off all the dues of depositors by way of interest, salaries etc. Cutting on the legitimate dues that must accrue to the depositors if banks show a profit; that is nothing short of robbery! In economics we all know that any arrangement made to benefit one section of the society can cause lose to other section of that society. To decide which section should benefit at the expense of other which section shows the ulterior motives of the policy makers. Depositors being the most vulnerable and helpless section, are often the victim. A view incidentally I share with Mr. Volcker, George Soros and a few others.

Mr. Volcker further added; If Washington wants to get serious about avoiding a second bubble and an even "Greater Depression," let us bring back elements of the Glass-Steagall Act which, in case you do not recall your history class, was a Depression-era law that separated Main Street's banking (investment Banking) from Wall Street's banking (Gambling Banking). I suggest, we must study this act for better Banking practices in India.

That way, we specifically limit the kinds of risk taking that Wall Street (Dalal Street) seems to thrive on by separating it from institutions charged with safeguarding taxpayers' deposits. You might not think this is a big deal or that it is a problem in the first place. But it is. The over confidence with which we take depositors flippantly is not a quality but a defect! Knowing fully well that this creature, depositor, is helpless and we can squeeze him any way we want! The trust of the depositor community is being misused shamelessly. Bankers do not take liberty with the employees the way they do with depositors for obvious reason that the strong unions will not allow it.

Following the global meltdown, the shotgun marriages and bailout legislation, the nation's four biggest banks - JPMorgan Chase, Citigroup, Bank of America, and Wells Fargo - now control more than two-fifths of all bank deposits, more than 66% of all credit card accounts, and over half of all mortgages in this country. They also run trillions of dollars in risky trading ventures that, as things stand; come right back and blow up in our faces... again.

Mr. Volcker further said, extreme reduction in the interest rates is not having any visible positive effect in the business nevertheless; it is in vogue for no sensible explanation! The only dangerous after effect possible as mentioned by an officer from India of the State Bank of India is that by the end of 2010 State Bank of India will end up as Lehman Brothers of India and worst expected worry to mention is; this bank is likely to take along with a few other dependent banks creating almost unserviceable damage! Since we cannot remedy it as things are out of anybodies hand; only thing that ordinary people may do is to keep away from these Banks as far is possible. He told me a lot of cooking is going on in books keeping in the bank’s accounts department to cover up for the losses due to this reduction in the interest rate but that is not going to help for much long! He wondered why banks are being panelized, may be because present economic policies are based on GDP rather than PP; if reverse is applied working can be more effective.

In other words, the risks we face now are actually higher in terms of financial concentration than they were before the crisis. And that is as much as anything what Volcker was driving at when he slammed the bankers for "innovation." In fact he meant many more things than just Innovations!

Volcker comments, I believe we simply need to keep risk where it belongs - on Wall Street (Dalal Street) - and security where it matters - on Main Street. That way, if the “Speculator boys” want to take obscene risks, they can, without driving the rest of us to the brink of financial oblivion. As I have maintained since the beginning of this crisis, "too big to fail" is a myth, nobody imagined of Lehman Bros to blow up. The real question is; who is too big to survive?

Former Fed Chairman Paul Volcker has put the same idea I am advocating through my blog all these days that we must segregate simple trade from speculative trade but he is using a more indirect language so that speculative minds of the operators is not much disturbed. Paul Volcker has precisely put the three main functions of a bank and if one goes by that; present involvement of banks in the speculative market looks treacherous. Hope our Banks take a cue from this and keep banking from any speculative activity directly or indirectly.

Our method of calculating GDP and definition of "Growth" need be corrected. Banking philosophy also needs to be revamped. Pertinent question now many economists put up is what is first, GDP or PP? When PP is decided first; and then GDP/P instead of GDP to PP/P, a lot of difference it shall make for economic plans. Volcker hinted at this in his talk!

Paul Volcker suggested “there is very little evidence that innovation in the financial markets has had any visible effect on economic productivity.” Also refers to so called developments in the economic science. Present situation clearly shows that neoeconomics has failed to deliver results. This is primarily because, real value transactions were mixed with notional (imaginary) value transactions creating confusion and what is correct and what is not, became very difficult to negotiate. Almost all mathematic formulae used in this modern economics give wrong results. In other words we may conclude that it amounts to undermine the credibility of the underlying science of economics. We may have to rewrite new theories to postulate economics! In that case I can say; all those who claim to be learned in the present set of economic science are disqualified as the very science they talk of knowing is itself disqualified!

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