I had the privilege of interviewing former Reserve Bank of India governor Dr Y V Reddy last week. He has just released a book of 23 speeches made between September 2003 and September 2008. The book is remarkable as much for the selected speeches as it is for the sequence in which the speeches are presented.
The speeches that deserve the most attention are those that include one made in July 2004 in Mussoorie to a group of civil servants, titled 'India And The Global Economy', and one made in July 2008 in Manchester, titled Global Financial Turbulence and Financial Sector in India. And of course everything in between.
But it's the Mussoorie to Manchester journey which is the most fascinating. It was at Mussoorie where Reddy first showcased the RBI's opposition to foreign banks increasing their stakes in Indian banks. Which in turn was linked to a broader view on capital flows.
And at Manchester, four years later, as the world was beginning to turn upside down, Reddy spoke on a range of issues broadly focused on even tighter monitoring of banks and their dependence on sources other than traditional sources of retail deposits.
I would even go so far as to say that the speeches and their tone (in perfect hindsight obviously) are akin to Winston Churchill raging in British Parliament in the 1930s about Adolf Hitler's amassing of arms to launch a war. Obviously no one believed Churchill, as few believed Reddy. But Reddy, unlike Churchill, did manage to stave off considerable damage.
What made him so resolute and clear in his thought? The answer, Reddy says, was because he always put the safety of the Indian banking system first. So if an asset bubble were to develop his first reaction would be to see whether the banking system was exposed to it. And if it looked like it was, then bring about measures to contain the bubble. Which of course could include monetary steps.
Reddy admits this is at variance from the Alan Greenspan approach where the bubble would be allowed to develop as the market in some ways would be trusted to take care of the outcome.
Further, in Reddy's words, protecting the banking system actually meant protecting the interests of the common man who had reposed faith in it. He asks, "Look at the majority of the Indians who bank in India. What does the common person want from a bank? A safe place to keep the few thousand rupees he earns safely. Which he can use for doing a transaction or two later. That's all."
And therein, I gathered, lay the crux of the Reddy doctrine. Now people might dismiss it as bureaucratic doubling up, obvious and simplistic. If that was the case, I do not recall anyone seeing it this way.
Reddy says he usually had two factors in his consideration set at all times. The common person, maybe more agriculture-common person than anyone else and the real sector, read Indian corporate sector. And quite emphatically, not the financial sector particularly the financial intermediaries. He says he's always been conservative on the issue of financial intermediaries.
And even between an upside and a downside on any central bank policy move, if the common person was involved, he would protect the downside rather than go for the upside. Which is of course what everyone else did. For which he's taken a lot of flak but survived to write the tale.
The other significant point Reddy makes in reference to the period of excesses is what he calls the disproportionate impact of the market on public policy.
The good news is, in his words, "There will be a rebalancing on, between the faith in the market and the faith in the government or public policy. Some respect will be restored to public policy. Its not that market logic will be removed, but it will be viewed with some amount of caution and suspicion."
The most critical point Reddy makes is to do with the very role of banking. "There is now a clear recognition that banking is special, banking activity is special. Hence it should be treated as a public utility. So banks may be commercially owned but they must be heavily regulated."
What are the Reddy observations got to do with where we stand today? Okay, here goes. For one, as people spot green shoots and golden rays, there are troubling signs of slipping back into a phase of low interest rates and asset bubbles.
What makes it even more worrying is that the existing asset bubbles are still to be pricked. A case in point being real estate, where prices are on an average still 300 per cent above 2004 levels. And the pundits are already calling it a bottom!
More worrying is the fact that the loudest voices at this point are the realtors screaming for rate cuts. Which is fine. But what about the 'common person' who is still staring at 10 per cent consumer price inflation? This person, as I see him in renewed light does not seem to really figure. At least not by inference. If that is the case then we really have not learned from the oversight of the past.
Now, obviously not everything Reddy is talking about is directly linked to this one issue. But my sense is that we are cutting loose when we should be tightening even further. Now that does not mean stop flow of credit.
It means make credit expensive so that asset prices become more reasonable and there is greater respect for capital, which has all but been lost. I bet the common person will not be as affected as we might think. He never was.
The author is Editor, UTVi Business. He would be a loser if the asset bubble were to burst.