Central Banking Wisdom

Y.V. Reddy, the author of this book, was governor of the Reserve Bank of India from September 2003 till September 2008 (Lehman Brothers collapsed on September 15 that year). No less a publication than The New York Times credits him with being one of the architects of the policies that cushioned the Indian economy from being hit hard by the global financial crisis. In this book, a compilation of Reddy’s essays on a range of banking-related subjects, the chapter on the global financial crisis offers insights into how Western central banks — chiefly the US Fed (though Reddy abstains from naming it) — failed to discharge their regulatory duties properly. Reddy’s points about the Indian central bank’s policies that enabled the country to emerge relatively unscathed should be read closely by all who want to gain an insight into the arcane world of central bank policy-making. Proud boast In the early years of the first decade of this century, it was the proud boast of the US Treasury and central bank that they had learnt to tame the boom-and-bust cyclicality of the economy. In reality, what the Fed was doing was that to keep the economic expansion going it kept interest rates at very low levels for a prolonged period. Sceptics like Raghuram Rajan who warned that such policies would create asset bubbles, whose bursting would cause grievous damage to the economy, were scoffed at. Retribution finally arrived in 2008. The Fed’s accommodative policy had created a surfeit of li

This article was originally published on October 28, 2011.