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The unexpected rejection of the treasury’s bailout plan by the US House of Representatives unsurprisingly sent markets across the world into a tailspin. Inter-connectedness defines the global financial system and US firms are dominant, so the mood went sour everywhere. America’s domestic politics—presidential elections are a month away and the current president is lame-duck; all the members of the House of Representatives are up for election as well—has for now produced a rejection of a plan that is good in many parts and deserves a chance. This newspaper and our columnists have been on the side of those who argue that the bailout is the only way to prevent a deeper, more protracted recession in the US, and beyond. However, let’s pause to appreciate US politics as well. The rightwing of the Republican Party and the leftwing of the Democratic Party overrode a bipartisan leadership-level understanding. There was real passion and individual conviction in the debate—no lawmaker was afraid of party leadership’s wrath. When we in India talk about parliamentary oversight of policies, this is what we miss—MPs voting under party whips do not a debate make. The sensible bet is still on US legislature passing some form of a bailout. But in the interim, it is important that important stakeholders everywhere don’t lose their head.
A good example, mercifully brief, of demonstrations of panic was the rush for a few hours to empty bank accounts following rumours that India’s largest private sector bank, ICICI, was over-exposed to the global crisis. RBI and Sebi both acted fast in issuing statements appealing for calm and reassuring people about the safety of India’s financial firms and the system in general. The role of the central bank and market regulator in calming sentiments in a time of low confidence levels should never be under-estimated. Many times, perfectly solid institutions can face trouble (and indeed collapse) in the face of a self-fulfilling doomsday prophecy—only last year, Alistair Darling, UK’s chancellor of the exchequer, unwittingly started a run on Northern Rock with an ill-timed statement on the ‘financial health’ of the institution. Policy makers have to admittedly walk a tight rope in the time of panic. Bernanke and Paulson have done well under the circumstances in the US, and will acquit themselves better if their bailout plan is eventually cleared. In India, RBI and Sebi deserve a pat on the back for their swift intervention.
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