Lender of Last Resort (LOLR)

LOLR is the term used for the government or the central bank of a country. It plays the role of a lender when no other source is open to a borrower. Who is this borrower so gracious that LOLR will always be available to it? This is a dilemma faced by many when they see LOLR stepping in to protect a run on deposits of large financial institutions. This question has come to haunt once again when the latest casualty of infamous sub-prime crisis, Northern Rock Plc., has been provided a lifeline by LOLR.

Northern Rock is the largest mortgage lender in UK. The model Northern Rock operated on was such that its mortgage lending was almost four times its customer deposits. Northern Rock largely depended on its ability to package its mortgage loans and sell to investors. Also it relied heavily on short term loans from the inter-bank markets. However, in August, BNP Paribas suspended withdrawal from its investment funds targeting such mortgage backed securities. The reason given by BNP was that there was no clarity on valuation of investments made by these funds. This caused banks across Europe to become wary of their counterparties in the inter-bank loan markets. At this time Northern Rock started to feel the pinch of credit squeeze. Finally, in September Northern Rock initiated talks with the Bank of England (UK Central Bank) when it realized that inter-bank loans market is not going to improve.

LOLR is supposed to keep the financial system of country in tact. At the same time it is responsible for maintaining the investor and depositor confidence in LOLR’s ability. Across the world, be it Federal Reserve or European Central Bank or Reserve Bank of India, LOLR indulge in open market operations (OMO) when they feel excess liquidity or credit crunch is hurting the economy. The prime target of these LOLR is the inter-bank market which is also called call money market. However, the Bank of England has shied away from indulging in any kind of measures to ease the liquidity in inter-bank market. The reason given by the Bank is that it is not there to protect investors but rather to protect the interest of depositors. Certainly Bank of England has succeeded in both its aims as the Northern Rock stock has fallen by almost 60% and all its depositors have been protected by the credit line provided by LOLR. But it remains to be seen how much Bank of England has done to maintain depositor and investor confidence in its abilities.

A Layman’s Perspective to India-US Relations

I, like the present generation of professionals of India, is a career minded person who wants to see a strong India. Just a thought crossed my mind that why not pen down my ideas of recent happenings in India-US relations. So here I am with absolutely my version of history and resulting present developments.

1. Why India chose the option to go nuclear?
I have read many political and military ideologues and journalists on this aspect and the only conclusion that I could draw was that nuclear weapon was a deterrent to war. And really this has been proven correct as since testing a nuclear weapon, India has never been at war in open arena.
Then another thought comes to my mind that who was the enemy India was trying to deter? It was not Sri Lanka, Burma or Nepal, it was Pakistan and China. Now Pakistan was an enemy because it had US as an ally (for only this reason because otherwise it would have become another Afghanistan) and China was an enemy because of its regional aspirations. Why would China never look at expanding itself over Pakistan and only Indian territory would be its area of interest? That is again because US was an ally of Pakistan.
Befriending US and portraying that US is India ally would certainly deter these two enemies no. 1 of India. Certainly having US as ally is a cheaper option to deter these enemies than to go on developing more advanced nuclear weapons.

2. India influencing US policies
India was never seen so big on the political map as it is now. A US presidential candidate was made to eat his words when he said something negative about India. Although this is not the case if negative sounds about India are made in any other country. This leads me to two conclusions. First, India and more so Indians have grown so strong politically that they can influence the policies (even if to some extent only) of strongest nation on Earth. Second, India and Indians are still not so strong that they can influence policies of any other country. So why not befriend US and influence other countries via US? Success is for us to see in cases of Australia and Japan.

3. Democratic Setup or Communist Setup
In India a sizeable portion of population lives below poverty line. It is comparatively easier to push poor people towards communist thought process than the people who are relatively better off. And I believe this is the prime reason why communism has at all times been represented in the Parliament. At this point of time, communism is at its peak.
Why am I writing this point here? It is not because I believe democracy in India will not survive without US help. It is because allying with US will be a boost to the democracy. You see I am a believer in democracy because that is the reason why I am where I am. I am afraid of the happenings in USSR and other communist countries and negative stories about Chinese government atrocities on their citizens.
For the US, I believe they have always been afraid of communists since the cold war days. They will rather not allow another communist state to stick its head up against US. So why not all the democratic minded Indians befriend US?

I consider myself a layman who does not understand much about the political games but this is my assessment of political scenario unfolding in the world. I am a citizen of India and I respect my country.