The JP Economy and Government Irresponsibility
February 2, 2004
Ram Seshadri is fund manager at Alyx Funds LLC (www.alyxfunds.com)
The US economy is growing rapidly and the world is in a synchronized recovery. Pundits are ecstatic and hoi polloi are growing ever more confident. Watching how this “boom” has unfolded brings to my little mind of an event long purged as a dark memory in my innocent youth.
While I was a kid growing up in middle class India during the 70’s and early 80’s, when the opportunities seemed just about non-existent whether you graduated with a Master’s degree in Engineering or simply dropped out of college, my parents and I were pretty much wary of our future. Into our lives, a new government strode into power with the same old promises – of making a difference. Through most of our lives, we had never seen any government make much of a difference to India’s poverty, so we stayed with our heads pretty close to our books as we felt that somehow, education, however useless it seemed, at least offered you a way out of reality.
But that is when a new junior minister came into prominence in India and changed our lives.
His name was Janardhan Poojary. JP was a bright young minister from a Southern State and was widely viewed as being close to the Prime Minister. One year into his new term, and searching about for ways to jumpstart moribund India, which was struggling under enormous state expenditures and hugely inefficient state behemoths, he hit upon a radical new idea.
He became the first minister to organize a “Loan Mela” (literally a “Loan Festival”) in our country. This is how it worked. JP went to a small town or a village and rounded up all the bankers in that town (at that time, we all feared politicians and people in India probably still do). He even got some of the bank offices from nearby big cities if he couldn’t find any bank in the small town or village. Before that day’s Loan Mela, he spread the word through minions (or thugs) that anyone who needed a “loan” was welcome and all they needed to do was sign a paper (or in many cases, put in a thumbprint) and voila! they received a “Loan” or in many a poor, illiterate’s mind: a wad of cash beyond their wildest dreams.
For his first few Loan Mela’s only a few lucky ones showed up because many in India are extremely leery of debt and even more leery of bankers. But after the first few villagers confirmed that this was the real deal, word spread like wild fire. Pretty soon, Loan Melas were being held in every town and village in the country, and JP was the most popular man in the Prime Minister’s cabinet, sometimes eclipsing the Prime Minister’s own popularity.
The “loans” being handed out were for sums ranging from Rupees 1000 to 10,000, a princely sum those days. A town or village showered with such largesse, literally blossomed the next day (or shall we say, “boomed”?)
As the Loan Melas were repeated throughout the country, India boomed overnight. Sales of everything from tractors to televisions exploded as people in the countryside bought anything that caught their fancy with the government’s largesse.
Needless to say, the government was very popular for about 2 years as the “boom” raged on. The government was very careful not to hold these Loan Mela’s in cities as they knew all of those city slickers would cheat them and stand in line for a second helping. So this phenomenon was confined mostly to the countryside and we read about it only in the newspapers.
And one glorious day, without warning, the Loan Melas ended. There was no real explanation why, though most people speculated that some junior banker somewhere probably said he had no money left in the vaults to lend.
Once the Loan Melas’ ended, the boom ended and India was caught in a vicious spiral, even worse than where it was before the boom (hard as it is to imagine). The banks were caught with unbelievable amounts of bad loans and many were solvent only in name. The following recession and the near collapse of the banking industry hobbled India well into the early 90’s. No one knows what became of JP though most speculate he retired in a good comfortable home and probably gave himself a small loan in the end for his efforts.
Fast forward to 2004.
A government in desperate times wanting to cheer up its populace with an artificial boom. A treasury that opens its doors wide open for private enterprise to lend out without any checks and/or balances. A banking system that plays middlemen to an overeager Federal Reserve whose political chairman’s only motto is “get reappointed or reap the whirlwind”. Sounds familiar? Dear Readers, the JP Era is back and bigger than ever. This time it’s happening 30 years later with all the attendant technological progress (in Finance) and the extra dollop of hubris that comes from its origins on the shores of the world’s only superpower.
Look no further for comparisons to JP: We have Fannie Mae and Freddie Mac asking each and every mortgage broker in the country to hold “Loan Melas” (we just have a different name here – they are called Loan Sales Events) where anyone with a pulse and not even an income can buy a $300,000 home. The lender then turns around and sells the loan to the government’s arms-outstretched Fannie and Freddie. The broker has virtually no risk and he can lend to anyone he wants and virtually any amount (we are talking about borrowers with no proofs of income here!). It should then be clear to attendant readers that Fannie Mae and Freddie Mac are the new JP’s of our era. New Era anyone?
Just when I thought that the tale of a shameful era of irresponsible government in a third world nation was long consigned to the dark vestibules of my memory, I was rudely reminded the other day of one more JP in our First World midst – Sallie Mae (thanks to a cover story on this smooth operator in the US News and World Report, October 2003).
It seems that Sallie Mae and other big private lenders are now jostling to provide student loans to undergraduates (any amount). The only risk seems to be the risk of not making a huge profit. The way it works is this: Our government will insure these JP avatars with up to 98% of their losses in case the student defaults. Apparently this is a booming business and the stocks of these companies are soaring on Wall Street. The JP era strikes again!
In fact, the US government’s willingness to underwrite loans to everyone (and all that a private enterprise has to do is to be in the middle and collect a fee) makes of the JP Era look pristine in comparison.
Who will warn Americans about JP? It won’t be Alan Greenspan or any of the esteemed economists. They are all on JP’s side cheering on this irresponsible government profligacy while the people’s treasury is looted. Meanwhile, we’re at risk of a crushing recession once this boom ends and/or a vast bailout of all these government sponsored enterprises (though SLM is not a GSE). Also think about all the millions of innocent Americans who are holding debt securitized by loans in their money market accounts – loans given out during these Loan Melas.
However, this lending-without-consequence boom will end like all other booms that the JP’s of our history have instigated. They will end in tears and in an especially short time. The denouement will be silent and without announcement. That day of reckoning for the JP era in our midst will arrive, as it inevitably must, and in my opinion, is not too far from the corner.
Opinions expressed are not necessarily those of David W. Tice & Associates, LLC. The opinions are subject to change, are not guaranteed and should not be considered recommendations to buy or sell any security.
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