India-born Satyajit Das wears many hats: Avid cricketer, bird watcher, banker, consultant, author, and most
importantly the man who was one of the
first persons to warn the world about ‘The
Coming Credit Crash’ in his 2006
book, Traders, Guns & Money: Knowns
and Unknowns in the Dazzling World of
He explains why he believes the world is
headed for another fall.
You mentioned that world leaders have
learned nothing from the economic meltdown of 2008. Could you elaborate on the
lessons not learned and how it could once
again take us towards a 2008-like recession?
Will it be more severe than what the
world witnessed in 2008?
We just got to go back to the real basics.
Ask yourself: What caused the crisis (of
In my view, there are four inter-related
factors: High levels of debt, financial
imbalances in terms of savings and investments and current account surpluses and
current account deficits; the third is related to some extent to the first, entitlement
programs and the welfare States which
were generally unfunded, and the final one
is financialization of the economy, which is
related to debt. But there are other elements to it too.
In the period leading up to 2008, in the
United States of America, you needed $5
of debt to create $1 of GDP. In comparison, in the 1950s you needed $1 to $2 of
debt to create $1 of GDP.
What happens is, over time, like the
heroin addict, you need stronger and
stronger doses to get the same high.
Once the problems occurred, the sensible,
intelligent response should have been to
tackle the four problems I mentioned individually. We didn’t do any of that and the
debt is now higher and though the imbalances have come down a bit, they have come
down because of lower growth and not
because we actually dealt with them.
As you can see in Europe, winding back
entitlements other than in the direst circumstances like Greece, is pretty difficult.
The Germans are the classic example.
(German Chancellor ) Angela Merkel put
up the retirement age from 65 to 67. In the
last election she brought it back from 67
to 65 to satisfy her coalition partners.
So, there isn’t any willingness to tackle
any of these real issues.
The most ridiculous thing is we haven’t
dealt with financialization. That’s what got
us into trouble. We haven’t dealt with it.
All those (complex derivative) products,
derivative volumes are still the same.
CDOs (Collateralised Debt Obligation, a
complex derivative product that led to collapse of many investment banks during
the 2008 financial meltdown), is back to
the same volumes.
What is even worse, the central banks
and governments are now using finacial-ization to deal with the problems it caused
in the first place.
If a government sells its debt to a central bank (purchases bonds by printing
money and gives it to the government) to
finance itself, it’s paying interest to the
central bank. The central bank pays for
the bonds by creating reserves which
costs them nothing.
If I was to do that in a company I
would be locked up by the regulator!
You look at the European Union proposal for their infrastructure spending. It
is basically a gigantic CDO where the EU
takes the first loss. We have learned
In the film Matrix, one of the characters in the film called Morpheus
(Laurence Fishburne) offers Neo (Keanu
Reeves) the choice between a blue pill or
red pill. The blue pill lets you continue to
believe in a surreal world which you live
in and the red pill helps you understand
reality with all its pain.
The world (federal banks) keeps swal-
lowing blue pills. We keep pretending, we
keep believing that our central bankers
are saving us. But they don’t know what
they are doing.
Everybody is into this popping up of the
blue pill. The US did it for five years and
now they have unwound it. Then the
Chinese did it, the Japanese too and now
the European Union is pondering over its
own QE program.
The question is who will pay the price
for it and what price would it be?
Look, what can’t go on, won’t go on and
there will be a tipping point. It will
unwind. And it will unwind horribly.
People have borrowed and can never pay
back their debt. If it can’t be paid back, it
won’t be paid back.
In Greece, they are talking about issuing zero coupon bonds with 100-year
maturity. What’s the difference if you as
well write it off? This whole thing is nonsense!
Eventually, we will have to take a hit
and wipe out a whole lot of wealth. It’s
In the meantime, the policies keep creating more and more asset price bubbles
— equities, bonds, property, emerging
markets etc. In the end, when it (the loose
monetary policies adopted by federal
banks across the world) unwinds it will
We all know it will be horrible. It is
going to make 2008 look like a picnic.
This time there is going to be nothing to
back-stop us because all the balance
sheets of the government are weaker as a
result of the last crisis. If you have already
got the interest rates at zero, and you have
AN ECONOMIC CRISIS THAT IS GOING TO MAKE 2008 LOOK LIKE A PICNIC
Satyajit Das, who had predicted the earlier crash, lists the lessons not learnt and the consequences to Prasanna D Zore
The now iconic shot of staff members in a meeting room at Lehman Brothers offices in the financial district of Canary Wharf in London in September 11, 2008. The photo was shot from the Reuters newsroom in the same area just as the Lehman share prices started dipping and illustrates the beginning of the global financial crash. K