Bernanke’s fearful asymmetry
– James Saft is a Reuters columnist. The opinions expressed are his own —
Ben Bernanke may minimize the role of monetary policy in the housing debacle, but he minimizes two key factors: the effect of low rates and the Fed’s policy of cleaning up after but not popping bubbles had on risk-taking.
In what amounts to a defense of his own and Alan Greenspan’s legacy, Bernanke maintains that low interest rates didn’t cause the bubble, which he says required a regulatory rather than monetary solution.
“Borrowers chose, and were extended, mortgages that they could not be expected to service in the longer term. They were provided these loans on the expectation that accumulating home equity would soon allow refinancing into more sustainable mortgages,” Bernanke said in Atlanta over the weekend.
And where, I wonder, did borrowers get the idea that these new-fangled mortgages were good for them and that double-digit house price increases would continue? Greenspan famously sang the praises of mortgage innovation and floating rates for house buyers, while both he and Bernanke missed the bubble and downplayed its potential impact almost all the way to the bottom.
Even more to the point was the Fed’s asymmetrical response to bubbles: doing nothing to pop them on the way up, and dropping rates to ease the pain in their aftermath. So the Fed did after the dot-com crash and so it did again, in spades, after the housing bust.
The Fed under Greenspan, who seemed to believe that markets were not just efficient but somehow magical and whose direction of monetary policy during his term was largely consistent with that point of view, allowed the bubble to form.
China can outgrow overcapacity, at least for now
– Wei Gu is a Reuters columnist. The opinions expressed are her own —
China watchers are worried that excessive lending leads to massive overcapacity. However, the risk of Beijing pressing too hard on the brake is even greater. At least for now, China should be able to growing its way out of its bad debt problems.
Banking regulator Liu Mingkang recently told a conference that China’s banks should lend out 6-7 trillion yuan next year, equivalent to about one fifth of China’s annual output. Some think that is too much. However, these fears are overdone. Indeed, if new lending falls below 10 trillion yuan, bad debts will soar, private investment will be crowded out and the economic recovery may be derailed.
Since the stock of loans has been enlarged by this year’s explosive credit growth, the regulator’s target represents a 15 percent increase in China’s loan base. This is in line with past trends, but marks a sharp slowdown from this year’s 30 percent growth in total loans.
Just to keep funding current ongoing projects, the economy would need 8.3 trillion yuan in new loans in 2010, according to Nomura estimates. So the current goal implies that here would be no money left for new projects, and some current projects will not receive funding.
Setting the credit growth target too low will make it hard for new borrowers, because banks naturally want to keep funding current projects. That puts private sector borrowers, who are expected to invest more next year following strong government investment this year, at a disadvantage.
What’s more, if the banks sense the government might tighten lending targets next year, they are likely to lend as much as possible at the start of the year. This will increase the volatility of credit.
Wei Gu focuses her attention on new capacity, while the concern of most analysts is on the old capacity that is now obsolete, and growing more inefficient every day. China needs to develop new plant and equipment, naturally, just to remain competitive in the global market. However, many believe an equally pressing need is to close and consolidate obsolete buildings and companies. In my view, companies could strongly benefit from providing workers with a year’s income as a severance package, to prevent protests when the companies close down. That kind of investment would show a high return, since clearing the obsolete, inefficient capacity off the map of China is a very intense priority.
I think he is telling the truth, but only part of it. Borrowers were lent the money because banks were playing us all for greedy suckers (which we are) knowing that when the bubble would finally pop, congress and the feds would enact policies to make them whole, while leaving homeowners upside down on their debt. In other words, they created a world where they could lock in $5 worth of sales on $2 worth of product. And what popped the bubble? Oil, intentionally.