Thursday 17 September 2009

Greenspan should visit Singapore - and learn a thing or two

As Alan Greenspan tirelessly makes the rounds to save his legacy, Singapore is reminding us why the former Federal Reserve chairman’s efforts aren’t working.

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Guanyu said...

Greenspan should visit Singapore - and learn a thing or two

By WILLIAM PESEK JR, Bloomberg
17 September 2009

As Alan Greenspan tirelessly makes the rounds to save his legacy, Singapore is reminding us why the former Federal Reserve chairman’s efforts aren’t working.

Mr. ‘We Can’t Detect Bubbles’ probably never thought he could learn a thing or three from an economy of 4.8 million people. This week, Singapore’s National Development Minister Mah Bow Tan unveiled measures to prevent excessive price swings in the real estate market.

The reason: the Asian country sees the very signs of rampant speculation in homebuying that central bankers such as Mr. Greenspan long argued couldn’t be spotted or headed off. Funny how tiny Singapore can do it and the mighty Fed can’t.

Mr. Mah, in perhaps a Freudian slip, seemed to note the irony. He said Singapore’s measures were meant to ‘temper the exuberance in the market’. Remember it was in December 1996 that Mr. Greenspan made the words ‘irrational exuberance’ a euphemism for bubble.

The world could learn from Singapore’s speculation-management efforts; the US can learn the most. This suggestion may raise blood pressures in the laissez-faire crowd. It’s worth noting that Singapore, for all its quirks, scores highly in measures of economic freedom. A Cato Institute report this week ranked Singapore among the 10 freest economies, grading it higher than the US or Switzerland.

The point here isn’t to celebrate Singapore’s economy or politics. Nor is it to say a US$182 billion economy is a model for a US$14.2 trillion one. It’s to show that central bankers are full of bunk when they say bubbles can’t be identified.

This is blasphemy to free-market fundamentalists. Yet why did Yale University’s Robert Shiller see what the Greenspans of the world either couldn’t or refused to? That goes both for the technology-stock meltdown in 2000 and the housing one seven years later. How come Nouriel Roubini in 2006 predicted the very credit crisis the supposedly omniscient Mr. Greenspan missed?

One reason is dogged ideology. Being steeped in a history of Ayn Rand and Ronald Reagan meant Mr. Greenspan probably never saw a government regulation he didn’t want to scrap. Perhaps hubris was part of it. In the 1990s, Mr. Greenspan was a celebrity, showing up in People magazine. It’s dangerous to believe your own press.

The good news is that Asia has few of these problems. Central banks and finance ministries in the region were slower to deregulate than the US was. Monetary officials in Asia never became the larger-than-life powers that they did in, say, the US or Germany.

That’s not to say Asian central banks don’t dig in their heels. The global crisis that tarred Mr. Greenspan’s standing has been good to Yaga Venugopal Reddy. As Reserve Bank of India governor from 2003 to 2008, Mr. Reddy resisted allowing the kind of leveraging and risk-taking that killed Bear Stearns Cos and Lehman Brothers Holdings Inc.

‘If America had a central bank chief like YV Reddy, the US economy would not have been such a mess,’ Nobel Prize-winning economist Joseph Stiglitz was quoted as saying in The New York Times in June.

While hindsight may be 20/20, forecasting and central banking are anything but. It’s also true that one investor’s dangerous asset bubble can be another’s perfectly rational bull market. There comes a point, though, when central bankers need to take away the punchbowl.

Look at China. As impressive as China’s 7.9 per cent growth is, it’s hard to argue the Shanghai Composite Index should be up almost 90 per cent this year.

The same goes for the Hang Seng Index’s 45 per cent rally. The city is, after all, in recession. This week, Hong Kong Monetary Authority chief executive Joseph Yam said central banks face a dilemma. Tightening too soon may curb a recovery, while maintaining loose policy may produce ‘asset bubbles,’ he said.

Guanyu said...

In Hong Kong’s case, I’d say it’s too late. Its market capitalisation to gross domestic product (GDP) ratio is 640 per cent, according to Mark Matthews, a strategist at Fox-Pitt Kelton in Hong Kong. That’s four times larger than that of Singapore and 10 times as large as the average for the rest of the region.

Bubble, anyone? Exhibit A: a one-bedroom apartment in Kowloon sold for a record HK$24.5 million (S$4.5 million), the South China Morning Post reported. For 816 square feet, that had better include visits by Jackie Chan or Jay-Z.

No one is saying bubble management is easy; it’s often more art than science. Yet today’s growth is more about easy money than genuine demand. The quality of growth matters as much as the quantity.

Asia learned that lesson 12 years ago, just as the US is today. The difference, of course, is that Mr. Greenspan’s bubbles were global phenomena. The Fed’s low-rate policies fuelled speculation in high-risk assets. By 2003, speculative capital flows into Asia reached a record high, surpassing the previous peak in 1996. They had the Fed written all over them.

You can stick with the idea that bubbles are mythical forces that can’t be tamed. Or, for a different view, you could visit Singapore.

The writer is a Bloomberg News columnist. The opinions expressed are his own