Begin forwarded message:
From: dasg...@aol.com
Date: March 19, 2009 11:45:10 PM PDT
To: ramille...@aol.com
Cc: ema...@aol.com, j...@aol.com, jim6...@cwnet.com, l...@legitgov.org
Subject: Bernanke's Federal Reserve Is Taking Bigger Risks Than AIG at
Its Worst
Greenspan’s Bubbles 101 Lesson Must Be Avoided
William Pesek
http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_pesek&sid=a3kIiO2iNxaw
March 20 (Bloomberg) -- Now that the Federal Reserve is all in, in
poker parlance, Asia faces some big questions.
The card-playing analogy is an apt one. Like the Bank of Japan over
the past decade, the Fed looks like a gambler going for broke with
near-zero interest rates and pledges to buy government debt. With a
pinch of skill and an ounce of luck, the Fed hopes to even the score
in the biggest economy.
It will take time before we know where the chips fall, yet moves by
the Fed, the BOJ and the Bank of England are putting Asian central
banks on the spot. Will they, too, roll the dice and slash rates to
zero? Monetary-policy makers should resist the urge and let
governments take the lead.
The issue is less about the level of short-term interest rates than
their effect on asset prices. It’s in times like these that bubbles
are created, just as we saw in the U.S. during Alan Greenspan’s tenure
as Fed chairman. It has never been more important for developing
nations to act prudently and avoid what some call Greenspan’s “Bubbles
101.”
I first heard that phrase in May 2007 from Roberto de Ocampo, who was
once the finance minister of the Philippines. Since then, the term has
cropped up more and more in conversations with Asian policy makers and
business people.
“Think of it as Asia’s Greenspan test,” says Marshall Mays, director
of Emerging Alpha Asset Management Ltd. in Hong Kong. “No one has
blown bubbles better and the risk is that Asia learned the wrong
lessons from his time and his dogged efforts now to say he was
misunderstood.”
Disorienting World
It’s disorienting for this region to look at the once-omnipotent Fed
as an example of what NOT to do. During Asia’s 1997 crisis, U.S.
Treasury officials would sometimes bring Greenspan along to meetings
in Asia. The message: Look, even Guru Greenspan thinks you should do
what we say.
Now, of course, Asia sees that the so-called New Economy was really a
series of bubbles.
Greenspan, Fed chairman from 1987 to 2006, was always at the ready to
re-inflate things with the world’s most powerful monetary pump. That
tendency to rescue markets with low rates when things got dicey proved
disastrous. It skewed incentives as markets expected to get bailed
out. It also created excess liquidity that encouraged investors to
double-down on risky bets -- think American International Group Inc.
-- and sent waves of volatile hot money to Asia.
Going to Zero
Japan is effectively at zero -- its overnight rate is 0.10 percent.
The question is whether more central banks will move in that
direction. Rates in Singapore are 0.25 percent, while they are 1.25
percent in Taiwan, 1.50 percent in Thailand and 2 percent in both
South Korea and Malaysia.
While each has some latitude, rates across Asia are getting low. Not
everywhere, of course. Indonesia’s benchmark is 7.75 percent,
Vietnam’s is 7 percent and in the Philippines it is 4.75 percent.
China’s key rate is 5.31 percent, while India’s is 5 percent.
The global crisis will hit Asia with growing force as the year
unfolds. Double-digit declines in exports and sliding stock markets
were merely the first wave of the turmoil. The second will come as
U.S. households rediscover thrift. A few years of weak world
consumption will lower Asian living standards.
With credit markets malfunctioning and central banks struggling to get
traction, fiscal policy is a more important lever. The crises of the
last decade left Asia averse to big budget deficits. That is no longer
an option as world growth slows and the limits of monetary policy come
to light. Governments must spend more, period.
Real Recovery
Asia’s eventual recovery must be for real, not driven by asset bubbles
destined to burst. Lower borrowing costs won’t give Asia much sway
over exchange rates, either. Even Chinese Premier Wen Jiabao’s
concerns about the safety of his nation’s holdings of U.S. Treasury
bonds didn’t hurt the dollar. While the U.S. is the epicenter of the
crisis, developing economies may pay a bigger price as capital goes
into the dollar anyway.
Central bankers would do more harm than good by following the
Greenspan Fed’s policies.
Not that Ben Bernanke, Fed chairman since February 2006, has been a
hawk. Yet he inherited a financial system addicted to low rates and a
political system that likes things that way. That’s why, three years
after the fact, the Greenspan era is still with Asia.
Central-bank independence is now a quaint concept. Expect monetary-
policy makers more and more to bow to the whims of volatile markets
and panicked politicians. Two years ago, who would have seen the Fed
pledging, Japan-style, to buy as much as $300 billion of Treasuries to
hold down rates?
The Fed’s autonomy is as ambiguous as ever with U.S. officials
becoming an automated teller machine for irresponsible gamblers and
committing to buy or loan against everything from corporate debt,
mortgages and consumer loans to government debt.
Asia’s central banks will come under extreme pressure to slash rates.
Here, the Greenspan years are more of a cautionary tale than a
strategy on which to bet.
Feeling the pinch at the grocery store? Make dinner for $10 or less.
