Banks And Housing: No Systemic Risk…Yet

I attending a talk on property today, which brought to mind the “evidence” that we have a budding property bubble. The consensus today is that there isn’t one, despite the anecdotal evidence – just a boom stemming from pent up demand. Prices haven’t zoomed as excessively high or are as volatile as they are in Singapore or Hong Kong.

But my focus is more on what systemic risk a potential bubble – or boom, as the case may be – might pose to the banking system. I already talked about this issue at the beginning of the month, which to my surprise was one of my more popular posts.

July 2010 Monetary Conditions Update

There’s lots of things to talk about this month, but I haven’t much time to go into detail just yet. So this will be short and sweet, until I can go over the numbers fully.

First news is that BNM has revamped the presentation of the Monthly Statistical Bulletin – there are a few new things in there such as extended coverage of the banking system, and a few losses like the full breakdown of the money supply aggregates.

But as far as the monetary numbers are concerned, what I’m seeing is basically a continuation of some of the trends we’ve been seeing in the past few months. Money supply growth has held steady in July (log annual and monthly changes; seasonally adjusted):

Deputy Finance Minister Says Gold Dinar Is Ok – For Investment Only

Back in the news again:

Dinar only for keeping, not trading, says Awang Adek

BACHOK: The Federal Government does not see any problem if the gold dinar and silver dirham introduced by the Kelantan government are only for keeping and not trading in the open market.

Deputy Finance Minister Datuk Dr Awang Adek Hussin said the federal government would oppose the state government if it tried to use them as currency as it was against Bank Negara regulations and could victimise traders.

I’ve said quite enough regarding this subject already, but I’ sure this won’t be last we’ll hear of this issue.

Bill Mitchell Disses Morgan Stanley

I reported yesterday on a Morgan Stanley report that discusses the state of government finances. Bill Mitchell, a proponent of Modern Monetary Theory (MMT), has a fine critique of the piece:

There is no solvency issue for a sovereign government

…There is no debt crisis in sovereign nations. The only public debt problems that have emerged in the current crisis have been in non-sovereign countries and even then with appropriate “fiscal support” those crisis were managed. I am referring to the intervention by the ECB when they decided to purchase outstanding public debt in the secondary bond markets – which amounte [sic] to a fiscal act within a flawed monetary system.

But blurring the distinction between sovereign and non-sovereign nations is the starting gate for this absurd journey in self-importance that Marès has produced.

The report is “the first issue of Sovereign Subjects” which is “a new Morgan Stanley publication focusing on sovereign risk in advanced economies”. Please write to Morgan Stanley and tell them that the publication is a crock and they should save their time by not producing a second issue.

The first issue of this propaganda document perpetuates some classic myths and then some…

If you’ve ever been dissatisfied with some of the answers that mainstream economics serves up, this guy is required reading (along, I think, with Scott Sumner). I find myself attracted to some of the ideas behind MMT, which shares some characteristics with Post Keynesian thought, though I don’t know if I’d commit wholesale to this ideology…yet. But the more I read and explore economics, the more their ideas make sense – certainly the idea of fiscal austerity in the face of falling economic activity goes against my instincts, especially when monetary authorities aren’t doing enough.

But the read the whole piece…it’s worth your while.

A Change Of Governance At The IMF?

From The Economist Free Exchange blog:

Intrigue at the IMF

THINGS are hotting up at the IMF, and it doesn’t have anything to do with bail-outs (or with the heat wave in Washington, DC). Instead, the chatter at the fund is about America’s decision to abstain in a routine vote on the size of the body’s executive board, news of which crept out into the world beyond 19th Street at the end of last week. This may sound arcane (and in a way it is), but it is something that could force the Fund’s members to make a more serious effort to ensure that the long-promised shift in decision-making power at the IMF towards big, fast-growing emerging economies (like China, India and Brazil) materialises.

This has been brewing for a long while, and it took the US siding with emerging economies, ironically, to push the process forward.

Sovereign Debt Defaults And Financial Oppression

There’s a fascinating article on Morgan Stanley’s Global Economic Forum today, assessing the state of government finances in the West:

Ask Not Whether Governments Will Default, but How
By Arnaud Mares

The sovereign debt crisis is not European: it is global. And it is not over. The European sovereign debt crisis of spring 2010 was a misnomer in more ways than one: there was not one crisis but two. And it will continue well beyond 2010, in our view. The first crisis was, and remains, an institutional crisis of the euro, caused by a flawed multilateral fiscal surveillance framework. Steps have been taken towards a correction of the flaws with a move from peer pressure to peer control of fiscal policy. This is reflected by the acceptance by the Greek, Spanish and Portuguese governments of fiscal measures largely dictated from Berlin and Brussels. The second crisis was, and remains, a sovereign debt crisis: a crisis caused by sovereign balance sheets being overstretched, to the point where insolvency ceases to be merely possible and becomes plausible. This crisis is not limited to the periphery of Europe. It is a global crisis and it is far from over. We take a high-level perspective on the state of government balance sheets and conclude that debt holders have to be prepared to enter an age of ‘financial oppression'.

Excess Reserves Don’t Necessarily Lead To Excess Credit Creation

I just can’t leave this topic alone. But it’s interesting to contrast the Malaysian experience with what’s going on in the US and Europe right now.

In my post on hyperinflation, I made the assertion that credit creation is no longer an asset side phenomenon driven by the logic of fractional reserve accounting, but limited on the liabilities side of the balance sheet by capital ratios. This in turn means that excess reserve creation carried out by western central banks isn’t necessarily inflationary.

Here’s some supporting evidence, in the Malaysian context. First the track record of loan growth since 1998 (log annual changes):

Jim Rogers Is Wrong

Maybe its his Asian perspective, since he’s based in the East now, but calling for interest rate hikes in the developed world is about on par with implementing fiscal austerity in a recession…oh, wait, they’re doing that too:

Rogers Says China, World Should Raise Rates in Inflation Fight

China and other global economies should increase interest rates to contain a surge in inflation, said investor Jim Rogers, chairman of Rogers Holdings.

“Everyone should be raising interest rates, they are too low worldwide,” Rogers said in a phone interview from Singapore. “If the world economy gets better, that’s good for commodities demand. If the world economy does not get better, stocks are going to lose a lot as governments will print more money.”

Hyperinflation? Ain’t Happening

There’s a popular belief that’s been hanging around since late 2008 that the US and other countries that have engaged in quantitative easing a.k.a. money printing, are going to experience hyperinflation and currency collapses. If you’re not familiar with the term, it’s inflation on steroids, where currency losses its value faster than you can spend it, and where prices are higher in the afternoon than it is in the morning.

The most recent and historically extreme example of the hyperinflation phenomenon is of course Zimbabwe, which has come to symbolise economic and monetary mismanagement on an unbelievable scale. But hyperinflation is not just a disease of weak and developing nations. The other prominent example is the short-lived Weimar Republic, the government that replaced Imperial Germany in the aftermath of World War I. There have of course been lesser borderline cases in the past century, notably Argentina and Turkey, though inflation in those countries never reached the sublime heights it did in Zimbabwe and Germany.

June 2010 Employment Report

I reported a few months back that the Department of Statistics has started issuing monthly employment and unemployment reports. I haven’t touched the subject since, because unemployment hasn’t varied much, even in the depths of the recession. But I’m going to cover this from now one, partly from a sense of completeness, and partly because I suspect its going to be important later on.

The first you’ll note looking at the numbers, is how volatile they actually are:

Development Economics: A Layman’s Primer

It’s really short on the theory, but that’s what makes this World Bank blog post a good primer for development issues:

Pathways to Development: What We Know and Don’t Know
Raj Nallari

Development is about welfare enhancing transformation through economic, social, political, and technological progress. Transformation is predicated on per capita income growth but development is also about progress in reduction of poverty and inequality, individual capabilities, access to social services, and quality of life. Both growth and development are also predicated on distributive politics of how a society is able to deal with vested interests and social conflicts.

During past sixty years, growth spurts have occurred in most countries but generally outcomes have fallen short of expectations. Developed economies have averaged growth rates of 2.4 percent during 1990 and 2008 while developing economies have collectively increased their GDP by an average of 4.7 percent over the same period. For low and middle income countries, physical capital is the principal determinant of growth, while for upper middle income and higher income economies total factor productivity was the most important driver. TFP is a catchall for other factors, which are human capital variously measured, and its quality; technological capability and innovation; managerial skills; organizational effectiveness; institutions affecting incentives, competition, allocative efficiency and governance; and the characteristics of urbanization.

No Stimulus Measures This Time

So the PM says:

PM: Strengthening economic fundamentals better than stimulus packages

PUTRAJAYA: It is better for the government to strengthen economic fundamentals rather than introduce stimulus packages frequently to overcome the economic slowdown, the Prime Minister said.

Datuk Seri Najib Tun Razak said the country needed to avoid introducing stimulus packages too frequently because it would increase the government's deficit.

However, Najib said that stimulus measures, especially for local investors to increase investment, needed to continue.

"If we do this and projects with big multiplier effect on the economy are implemented, then even with a slight drop in foreign demand, we can still achieve our 6% target," he said…