Contingent Liabilities: You Ain’t Seen Nuthin’ Yet

One of my favourite econs bloggers, James Hamilton, has a new working paper (abstract; emphasis added):

Off-Balance-Sheet Federal Liabilities
James D. Hamilton

Much attention has been given to the recent growth of the U.S. federal debt. This paper examines the growth of federal liabilities that are not included in the officially reported numbers. These take the form of implicit or explicit government guarantees and commitments. The five major categories surveyed include support for housing, other loan guarantees, deposit insurance, actions taken by the Federal Reserve, and government trust funds. The total dollar value of notional off-balance-sheet commitments came to $70 trillion as of 2012, or 6 times the size of the reported on-balance-sheet debt. The paper reviews the potential costs and benefits of these off-balance-sheet commitments and their role in precipitating or mitigating the financial crisis of 2008.

And people are complaining when Malaysian government contingent liabilities hit 15% of GDP. Makes you wonder, dunnit?

Of course, it’s not a totally fair comparison. The Malaysian number only encompasses government guaranteed debt, not the full extent of explicit and implicit contingent liabilities as Prof Hamilton has tabulated for the US.

Nevertheless, the US numbers are staggering – it’s the equivalent of about 500% of US GDP. While the bulk is made up of "safe” contingencies through the Federal Reserve and the iffier actuarially estimated future liabilities of the US social security and medical assistance programs, guarantees for housing and student debt take up 50% of GDP, or more than three times Malaysia’s total government guarantees. US Federal deposit insurance takes up another 50% of GDP, compared to approximately 30%-40% of GDP for Malaysia (based on PIDM figures).

Any comparable exercise for Malaysia would show piddling numbers by comparison.

Technical Notes

James D. Hamilton, "Off-Balance-Sheet Federal Liabilities", NBER Working Paper No. 19253, July 2013

The Fitch Rating Downgrade: Much Ado About Nothing

Right off the bat, I should say that the timing of the release of the report – just before Hari Raya – was purely coincidental, and not in any way due to hidden motives. It just so happens that Fitch’s annual rating review of Malaysia’s sovereign rating occurs about this time every year.

Nobody pays much attention when ratings are affirmed, but up or down movements are much more visible from a news-worthy perspective, and bad news trumps goods news every time. And yes, the good news/bad news phenomenon has actually got pretty solid research behind it.

A Belated Eid Mubarak; And I’m Back

I’ve been offline for more than a week now, but I’m back at work, refreshed and recharged. To all a happy holidays and Eid Mubarak to all muslimin and muslimah.

There’s quite a few topics that have come up over the past few weeks that I’ll have something to say on over the coming days, not least of which is the TPPA and Malaysia’s sovereign ratings. I’ve had quite a few emails asking about the former, plus attending MITI’s open day, so I’ll be writing what I think once I get my thoughts organised.

BNM Watch: Interest Rates On Hold But Liquidity Support Increasing

Last Thursday’s Monetary Policy Committee meeting resulted in another anti-climax (excerpt):

Monetary Policy Statement

At the Monetary Policy Committee (MPC) meeting today, Bank Negara Malaysia decided to maintain the Overnight Policy Rate (OPR) at 3.00 percent…

…For the Malaysian economy, domestic demand has continued to support growth amid the continued moderation in external demand. The sustained weakness in the external sector may, however, affect the overall growth momentum. Going forward, private consumption is expected to remain steady underpinned by income growth and stable labour market conditions. Capital spending in the domestic-oriented industries and the ongoing implementation of infrastructure projects will also support investment activity…

…The MPC considers the current stance of monetary policy to be appropriate given the outlook for inflation and growth. In addition to domestic conditions, the MPC will continue to carefully assess the global economic and financial developments and their implications on the overall outlook for inflation and growth of the Malaysian economy.

The Hammer Falls

BNM isn’t wasting much time (excerpt, emphasis added):

Measures to Further Promote a Sound and Sustainable Household Sector

Bank Negara Malaysia announces today, the implementation of a set of measures aimed at avoiding excessive household indebtedness and to reinforce responsible lending practices by key credit providers. These measures, which take effect immediately, complements the earlier measures introduced since 2010 to promote a sound and sustainable household sector. The measures are:

1. Maximum tenure of 10 years for financing extended for personal use;
2. Maximum tenure of 35 years for financing granted for the purchase of residential and non-residential properties;
3. Prohibition on the offering of pre-approved personal financing products.

The limits on financing tenure will not affect applications made before today...

...These measures are issued pursuant to section 31(1)(a) of the Central Bank of Malaysia Act 2009 and apply to all financial institutions regulated by Bank Negara Malaysia, credit cooperatives regulated by the Suruhanjaya Koperasi Malaysia, Malaysia Building Society Berhad and AEON Credit Service (M) Berhad. This is to ensure consistency in the financing practices across all the key credit providers.

Not before time. This action was long overdue, and only needed the legislative authority to allow BNM to enforce it effectively outside of the banking system.

About the only other thing I can think of to add to this would be if the government tightened its own limits on salary deductions allowed to civil servants. But that’s obviously not within BNM’s purview.

May 2013 External Trade

So much for expecting a bounce. May’s trade numbers offer little room for optimism (log annual and monthly changes; seasonally adjusted):

The Strange And Mysterious Workings Of Singapore’s Monetary Policy

Singapore is a pretty unique economy, what with being a very open island trading nation, and with its political and social history.

Its approach to monetary policy is just as unique. Unlike the vast majority of central banks, Singapore’s Monetary Authority (MAS) uses the exchange rate as its primary monetary policy instrument. While this in itself is not too radical, unlike exchange rate regimes in the past the application of this policy is not through targeting a level of the exchange rate, but the slope and breadth of its appreciation.

This makes economic sense, as inflation is an appreciation in the general price level, not the price level itself. If the goal of monetary policy is stable prices (and/or economic growth), then a policy of exchange rate appreciation to regulate an increase in prices is appropriate.

People First?

I read this article last week, but something about it really bothered me. It was like an itch I couldn’t scratch. I only figured out what was wrong yesterday (excerpt; emphasis added):

Time govt lived up to its slogans, says MIER chief

KUALA LUMPUR (June 28): Malaysia's economic policies need to be implemented in line with the government's slogan of 'People First,' which means the people should be the ones benefitting "firstly and mostly," the chief of the Malaysian Institute of Economic Research (MIER) said.

Unfortunately, this is not the case, pointed out Dr Zakariah Abdul Rashid, who is executive director of the think tank.

In an exclusive interview with fz.com, Zakariah touched on various issues, including the importance of interpreting economic indicators carefully, the widening gap between the rich and poor, doing away with race-based assistance and the importance of being competitive in choosing our leaders...

Efficient Markets and Perfect Information

Robert Skidelsky on the efficient markets hypothesis and  New Classical economics generally:

Every general crisis involves self deception as well as the deception of others. In Donald Rumsfeld’s immortal phrase, it is the “unknown unknowns” which trip us up. If only one person were perfectly informed, there could never be a general crisis.

But the only perfectly informed person is God, and He does not play the stock market.

[Skidelsky, Robert, “Keynes: The Return of the Master”, Audible Inc, 2009]

What’s Malaysia’s Full Employment Rate?

I honestly don’t know, but our new EPU head thinks its 4% (excerpt):

Parliament: 20 years of full employment, says Abdul Wahid

KUALA LUMPUR: The country's sustainable economic growth over the past 20 years has kept the unemployment rate at below 4 percent, which based on economic definition, is considered as full employment, Dewan Rakyat heard.

Minister in the Prime Minister's Department Datuk Seri Abdul Wahid Omar said the good economic growth since 2011, from 5.1 percent to 5.6 per cent last year saw the creation of 438,800 jobs in 2012, compared to 385,000 previously.

The Financial Services Act

BAFIA is no more; long live the FSA (excerpt):

Financial Services Act 2013 and Islamic Financial Services Act 2013 Come Into Force

The regulatory and supervisory framework of Malaysia enters a new stage of its development as the Financial Services Act 2013 (FSA) and Islamic Financial Services Act 2013 (IFSA) come into force on 30 June 2013.

The FSA and IFSA is the culmination of efforts to modernise the laws that govern the conduct and supervision of financial institutions in Malaysia to ensure that these laws continue to be relevant and effective to maintain financial stability, support inclusive growth in the financial system and the economy, as well as to provide adequate protection for consumers. The laws also provide Bank Negara Malaysia with the necessary regulatory and supervisory oversight powers to fulfil its broad mandate within a more complex and interconnected environment, given the regional and international nature of financial developments. This includes an increased focus on preemptive measures to address issues of concern within financial institutions that may affect the interests of depositors and policyholders, and the effective and efficient functioning of financial intermediation.

It is important that Malaysia's regulatory and supervisory system is adequately equipped to respond effectively to new and emerging risks so that confidence in the financial system is preserved and that the critical financial intermediation activities which are vital to the economy are not disrupted. The FSA and IFSA amalgamate several separate laws to govern the financial sector under a single legislative framework for the conventional and Islamic financial sectors respectively, namely, the Banking and Financial Institutions Act 1989 (BAFIA), Islamic Banking Act 1983, Insurance Act 1996 (IA), Takaful Act 1984, Payment Systems Act 2003 and Exchange Control Act 1953 which are repealed on the same date…

Shadow banking has become an increasing concern among regulators the world over in the aftermath of the Great Recession. The FSA and IFSA is BNM’s response, allowing it broader powers and a wider scope for those powers, encompassing “financial holding companies and non-regulated entities to take account of systemic risks that can emerge from the interaction between regulated and unregulated institutions, activities and markets.”

This suggests that entities previously outside banking regulation such as co-ops, development institutions, and companies with significant shareholdings in banks may come under BNM’s withering and critical eye.

I can’t wait to see what happens.

The Endogenity Of Money

I’ve been meaning to write a post about my…conversion…to endogenous money theory for many moons now, but its always been on the back burner. The reason why I think endogenous money is important is because conceptually, it provides a much more accurate view of how the financial and monetary system in the modern era actually works.

And the reason why I’m posting about it now is because somebody did a remarkably good summary of endogenous money theory (excerpt):

Endogenous Money 101

Money is at the centre of all modern capitalist economies. Understanding its nature and origins is therefore of great importance. At the heart of Post Keynesian monetary theory is the idea of endogenous money.

This is opposed to the mainstream exogenous money supply theory: the idea that the central bank has direct control over the money supply and its growth. The latter theory is wrong, and I review that major points of endogenous money below.