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.

Ryan Avent On The BIS

The Bank of International Settlements (BIS) is the oldest multilateral financial institution currently in existence – it acts as a clearing house for national level central banks, much as central banks perform the same function within their own jurisdictions. What the BIS says tends to resonate as well as reflect what central bankers think – unfortunately.

The analysis accompanying the latest BIS annual report has Ryan Avent (prolific blogger and The Economist magazine’s economics correspondent for the US) up in arms (excerpt):

The twilight of the central banker

THE Bank for International Settlements is known as the central bank to central banks. It shouldn't be surprising, then, if the misjudgments common to central bankers are occasionally distilled in BIS analysis into a somewhat curious view of the global economy: one in which heroic, blameless central banks have done their utmost to keep the world economy afloat, in the face of ceaseless governmental incompetence and despite a constant bombardment of baseless outsider criticism. The ability of central bankers to bandage over the harm inflicted by bumbling politicians is limited, warns the BIS in its latest annual report. Unless the world embraces the sober leadership of the wise central banker disaster looms.

The annual report is a remarkable document, one which might well come to serve as the epitaph for an era of central banking spanning the Volcker disinflation and the Great Recession—the epoch of the central banker as oracle, guru, maestro. If the end of this era is upon us, we can credit a series of revelations: that central bankers learned the lessons of economic history less well than they'd thought, that they displayed an unfortunate tendency to set aside economic rigour in favour of an obsessive focus on price stability, and (perhaps most importantly) that they are in more need of democratic accountability than is often assumed. Above all, the report captures what may be the most critical error of the modern central banker: eschewing a focus on his proper domain—demand stabilisation—in favour of an arena in which he has no business sticking his nose—the economy's supply side...

This is one of the longest posts that I’ve seen RA write, and the resulting commentary much more thoughtful than the usual. Recommended as a good read, and a summary of the current debate on the role of central banks in an economy.

(H/T Brad De Long)

Reviewing Gender Equality

Women’s issues take centre stage in the latest issue of the IMF’s Finance and Development magazine (excerpt):

Women at Work
FINANCE & DEVELOPMENT, June 2013, Vol. 50, No. 2

Reductions in gender disparity don’t translate to equal opportunity

One of the most dramatic developments in the 20th century was the entry of women into economic and political spheres previously occupied almost exclusively by men. Although women are making progress in eliminating gender disparities, they still lag men in the workplace and in the halls of government. These gaps are found throughout the world, but are particularly pronounced in developing economies. So far, the greatest success has been in reducing education and health disparities and the least in increasing women’s economic and political influence. Renowned scholars, leading institutions, global businesses, and a growing range of nongovernmental organizations stress the benefits of further reducing gender inequality to allow women to realize their full potential in economic activities and in civic life.­

This issue of F&D examines women at work. It analyzes various aspects of women’s work experience—the gains that women have made in equalizing job opportunities and leadership roles and the challenges they still face to achieve genuine equality...

...These articles suggest that women are making progress in closing gender gaps in the economic and political spheres but that they are still far from achieving equity. These studies provide guidance for the design of policies to tap the full potential of women.

You can access the table of contents here.

Personally, I found the article on women economists the most interesting – a study of economist attitudes found that women tended to favour government intervention more than men do, especially on social issues. That leads to some interesting speculation – would overall policy direction and economic philosophies change when more women economists come into positions of influence?

April 2013 Employment Report

Employment continued to strengthen in April 2013, with the economy creating 173k jobs (‘000):

That puts the employment growth figure at about 2.4 million jobs since the beginning of 2009. This helped absorb 137k new entrants into the labour force and 40k from the ranks of the unemployed. As a result, the unemployment rate has fallen again:

Despite what seems to be a much more challenging business environment this year, job generation appears to be intact even if the numbers were poor for February-March. As far as the labour market is concerned, things are about as tight as could be – the numbers for both retrenchment and active job seekers are down in 1Q2013. So far so good.

Technical Notes:

April 2013 Employment Report from the Department of Statistics (warning: pdf link)

The Biggest Risk To The World Economy

No, it’s not European debt; rather it’s Chinese deflation (excerpt):

Chinese monetary policy failure

“Fed tapering” seems to be repeated in every single story in the financial media over the last couple of days. However, I am afraid that the financial media – as often is the case – is overly US centric. We might want to look at another central bank than the Fed. We should instead pay some (a lot!) of attention to the People’s Bank of China (PBoC)...

...It seems to me that the PBoC is just continuing the excessive tightening and that seems to be the real culprit behind the stream of bad economic data we have got out of China recently. It looks like Chinese monetary policy failure.

So yes, Bernanke might have a communication problem, but at the moment it seems like the biggest monetary policy failure is Chinese rather than American.

The article Lars quotes shows some pretty worrying developments in the Chinese interbank market – rates have spiked, indicating a liquidity crunch that the PBoC is not accommodating.

To corroborate this info, watch gold…I’ve always felt the runup in gold prices this past decade was more a story of Chinese (and Indian) monetary policy than the Fed’s. As of yesterday, spot gold is at its lowest level since January 2011 – today’s price has fallen to levels not seen since September 2010, before recovering a bit.

That aside, this is not good news for anybody, especially commodity exporting nations such as Malaysia. I’m afraid weakness in the Ringgit is going to be much more persistent that I expected, and growth harder to come by.