Australia's Early Rates Hike, Example for Region Facing Asset Bubbles
The Reserve Bank of Australia governor sometimes jokes about boring audiences with his comments and speeches. Looking at Australia's contrarian experience during this global crisis, it's hard not to conclude that boring is good. In fact, bankers and monetary authorities becoming ho-hum again is what's needed to restore order.
Stevens personifies the point. Never falling for Alan Greenspan's we-can't-recognize-bubbles shtick, he pulled away the proverbial punchbowl when the Federal Reserve kept the bar open too long. That determination to keep things from getting out of hand served the 14th-biggest economy well.
It also offers a roadmap for China, India, Indonesia, South Korea, Taiwan and other economies that have been slow to raise rates. They need to act more Australian in the months ahead. Otherwise, today's asset bubbles will feed into inflation and make 2010 a needlessly volatile year.
Some activism is needed. There's a view that tomorrow's bubbles are the price we pay for recovering from the last ones. While politically expedient in the short run, there are big risks to what economists call "the bubble fix." Growth powered by bubbles is more about quantity than quality. It's hollow growth that forms a weak basis for any recovery.
Houses of CardsIt's amusing now to rewatch films like "Trading Places," or reread books like "Liar's Poker" by my Bloomberg colleague Michael Lewis. Both deal with the excesses of the 1980s, all of which can look innocuous these days given how greed, innovation and opportunity fused together to fashion investment banks into houses of cards.
Sherman McCoy, the central character in Tom Wolfe's "Bonfire of the Vanities," boiled the debt business down to one where you pass along a piece of cake, collecting the little crumbs that come off and pocketing them. The last decade saw real so-called masters of the universe looking to pocket whole cakes and the bakeries that make them, too.
Wheeling and dealing flourished in the 80s, yet the last decade saw a Wall Street pay-scale arms race. The smartest and best educated opted for finance over science, engineering or running corporations. Risk and leverage became virtues all their own and the growth in financial systems became a bubble all its own. More people managing wealth than creating it led to dangerously lopsided economies.
Avoiding ExcessesThankfully, Asia avoided much of that scenario. Bankers didn't succumb to the toxic-debt and trading excesses that undid the U.S. economy. Conservatism served Asia well in the crisis.
Central bankers can be just as much of a problem as the private sector. Asia's monetary policy makers need to return to basics and take away their own punchbowls. Asset prices in the region, and by extension growth rates, are being driven more by unusually low interest rates than economic fundamentals. It's time for policy makers to mop up that liquidity the way Stevens is in Australia.
The concept of central-bank independence has become a quaint one these past 18 months. Look no further than the U.S., where Federal Reserve officials lowered rates toward zero and beyond. In today's political environment, it seems all but impossible for Fed Chairman Ben Bernanke to begin ratcheting rates higher.
Central Banking StarsThose efforts got Bernanke named Time magazine's person of the year. Yet central bankers were never supposed to become celebrities. Here, I'm reminded of a conversation I had with economist Herbert Stein in 1997 about then-Fed Chairman Greenspan's notoriety.
The former Nixon administration official said that in his day, few Americans even knew who ran the Fed. Central bankers worked in anonymity doing a job that's vital, but hardly sexy. In the mid-to-late 1990s, though, Greenspan was popping up in gossip columns and being pictured in People magazine alongside Leonardo DiCaprio and Cameron Diaz.
One reason Greenspan got such billing was the outsized nature of the financial system. Central-bank policies were more important than ever, and investors began relying on them to make the world safe for their profits. The so-called moral hazard produced by those expectations is one of the lasting legacies of market booms over the past 15 years.
The Australian WayHere's where Stevens's example is important. He avoided going too far with rate cuts. The RBA was the first major central bank to raise rates this year. Australia had a comparatively shallow downturn, and now Stevens is doing what peers in Asia have yet to: working to avoid a new housing bubble.
Australian banks are helping, too. They are under attack from the government for raising home-loan rates by more than the central bank has increased its benchmark. In that way, banks are doing the RBA's work for it.
In a Dec. 8 speech, Stevens took solace in his belief that "2009 was less interesting than 2008, though still not quite boring enough in my view." His efforts to make 2010 as uneventful a year as possible are an example for central banks. A dose of boredom is exactly what Asia needs.
(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)