Asian Banks tighten to avoid bubbles

That’s very reassuring pro-active policy.

First, the news article, we’ll talk about some of the implications below.

Asian Banks Tighten to Avoid Bubbles
Monday, November 2, 2009 10:58 AM
By: Dan Weil

Central banks across Asia are tightening policy to avoid unsustainable rises in stock, bond, and real estate prices.

They are seeking to avoid a credit bubble, like that in the United States which caused the current financial crisis.

Regulators in South Korea, Hong Kong, and Singapore told banks in recent weeks they need to tighten lending standards, Bloomberg reports. And the central banks in India and South Korea have indicated they are poised to raise interest rates in coming months.

“Asset bubbles are something that authorities have to contend with quickly and not let run away,” Tai Hui, head of Southeast Asian economic research at Standard Chartered, told Bloomberg.

“Central banks are ready to take some of the wind out of the sails whether through interest rates or administrative measures.”

In Hong Kong, home prices have jumped 26 percent this year with mortgage rates at 19-year lows. So regulators have implemented stricter down-payment requirements for luxury homes.

Meanwhile, stocks have jumped 66 percent on the Shanghai exchange and more than 45 percent in Hong Kong, South Korea, Singapore and Taiwan. That compares to a gain of 18 percent for the Standard & Poor’s 500 Index in the United States.

Asian officials are expressing concern in public.

Heng Swee Keat, managing director of the Monetary Authority of Singapore, said at a recent conference, “Conditions are extremely accommodative, and how that will manifest itself is something that will be watched.”

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Now, some of the implications:

  1. Since the world economy is in a rather depressed state, the dangers of inflation seem rather remote. Essentially, inflation happens when too much money is chasing too few goods and services, but with plants having lots of spare capacity and unemployment high in many parts of the world, the chances of that are remote.
  2. Cost driven inflation is somewhat less remote. Although the high unemployment rate undermines labour’s bargaining position (so wage inflation is extremely unlikely), but raw materials are creeping up. Not enough to cause any serious damage yet, but central banks will keep an eye on this.
  3. Asset price inflation however is a serious risk. When people talk about the inflationary consequences of all that money being created by central banks all over the world (not just the US Fed), this should be the prime risk, as the real (goods & services) economy remains depressed with ample spare capacity, financial markets are getting bubbly again.
  4. For years, it has been a rather theoretical debate whether central banks should tackle (or at least try to tackle) asset bubbles. One problem is that these are hard to spot when they are forming. Remember that “irrational exhuberance” comment of Alan Greenspan (former Fed chairman) from December 1996? What if he had acted upon that assessment, and raised interest rates?….
  5. Now, Asian central banks seem willing to keep financial markets from spiralling out of control, and that is probably a good thing, although it depends on extraordinary good judgement.