December 1, 2013

Having Your Cake And Eating It Too

Readers suggested a topic on denial. “Has anyone else noticed the bubble in ‘No Bubble Here’ stories in the MSM financial press ever since Yellen’s confirmation hearing? Which incipient national housing bubble collapse is destined to wreak the most economic havoc on the home country and global economies? Norway’s? China’s? Canada’s? Other?”

A reply, “I think it’s easy to not see a bubble in stocks because frankly stocks should have already reached this valuation or higher. But that would be based on real growth, having taken our medicine long ago. Since those things didn’t happen but should have, I think it’s easier to convince people that stocks should really be valued where they are. Since they have no understanding of what is the cart and what is the horse anyway…”

From Macleans. “Bank of England Governor Mark Carney is concerned about the ‘prospective evolution of the housing market.’ That’s the rhetorical flourish central bankers use to say that they think they’re sitting on something that’s starting to resemble a bubble. The governor, then, is back to his old task of trying to let the air out of the bubble gradually, without triggering a pop and without raising interest rates.”

“But this isn’t only Mark Carney’s curse. Central bankers and finance ministers in Norway, Israel, Switzerland and New Zealand, to cite a few, are trying to pull off the same trick. Their efforts are testing one of the big lessons the West thought it had learned from the financial crisis: That you can use regulations alone to tame bubbles.”

“That lesson came from Asia. Well before the financial crisis, Hong Kong, South Korea and others had started regulating and supervising the financial system as a whole, rather than focusing on single banks and financial institutions. After the collapse of Lehman Brothers, cold-sweating Western eggheads started to pay attention. Low interest rates had helped fuel the disastrous U.S. housing bubble, but the midst of the worst recession in half a century was no time to raise them. How to keep monetary policy loose without fuelling new bubbles and borrowing binges? By using regulations to toughen financial conditions in certain trouble areas even as low interest rates kept propping up the rest of the economy.”

“With growth still sluggish, though, no one is eager to hike up interest rates, which would raise borrowing costs for everyone, not just homebuyers, and hurt exporters by tilting up the exchange rate. So we’re all trying the alternate approach. So far, though, this seems to have simply slowed the pace of housing prices and household debt growth. Both are still rising. Around the world, similar maneuvers have produced similarly iffy results.”

“For now, the jury on whether tighter rules are really a substitute for tighter monetary policy is still out. Managing a prolonged period of low interest rates without creating dangerous asset bubbles would be the equivalent of the proverbial having your cake and eating it too. As we all know, it doesn’t work in the world of physics. Whether it will in the world of finance remains to be seen.”

Bits Bucket for December 1, 2013

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