Toshihiko Fukui is looking more and more like Asia’s answer to Alan Greenspan.
It is exactly what many Japanese politicians had hoped for. When Fukui became Bank of Japan (BoJ) governor in March 2003, lawmakers urged him to be the “Greenspan of Japan, if not Asia.” It was a bow of acknowledgement to the then-Federal Reserve chairman’s effect on markets and the power of his monetary policies.
Politicians got their wish—not in the way many imagined. Now, markets are paying the price for Greenspan’s mark on Japan’s rate policies. Fukui’s BoJ, just like Greenspan’s Fed, has both created and enabled bubbles overseas with ultra-low rates.
All this may come as a surprise to Fukui’s supporters, and there are many. To them, Fukui restored credibility they felt had been lost during the 1998-2003 tenure of Masaru Hayami. The adulation sometimes seems akin to how many view Greenspan, who was dubbed “Maestro” in a gushing 2001 book by Bob Woodward (Maestro: Greenspan’s Fed and the American Boom).
What is conveniently overlooked about Greenspan’s 1987-2006 tenure is his role in China’s asset bubble and, by extension, Asia’s.
Greenspan’s policy of keeping interest rates unusually low in the first half of this decade fuelled speculation in high-risk assets. That led to a cheap capital-fuelled investment bubble in China.
Greenspan’s culpability for the financial contagion that the US subprime-mortgage mess is sending Asia’s way is almost beside the point. The first hint Greenspan’s fingerprints were on this crisis came in June, when former Fed colleague Edward Gramlich told The Wall Street Journal that Greenspan had opposed a proposal that would have boosted oversight of subprime lenders.
Greenspan seems to be getting a pass from a Wall Street that remembers kindly how he bailed out investments time and time again. From the Mexican peso woes and the financial meltdown in Orange County, California in the mid-1990s, to Long-Term Capital Management’s collapse in 1998, to the Internet stock bubble of the late 1990s, Greenspan proved to be a reliable market saviour.
That’s the Fed’s job, some might say. And Greenspan’s genius, supporters say, rested in the very reason Woodward dubbed him maestro: his ability to conduct all instruments of economics amid an orchestra of political demands.
More often than not, though, that meant helping Wall Street traders out of a jam. One side effect is what economists call the “bubble fix”, whereby central bankers’ attempts to calm markets lead to economic imbalances. Greenspan’s time at the Fed featured more than a few such episodes. Will Ben Bernanke’s?
It is an open question, following the Fed’s 17 August move to cut the discount rate—which it charges banks—by 0.5 percentage point to 5.75%. The surprise reduction was aimed at containing the subprime collapse, which threatens the broader credit markets.
Significantly, the Fed did not lower the more potent federal funds rate. Slashing the rate banks charge each other for overnight loans would have had a more dramatic impact on markets—and on perceptions of Bernanke’s betrothal to them. Given that barely two weeks earlier the Fed was fretting about inflation, Bernanke’s move—while clearly forced by markets—was a savvy one. The trouble begins if he starts slashing more vital rates at the next policy meeting on 18 September. Mortgage lenders did dodgy things; the Fed doesn’t have to save them from facing the consequences with a bubble fix.
By the time the Greenspan Fed began raising rates in mid-2004, it was already too late for Asia. Like clockwork, once the Fed lowered the federal funds rate to 1%, speculative capital flows rushed to Asia. In 2003, flows destined for Asia topped the previous peak in 1996, just before the region’s crisis began.
The biggest recipient, of course, has been China. Not surprisingly, Asia’s No. 2 economy is home to any number of speculative bubbles, from property to stocks.
Low US rates complemented zero rates in Japan. On Wednesday as BoJ begins a two-day policy meeting, the odds Fukui will boost rates from 0.5% are extremely low. That may be a green light to investors to continue borrowing cheaply in yen and moving those funds overseas into riskier assets. The so-called yen-carry trade is feeding bubbles globally.
One way in which all that easy money manifested itself is fuelling a surge in the use of derivatives. The search for higher returns boosted growth in the market for collateralized debt obligations. The upshot was untold amounts of leverage and risk in a global financial system struggling to keep up.
Globalization means Fed policies play a bigger role in Asia than folks in Washington may realize. The Fed is responsible for the US economy, of course, and Bernanke will focus on trends there. Asia will just have to hope his policies don’t overwhelm its markets with easy money.
Safely back in the private sector, Greenspan is now among those warning of bubbles in China. It’s one thing for investors such as Marc Faber to do that; it’s another for Greenspan to—unless he’s looking in the mirror. Instead of Maestro, “Mr Bubble” may be a more accurate nickname.
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