My spirits sank when I picked up the papers on Monday and found that President Obama’s approval rating remains high at 68%. It is not that I found the score too high or too low. It is the very notion of publishing an approval rating for a president who has barely spent a week in office. Of course, in case you missed, there are also reports of what he did in his first 100 hours.
One wonders whether any of us are picking up any lessons from the biggest global financial crisis that the world is facing. Media put stocks, companies and even countries up on the pedestal disproportionate to their intrinsic worth, only to bury them when they fail to match the hype. They have begun on the same note with Obama. Instability is nurtured by such immoderation in adulation and in subsequent deconstruction. The creation of unrealistic expectations gives rise to eventual disappointment. This creates volatile performance and other consequences follow from it.
The obsessive focus on the US and what its new president does or does not do blinds us to other developments that hold clues to fixing the problems, if only we care to look. A news item in Bloomberg on 19 January records that sale of homes in southern California went up by 51% in December as a surge in foreclosures pushed prices of single-family houses and condominiums down from a year earlier. Simple. If allowed to reflect reality, lower prices eventually attract buyers and the market clears.
Similarly, housing starts (breaking ground for new homes by homebuilders and developers) continue to decline in the US. Developers are reacting rationally to the record inventory of unsold homes. There is no point in swelling the number of unsold homes even if the rising inventory appears to add to economic growth in the short term. There won’t be any permanent bottom or lasting recovery for the sector. Thankfully, no one is calling on them to build more homes yet.
In the light of this, it should not be too difficult for governments to see the vacuity of their exhortation to banks to lend in the face of the mountain of debt that households and other market participants have piled up in recent years. So, the solution to the economic crisis is to have the debt reduced. Obviously, if debt among private agents is to be forgiven, it has to be assumed by the public sector.
Hence, there is case for stimulus, but the foregoing analysis suggests that it has to be in the form of putting cash in the hands of the public so that they repay the debt. Many economists come up with the conventional retort that households would save it. That is, they would use it to repair their balance sheet rather than spend it on items they have and do not need. That is a perfectly rational response to their present plight. That might not help businesses show a superficial recovery, but it is a problem for them to handle. Unviable businesses have to shut down. Once household finances are mended, spending recovery will begin and sustain.
Even there, it is not necessary for the governments to support all households. After all, the crisis—both in the US and elsewhere—has been due to assumption of risk that was neither gauged nor priced properly. It was both global and included all economic agents. Hence, not all households deserve to or need to be bailed out. The government ought not to encourage behaviour that led to the crisis in the first place. That is what both the press and the punditry are failing to see with their hype and misplaced priorities on immediate recovery, respectively.
At the same time, it will help if personal examples are set. Certainly, not the type of example set by John Thain of Merrill Lynch, but one set by the Singapore government would help. The Singapore government is cutting salaries of senior civil servants and ministers by 12-20% and has left open the possibility of cutting more. Although senior civil servants in Singapore are very well paid, the willingness to inflict a not-so-insignificant cut on wages not only sets a personal example but also facilitates real adjustment (as opposed to nominal adjustment) in the economy rapidly.
It is easy to cut interest rates or engage in mercantilist exchange rate policy but it is harder to make real adjustments that, in the final outcome, are more effective in restoring medium-to-long-term economic health and competitiveness. Singapore showed that it was capable of such vision back in the time of the Asian crisis and it is demonstrating that yet again.
China would be facilitating precisely this real adjustment with a fresh approach to the valuation of its currency. Revaluation would boost domestic purchasing power and encourage real domestic household spending. Beijing is stalling. Financial crisis is the symptom. Intellectual and leadership crises are the true malaise.
V. Anantha Nageswaran is head, investment research, Bank Julius Baer and Co. Ltd in Singapore. These are his personal views and do not represent those of his employer. Your comments are welcome at firstname.lastname@example.org