Comments on Alan Kohler “China's bubble to build on”, 16/04/2010, http://www.businessspectator.com.au/bs.nsf/Article/China-property-bubble-GDP-interest-rates-pd20100416-4JSW4?OpenDocument&src=sph
The most important matter when facing an asset including properties bubble is what is the best to do.
To burst the bubble completely may not necessarily be the best course of action, because of its effects on other parts of the economy, including financial health, consumption and etc.
It may be that the best course of action is to manage the bubbles if it can be done, so to prevent them from becoming worse, but at the same time minimise their negative effects.
Given the existence of inflation and increases in assets values over time, keeping the bubbles static may prove to be a better policy option after all.
This is no different from when you have inflation, the best policy should be to keep price stable that is to prevent further inflation, as opposed to having deflation.
Of course, it has some political economy effects, that is, different people will be affected differently, no matter what course of actions is taken.
Showing posts with label bubbles. Show all posts
Showing posts with label bubbles. Show all posts
2010-04-16
2010-03-24
Assets bubbles and their macro management
Comments on Takatoshi Ito “China’s property bubble worse than it appears”, 23/03/2010, http://www.eastasiaforum.org/2010/03/23/chinas-property-bubble-worse-than-it-appears/
It is more than likely that the housing bubbles in China are more serious than the official statistics shows and are likely to be a huge challenge to the Chinese authority in managing its economy as a whole.
China may be doing slightly better than Japan did back then, due to a number of reasons.
The first is that China is unlikely to completely bow to the US and EU pressure for currency appreciation, like Japan did in the Plaza accord. China may allow some appreciation when time is right, but that is likely to be tightly managed.
Secondly, repeated historical lessons of bubbles and bursting and their effects on the real economy may be learnt, that is, how to prevent bubbles from forming, growing and bursting too rapidly. I think China should be able to and can do better. When there are bubbles, the important task for the authority is not to burst but to manage the bubbles.
To use an analogue, when there is hyper inflation, the task is not to move the price back i.e. to deflate it rapidly, but to stop the further inflation. Managing bubbles is not completely the same as that, but has some similarity.
Thirdly, China's capital market is not as free as Japan was or other major western economies, and its monetary authority has more instruments to use than its overseas counterparts.
Fourthly, the stage of Chinese economic development now is different from that of Japan in the late 1980s or early 1990s, and there is enough room for expansion including fiscal expansion to smooth out the similar problems that Japan faced back then, or the US is facing now.
So in my view, while the housing bubbles in China is potentially more problematic, China should have the capacity and instruments to manage them and manage them in a much better way.
Certainly, if I had the authority to manage the Chinese economy, I would be highly confident to do it successfully, much more so than any other western countries in their recent history.
It is more than likely that the housing bubbles in China are more serious than the official statistics shows and are likely to be a huge challenge to the Chinese authority in managing its economy as a whole.
China may be doing slightly better than Japan did back then, due to a number of reasons.
The first is that China is unlikely to completely bow to the US and EU pressure for currency appreciation, like Japan did in the Plaza accord. China may allow some appreciation when time is right, but that is likely to be tightly managed.
Secondly, repeated historical lessons of bubbles and bursting and their effects on the real economy may be learnt, that is, how to prevent bubbles from forming, growing and bursting too rapidly. I think China should be able to and can do better. When there are bubbles, the important task for the authority is not to burst but to manage the bubbles.
To use an analogue, when there is hyper inflation, the task is not to move the price back i.e. to deflate it rapidly, but to stop the further inflation. Managing bubbles is not completely the same as that, but has some similarity.
Thirdly, China's capital market is not as free as Japan was or other major western economies, and its monetary authority has more instruments to use than its overseas counterparts.
Fourthly, the stage of Chinese economic development now is different from that of Japan in the late 1980s or early 1990s, and there is enough room for expansion including fiscal expansion to smooth out the similar problems that Japan faced back then, or the US is facing now.
So in my view, while the housing bubbles in China is potentially more problematic, China should have the capacity and instruments to manage them and manage them in a much better way.
Certainly, if I had the authority to manage the Chinese economy, I would be highly confident to do it successfully, much more so than any other western countries in their recent history.
2009-10-26
Sensible suggestions for monetary policy vs bubbles
Comments on Wolfgang Munchau, Financial Times “How to prick bubbles”, 26/10/2009, http://www.businessspectator.com.au/bs.nsf/Article/How-to-prick-bubbles-pd20091026-X6SZL?OpenDocument&src=sph
Munchau has some excellent suggestions to offer to central banks on how to use monetary policy to prick bubbles.
The most important point is that monetary authorities should not just focus on the stability of price, but also assets prices.
Once such thinking is held by central banks, they need to develop new tools to best to do that. Munchau did not touch this point, though.
His suggestions are so innovative so that I quote them in full:
“Remember the debate about whether central banks should prick bubbles? It was not too long ago that simply asking the question incited abuse. While pricking bubbles is now considered a suitable subject for polite conversion, there is still no agreement on what to do or how to do it. Since bubbles are already building up in several segments of the financial markets, it is time to think about this question in detail.
As I argued last week, there are some deep-rooted causes of the proliferation of bubbles – among them the size of the financial sector; the too-big-to-fail problem; and the banks’ renewed lust for risk. Governments have not been addressing these causes. Central banks will not provide the cure either, but they can address some of the symptoms. Symptoms matter.
Some economists, reluctant to let go of the comforting world of rational expectations, still tell us it is impossible for a central bank – or anyone else, for that matter – to call a bubble. This is baloney. When looking at house prices, just look at price-to-rent and the price-to-income ratios, sales volumes and credit statistics, and you know everything you need to know. Almost everything else central bankers do is more difficult than calling a housing bubble.
The most persistent argument against pricking bubbles is that monetary policy cannot target consumer and asset prices with a single instrument – the short-term interest rate. This statement is both trivially true and misleading. One can use existing instruments more flexibly, and one can also add new ones. Based on these principles, I have four proposals.
The first is the use of alternative regulatory instruments if available. This is not always possible but, where it is, such instruments could be deployed in the housing market, for example, where one could vary the ceiling on the loan-to-value ratio according to market conditions. Since housing bubbles are almost always credit-driven, an anti-cyclical LTV could encourage or discourage risky mortgage lending. Such a tool could be deployed by local central bank branches – or national central banks in the eurozone – since many housing bubbles are regional: east and west coast in the US, Spain and Ireland in the eurozone.
Second, central banks should use existing leeway in their monetary policy. In an ideal world, a single policy instrument should focus on a single target, but this is not an ideal world. Central banks will have to master the art of targeting some measure of price stability, as well as including asset prices in their consideration. In practice this would mean that a central bank should, by reflex, not always choose the lowest interest rate consistent with its definition of price stability. It should choose a higher rate in the presence of a bubble. With hindsight, if central banks had not cut interest rates quite so aggressively in 2003-04, we would probably still have had a bubble, but perhaps a smaller one.
Third, central banks should accompany their model-based economic forecasts with an analysis of monetary and financial conditions. The workhorse economic forecasting models used by central banks are built in such a way that they cannot capture financial shocks and bubbles. This makes them worse than useless in a world characterised by persistent financial instability. An analysis of monetary conditions and financial flows can provide at least a useful complement to now defunct models.
Finally, central banks must coordinate with one another. While each has the tools to establish price stability in its own jurisdiction, many asset prices – equity prices and housing prices in particular – tend to correlate globally. It makes no sense for the central bank of a small or medium-sized country to try pricking a domestic equity bubble. But if central banks act jointly, they could send out a strong signal. Just imagine what would happen if the world’s three leading central banks shorted Intel, BMW and Toyota.
I am aware that these measures are not going to solve the problem of financial instability. In the absence of deeper reforms in the financial sector, nothing will. But they might still be useful firefighting tools. It may be better to try out at least some of them than to pretend that the problem will simply go away.
I suspect strongly that we are already in another bubble in the global equity and bonds markets, and also in sections of the commodity markets. These may burst well before the world economy recovers from the most recent bubble. Central banks should eventually prick them before they cause calamity.
It may not be the time yet to deploy an anti-bubble strategy. But we sure need to put one together.
Copyright The Financial Times Limited 2009”
Munchau has some excellent suggestions to offer to central banks on how to use monetary policy to prick bubbles.
The most important point is that monetary authorities should not just focus on the stability of price, but also assets prices.
Once such thinking is held by central banks, they need to develop new tools to best to do that. Munchau did not touch this point, though.
His suggestions are so innovative so that I quote them in full:
“Remember the debate about whether central banks should prick bubbles? It was not too long ago that simply asking the question incited abuse. While pricking bubbles is now considered a suitable subject for polite conversion, there is still no agreement on what to do or how to do it. Since bubbles are already building up in several segments of the financial markets, it is time to think about this question in detail.
As I argued last week, there are some deep-rooted causes of the proliferation of bubbles – among them the size of the financial sector; the too-big-to-fail problem; and the banks’ renewed lust for risk. Governments have not been addressing these causes. Central banks will not provide the cure either, but they can address some of the symptoms. Symptoms matter.
Some economists, reluctant to let go of the comforting world of rational expectations, still tell us it is impossible for a central bank – or anyone else, for that matter – to call a bubble. This is baloney. When looking at house prices, just look at price-to-rent and the price-to-income ratios, sales volumes and credit statistics, and you know everything you need to know. Almost everything else central bankers do is more difficult than calling a housing bubble.
The most persistent argument against pricking bubbles is that monetary policy cannot target consumer and asset prices with a single instrument – the short-term interest rate. This statement is both trivially true and misleading. One can use existing instruments more flexibly, and one can also add new ones. Based on these principles, I have four proposals.
The first is the use of alternative regulatory instruments if available. This is not always possible but, where it is, such instruments could be deployed in the housing market, for example, where one could vary the ceiling on the loan-to-value ratio according to market conditions. Since housing bubbles are almost always credit-driven, an anti-cyclical LTV could encourage or discourage risky mortgage lending. Such a tool could be deployed by local central bank branches – or national central banks in the eurozone – since many housing bubbles are regional: east and west coast in the US, Spain and Ireland in the eurozone.
Second, central banks should use existing leeway in their monetary policy. In an ideal world, a single policy instrument should focus on a single target, but this is not an ideal world. Central banks will have to master the art of targeting some measure of price stability, as well as including asset prices in their consideration. In practice this would mean that a central bank should, by reflex, not always choose the lowest interest rate consistent with its definition of price stability. It should choose a higher rate in the presence of a bubble. With hindsight, if central banks had not cut interest rates quite so aggressively in 2003-04, we would probably still have had a bubble, but perhaps a smaller one.
Third, central banks should accompany their model-based economic forecasts with an analysis of monetary and financial conditions. The workhorse economic forecasting models used by central banks are built in such a way that they cannot capture financial shocks and bubbles. This makes them worse than useless in a world characterised by persistent financial instability. An analysis of monetary conditions and financial flows can provide at least a useful complement to now defunct models.
Finally, central banks must coordinate with one another. While each has the tools to establish price stability in its own jurisdiction, many asset prices – equity prices and housing prices in particular – tend to correlate globally. It makes no sense for the central bank of a small or medium-sized country to try pricking a domestic equity bubble. But if central banks act jointly, they could send out a strong signal. Just imagine what would happen if the world’s three leading central banks shorted Intel, BMW and Toyota.
I am aware that these measures are not going to solve the problem of financial instability. In the absence of deeper reforms in the financial sector, nothing will. But they might still be useful firefighting tools. It may be better to try out at least some of them than to pretend that the problem will simply go away.
I suspect strongly that we are already in another bubble in the global equity and bonds markets, and also in sections of the commodity markets. These may burst well before the world economy recovers from the most recent bubble. Central banks should eventually prick them before they cause calamity.
It may not be the time yet to deploy an anti-bubble strategy. But we sure need to put one together.
Copyright The Financial Times Limited 2009”
2009-10-19
Wolfgang Münchau on bubble to burst sooner
I have come to this article and it is an interesting perspective to view the current status of the equity and housing markets. See for yourself: Wolfgang Münchau "This bubble won't last long", 19/10/2009, http://www.businessspectator.com.au/bs.nsf/Article/A-new-crisis-on-the-horizon-pd20091019-WXUVM?OpenDocument&src=sph
Wolfgang Münchau uses his two favourite metrics of stock market valuation are Cape, which stands for the cyclically adjusted price/earnings ratio, and 'Q', to value the market bubble. He concludes that:
"Cape and Q measure different things. Yet they both tend to agree on relative market mispricing most of the time. In mid-September both measures concluded that the US stock market was overvalued by some 35 to 40 per cent. The markets have since gone up a lot more than the moving average of earnings. You can do the maths. "
He argues that "The single reason for this renewed bubble is the extremely low level of nominal interest rates, which has induced people to move into all kinds of risky assets. Even house prices are rising again. They never fell to the levels consistent with long-term price-to-rent and price-to-income ratios, which are reliable metrics of the property markets’ relative under- or over-valuation."
He remarks:
"In other words, there is danger no matter how the central banks react. Successful monetary policy could be like walking along a perilous ridge, on either side of which lies a precipice of instability.
For all we know, there may not be a safe way down. "
Wolfgang Münchau uses his two favourite metrics of stock market valuation are Cape, which stands for the cyclically adjusted price/earnings ratio, and 'Q', to value the market bubble. He concludes that:
"Cape and Q measure different things. Yet they both tend to agree on relative market mispricing most of the time. In mid-September both measures concluded that the US stock market was overvalued by some 35 to 40 per cent. The markets have since gone up a lot more than the moving average of earnings. You can do the maths. "
He argues that "The single reason for this renewed bubble is the extremely low level of nominal interest rates, which has induced people to move into all kinds of risky assets. Even house prices are rising again. They never fell to the levels consistent with long-term price-to-rent and price-to-income ratios, which are reliable metrics of the property markets’ relative under- or over-valuation."
He remarks:
"In other words, there is danger no matter how the central banks react. Successful monetary policy could be like walking along a perilous ridge, on either side of which lies a precipice of instability.
For all we know, there may not be a safe way down. "
2009-09-05
Some fast stock market bubbles
Comments on stanleyjunjun的日志 "[转贴] 世界上几次“6倍涨幅”股市的结局", 31/07/2009, http://www.pinggu.name/space.php?uid=311813&do=blog&id=17440
股市泡沫容易形成，较为普遍，目前还没有什么太好的办法解决。
泡沫的崩盘速度当然更快，更剧烈。
需要有效而成本极低的方法来调控。
希望学金融的能有新发明，解决这一难题，获得诺贝尔奖。
股市泡沫容易形成，较为普遍，目前还没有什么太好的办法解决。
泡沫的崩盘速度当然更快，更剧烈。
需要有效而成本极低的方法来调控。
希望学金融的能有新发明，解决这一难题，获得诺贝尔奖。
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