Hot air bubble
It’s time for Asian regulators to give the West a lecture on popping financial bubbles. Policymakers in the United States and Europe have spent the past few years earnestly debating new methods to smooth out the ups and downs in economic cycles. They should pay more attention to Asia’s experience.
The Western vogue for “macroprudential” policy is a response to the mistakes of the last boom. Neither central banks nor regulators took responsibility for the credit-fuelled explosion in asset prices that led to the crisis. They want to do better, but so far the Western debate has been mostly theoretical. Though several countries have set up bodies to identify and prick bubbles, few have done very much.
In Asia, it’s a different story. Many states have been trying to keep a lid on asset prices since the late 1990s, when the region’s financial crisis undermined the credibility of wholly free markets. Regulators responded with a range of tools which were still taboo in the West. These include caps on mortgages relative to property values; limits on interest repayments as a proportion of income; and forcing banks to set aside extra liquidity reserves to prevent excessive lending.
Western regulators do not seem to care about these experiments. Thus policymakers in China were this week treated to a lecture by Donald Kohn, a former Federal Reserve governor and member of the Bank of England’s Financial Policy Committee, on the lessons the People’s Republic could learn from macroprudential policy in Britain and America. If anything, it should have been the other way around.
It is too early to tell whether the macroprudential techniques actually work. The tools deployed by Hong Kong and Singapore may not adequately insulate their banks from rising interest rates. China’s housing market has overheated – despite the authorities’ best efforts – and is now showing signs of cracking.
Still, Asia can surely offer some practical lessons. Continuing to ignore them suggests that, for all their willingness to debate new ideas, Western regulators have not fully overcome the intellectual myopia that got them into trouble in the first place.