Tuesday, June 15, 2010
How Independent Are Central Banks Nowadays?
If you check the readership for this blog, it has downshifted markedly. I can blame the World Cup for contributing to part of the problem. But is it a problem to have lower readership? I think many may have skipped my blog as I have not talked about stocks specifically over the past 3-4 weeks. I think I am comfortable with lower readership if that is the main reason. I am not going to do things I am not comfortable just so that there are "hot things" to read in my blog. I didn't think May was a good month to be looking at stocks and neither is June, full stop. Let's reassess the situation in July. Just go and enjoy the World Cup, play some golf ... save a lot of money and headaches ... no followers, the syndicates also go to sleep anyway.
Back to the headline topic, for all the politicking and grievances with Malaysian politics, we should be thankful that Bank Negara is still "relatively" (and thats the key word) independent. We all know of a time when it was "too independent" when speculating freely in various currencies, no need to go through our history books to know when that happened. You would never, never want your central bank to be beholden to the ruling government or as an arm of the ruling government's election machinery. Once it gets that way, you can be guaranteed a mess bigger than the initial crap you put through the system.
Bank Negara has kind of reinvented itself over the past 12-14 years, and its independence record has been much better than the rest. Some may say that too many central bankers have been too eager to loosen monetary policies owing to the subprime mess. Granted, but do they really have a choice? Even with the Greek fiscal tragedy, there is nothing much the ECB can do other than lend Greece money.
If you ask a graduate economics student what the first objective of a central bank is, he/she should answer: moderate inflation while championing growth. That's it, that's the whole mantra of a central bank, no need to complicate matters.
Well, the central banks would probably have that as the main objective domestically, but they will have an overriding concern when the entire global financial infrastructure and trade are at stake. We can say that the subprime mess qualifies as such an event as credit seized up, hence the concerted Mafia like effort by all central bankers in loosening the purse strings was laudable.
When almost every central bank moved interest rates close to zero to do that, there would have been many economies which "did not need interest rates to go that low" - i.e. HK, China, Singapore and even Malaysia ~ which is why we had such an outsized jump in real estate in those economies following the subprime mess.
Zeti moved local rates back up quicker than most, and many observers failed to recognise what an important decision that was. We needed to kill off the froth. Property players may moan and groan about it, but the reality is that prices in many sub sectors of real estate has jumped out of the affordability range and into speculative bubbles. Of course ALL property developers and valuers will not agree with any thing I am saying. Just look at the top 20% of the markets in China, HK, Malaysia and Singapore ~ its the same fishes feeding the same ponds. Go to any luxury condos just completed and see how many are occupied, you'd be lucky to find a figure higher than 30%. Just go to The Loft, Suasana, the KLCC condos, and even some of the gated luxury developments. There is no push factor to force the owners to sell (yet), which is why prices are holding.
In the meantime, genuine home buyers have to go further and further out to find a place they can afford. As recent as 5 years ago, Kajang would be considered as was too far, now its considered OK. Affordability does wondrous things to the mind. There are some developments which deserve to go higher such as the Desa Park City developments, well thought out, which is why even with higher prices, its nearly fully occupied.
But I digress, low interest rates in those markets cause higher prices and implies better affordability. There are plenty of Singaporeans, HKers and mainland Chinese who own a piece of the high end markets in Malaysia ~ and vice versa, there are plenty of players invested in the same markets. If there are no financial crisis among the group, prices can stay there till reality catches up. If there is one, then step aside from the stampede because in many of those places, many of the units/homes cannot be rented out to get a yield of 2%.
But I digress again. There have been some instances whereby central bankers have been "influenced" to make certain decisions, and you can safely see that it brings no benefit in the end. Credibility of a central bank reflects enormously on the credibility of financial markets and the various important pillar institutions in the eyes of investors.
The South Korean government broke a decade long precedent by sending a senior finance ministry official to the meetings of Bank of Korea. Why? To ensure that interest rates are kept down. Bank of Japan was "forced" to double a lending program for banks in March 2010 following pressure from Finance Minister Naoto Kan to do more to help the economy. The ECB has been buying sovereign bonds of affected countries in the EU to ease the pressure of higher interest rates when weaker countries in the EU needed to borrow more. The ECB should never be buying distressed debt.
The independence of a country central bank is almost sacred. Let's keep it that way.