Transcript Asian Monetary Fund

Growth & Crises
Michael Smitka
Fudan University 復旦大學
November 2000
Overview - why so few crises?
• Leverage is dangerous!
• Banks avoid crisis using rules of thumb
• Those rules work - most of the time
Why then crises?
• Change undermines rules of thumb
– Change in types of industry / borrowers
– Change in strategic environment / flow of funds
– Change in regulatory environment
• Mistakes are made …
– … and a shock produces crisis
Remedies?
• Regulators face a new structure
– They work by rules-of-thumb, too
– And have the same history
• An AMF role?
– Experience beyond one economy’s limits
– But would their advise be taken?
– Even once would repay the effort!
Japan’s Case
• No need for financial controls
– project selection was easy
– failure was hard / recessions were few & far between
• But pricing long-lived assets was hard
– Real estate grew faster than economy
– Stock prices grew faster than economy
– Growth industries grew very fast indeed!!
Growth Dynamics
• Transition out of agriculture
– Fast productivity growth in industry
– Urbanization!
• Household formation
• Infrastructure, housing
• But it’s a one-time transition!
– And eventually ends
Slowdown
• Industry no longer needs funds
• But households keep saving
– Past savings was at low income levels
– So accumulated wealth is modest
– Need to keep saving to fund old age
• Who then will borrow?
Shifts in Japanese Savings Flows
I (business)
1961-65
17.0
1966-70
16.7
1970
19.6
S (business)
S-I
5.2
-11.7
8.7
-8.0
10.7
-8.9
I (household)
S (household)
S-I
2.8
12.1
9.2
4.3
12.0
7.7
S - I Private
-2.5
I
(Center
S
& Local)
T-G
T - G+S-I
1971-75
15.2
4.0
1976
8.8
1976-80
8.3
2.7
1981-85
8.5
1986-92
11.1
2.3
-8.8
-11.2
0.8
-8
-5.7
2.9
-5.5
4.5
12.8
8.3
4.0
16.4
12.4
7
19.9
12.9
6.1
17.1
11.0
2.8
13.6
10.8
1.3
11.6
10.3
-0.3
-0.6
1.2
4.9
5.3
5.3
1.5
5.5
6.9
1.4
5.7
6.6
0.9
5.7
7.6
1.9
6.9
6.7
-0.2
6.5
2.3
-4.2
7.5
2.4
-5.1
6.8
3.6
-3.2
6.4
8.3
1.9
-1.1
0.6
1.3
1.0
0.7
0.3
2.0
3.4
The Primary Shock: 1970 vs 1976
• Corporate investment fell 10% of GDP
• Savings rose!
• Banks were left to scramble
Interregnum
• Japanese fiscal deficits
– created a new borrower for banks
– MOF policy stopped that by 1982
• Reagonomics: US consumption boom
– Export-led growth from 1982
– Appreciation / Plaza Accord stopped that
from 1986
Secondary Shock
• Bad macro policy
– Easy money from 1986
– “Japan as Number One” psychology
• Just as banks sought new borrowers
– Real estate … and more real estate!
– Small business
– Also international loans
Shocks, continued
• “Bubble” economy
– Stock prices doubled
– Urban real estate prices rose even more
• Fiscal policy mistakes accentuated
– On-again, off-again policy built up debt
• Regulatory policy errors accentuated
– Banks allowed to make more bad loans
Lessons
• Long-lived assets easy to mis-price
– Stocks
– Real estate
• Outside nay-sayers may be right
• Rapid growth creates pressures that
virtually promise crisis
But crises may be inevitable
• Even the slow-growing US suffered
– Interest rate shocks undermined S&Ls
– Regional growth led to real estate bubbles
– A new venture, international lending,
proved disastrous (esp. to borrowers)
• And now deregulation …
– Loan quality falling in a boom economy
The End
• Until leverage strikes again
– Deregulation is no panacea
– Regulation fares no better