productive
capabilities (this was partly to blame for the
drug problem cited above). The US could no longer
make stuff, ranging from refrigerators to cars,
that could compete with the offerings from Japan
and Europe on either price or quality. In that
context, creating a nation of software developers
(the Internet boom and bust) and then property
developers (real-estate boom and bust) seems a
logical choice.
As borrowers expanded
their appetite for loans and depended
increasingly on house-price
appreciation to repay mortgage debt, US banks of
course felt the need to sell down their risks
increasingly, in turn spawning the financial
innovations that I wrote about in previous
articles. Selling down the risk to hapless Asian
savers seeking higher returns than Treasury bonds
also freed up the banks to make more loans.
Therein lay the crux of the current crisis
- as banks originated ways to distribute risk,
they did not care about underlying credit quality
to the same extent that they would have if the
loans had sat in their own books. Investors buying
into securitized transactions relied on data that
had been gathered during periods when the banks
did care about underlying credit quality. Removal
of this crucial factor was to cause a massive
increase in underlying problems soon enough.
Implications Dealing with all
these issues holistically requires us to examine
the primary causal factor, which inevitably is the
excessive consumption of the US consumer. In
another article, [4] I described the United States
as a corpulent feline that threatens the world
with its firepower even as its own economy dies
from within. This will come back to haunt both
East Asia and the Middle East in coming weeks and
months.
The collapse of market confidence
has hit the North American and European financial
systems hard. Banks fear the simple activity of
lending to one another in the overnight market,
necessitating that central banks cut rates for
emergency funding (known as the discount window)
and the Fed being pushed to cut rates next month,
which now appears a dead certainty. However,
neither rate cuts nor central-bank intervention
will work without the crucial ingredient of the US
getting more support from the rest of the world.
This is where the principle of caveat
venditor that I described above will come into
operation. In essence, US legislators have already
started blaming lenders for the problems being
faced by borrowers. The country's most famous bond
manager, Bill Gross at PIMCO, has gone to the
extraordinary length of suggesting direct
government assistance for affected mortgage
borrowers. I don't know if he plans to run for
election as the next governor of California, but
this is among the silliest things said by pretty
much anyone in the markets recently.
Thus
lenders will be asked to pony up for further
restructuring payments in one way or the other -
either by accepting lower interest rates or by
facing the dreaded haircuts that I wrote about
previously. They wouldn't be given the option to
sell down risk, though, as the financial system
has frozen up. Government officials including US
Treasury Secretary Hank Paulson have reportedly
made dozens of calls to Asian central banks this
week demanding support for their markets, to be
provided through emergency issues of loans for
banks in Europe and North America.
A lack
of cooperation would inevitably increase the
chances for more nasty outcomes - including trade
sanctions of the sort that the US is now mulling
on China ostensibly for quality-control reasons
but more likely for the ones stated above. This is
eerily similar to the treatment meted out to
Colombia in the 1990s, albeit for entirely
different matters. Once again, the United States
rides to the rescue of its citizens at the expense
of all else.
It remains an unmitigated
principle of banking that if one owes a million
dollars to a bank and cannot pay, one is in
trouble, but if one owes a billion dollars to a
bank and cannot pay, the bank is in trouble. By
lending to inept bankers in North America and
Europe, Asian savers will now realize how true
that principle is.
There is always another
choice open for Asian policymakers. That would be
to examine the system as it stands now and decide
that ultimately the United States can simply never
repay its debts. This would mean calling the
greatest bluff in history, that of US financial
strength, and letting the system collapse under
its own weight. Doing this would cause significant
short-term pain to the global economy, but
eventually the removal of excessive US consumption
cannot but be a good thing for the rest of the
world.
Pushing that process through,
though, requires both vision and popular
legitimacy, and Asia's tragedy is that I cannot
think of a single policymaker around the region
who has both. Despise it if you will, but Asian
savers will remain under the thumb of their
biggest borrower for a long time yet.
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
