Greenspan Bubble Theory Draws 4.8 Million Shrugs: William Pesek Share | Email | Print | A A A Commentary by William Pesek "What? I dropped the ball? Can I give a long, rambling and borderline incoherent explanation in my defense, as I'm known to do?" Sept. 16 (Bloomberg) -- As Alan Greenspan tirelessly makes the rounds to save his legacy, Singapore is reminding us why the former Federal Reserve chairmanâs efforts arenât working. Mr. âWe Canât Detect Bubblesâ probably never thought he could learn a thing or three from an economy of 4.8 million people. This week, Singaporeâs National Development Minister Mah Bow Tan unveiled measures to prevent excessive price swings in the real-estate market. The reason: The Asian country sees the very signs of rampant speculation in home buying that central bankers such as Greenspan long argued couldnât be spotted or headed off. Funny how tiny Singapore can do it and the mighty Fed canât. Mah, in perhaps a Freudian slip, seemed to note the irony. He said Singaporeâs measures were meant to âtemper the exuberance in the market.â Remember it was in December 1996 that Greenspan made the words âirrational exuberanceâ a euphemism for bubble. The world could learn from Singaporeâs speculation- management efforts. The U.S. can learn the most. This suggestion may raise blood pressures in the laissez- faire crowd. Itâs worth noting that Singapore, for all its quirks, scores highly in measures of economic freedom. A Cato Institute report this week ranked Singapore among the 10 freest economies, grading it higher than the U.S. or Switzerland. Full of Bunk The point here isnât to celebrate Singaporeâs economy or politics. Nor is it to say a $182 billion economy is a model for a $14.2 trillion one. Itâs to show that central bankers are full of bunk when they say bubbles canât be identified. This is blasphemy to free-market fundamentalists. Yet why did Yale Universityâs Robert Shiller see what the Greenspans of the world either couldnât or refused to? That goes both for the technology-stock meltdown in 2000 and the housing one seven years later. How come Nouriel Roubini in 2006 predicted the very credit crisis the supposedly omniscient Greenspan missed? One reason is dogged ideology. Being steeped in a history of Ayn Rand and Ronald Reagan meant Greenspan probably never saw a government regulation he didnât want to scrap. Perhaps hubris was part of it. In the 1990s, Greenspan was a celebrity, showing up in People magazine. Itâs dangerous to believe your own press. Singaporeâs Example The good news is that Asia has few of these problems. Central banks and finance ministries in the region were slower to deregulate than the U.S. was. Monetary officials in Asia never became the larger-than-life powers that they did in, say, the U.S. or Germany. Thatâs not to say Asian central banks donât dig in their heels. The global crisis that tarred Greenspanâs standing has been good to Yaga Venugopal Reddy. As Reserve Bank of India governor from 2003 to 2008, Reddy resisted allowing the kind of leveraging and risk-taking that killed Bear Stearns Cos. and Lehman Brothers Holdings Inc. âIf America had a central bank chief like Y.V. Reddy, the U.S. economy would not have been such a mess,â Nobel Prize- winning economist Joseph Stiglitz was quoted as saying in the New York Times in June. While hindsight may be 20/20, forecasting and central banking are anything but. Itâs also true that one investorâs dangerous asset bubble can be anotherâs perfectly rational bull market. There comes a point, though, when central bankers need to take away the punchbowl. Chinaâs Froth Look at China. As impressive as Chinaâs 7.9 percent growth is, itâs hard to argue the Shanghai Composite Index should be up almost 90 percent this year. The same goes for the Hang Seng Indexâs 45 percent rally. The city is, after all, in recession. This week, Hong Kong Monetary Authority Chief Executive Joseph Yam said central banks face a dilemma. Tightening too soon may curb a recovery, while maintaining loose policy may produce âasset bubbles,â he said. In Hong Kongâs case, Iâd say itâs too late. Its market capitalization to gross domestic product ratio is 640 percent, according to Mark Matthews, a strategist at Fox-Pitt Kelton in Hong Kong. Thatâs four times larger than that of Singapore and 10 times as large as the average for the rest of the region. Bubble, anyone? Exhibit A: A one-bedroom apartment in Kowloon sold for a record HK$24.5 million ($3.2 million), the South China Morning Post reported. For 816 square feet (76 square meters), that had better include visits by Jackie Chan or Jay-Z. No one is saying bubble management is easy. Itâs often more art than science. Yet todayâs growth is more about easy money than genuine demand. The quality of growth matters as much as the quantity. Asia learned that lesson 12 years ago, just as the U.S. is today. The difference, of course, is that Greenspanâs bubbles were global phenomena. The Fedâs low-rate policies fueled speculation in high-risk assets. By 2003, speculative capital flows into Asia reached a record high, surpassing the previous peak in 1996. They had the Fed written all over them. You can stick with the idea that bubbles are mythical forces than canât be tamed. Or, for a different view, you could visit Singapore. (William Pesek is a Bloomberg News columnist. The opinions expressed are his own.) To contact the writer of this column: William Pesek in Tokyo at wpesek@bloomberg.net Last Updated: September 15, 2009 15:00 EDT
USA problem is mismanagement at most levels of gov't. Singapore prospers because it is well-managed. When you see it first hand (mismanagement)..........makes one want to throw-up or become the notorious ET teabagger, a much reviled and mocked species.