An Elephant in the Room
An Elephant in the Room
There is, however, an elephant in the room that most central bankers and financial regulators of advanced countries have missed. The elephant in the room is the biggest and most important issue that is before one’s eyes, but we ignore it because we do not know how to handle it. Hence, most people tip toe or move around the elephant rather than confront it.
The biggest item that is common to monetary policy, financial regulation and fiscal policy is land and real estate, including fixed investments.
The value of land and fixed assets is directly related to interest rates – the lower the interest rates, the higher the value of real estate. Real estate is the biggest collateral of bank loans and often the biggest asset of most households or firms. Land sales are also the biggest revenue for many local governments. Hence, asset bubbles are most difficult to handle because their deflation can kill banking systems and eventually become fiscal deficits.
Recently, it was revealed that US regulators did not see that real estate-related loans of the US banks accounted for 55% of total loans and asset-backed securities accounted for 74% of their debt securities holdings.
Since real estate is 225% of GDP, it was not surprising that a 20% fall in real estate caused the massive melt down in the financial derivative markets and eventually the solvency of banks.
A new generation of central bankers will have to learn new lessons from the current crisis.
http://biz.thestar.com.my/news/story.asp?file=/2010/4/17/business/6054682&sec=business
> Datuk Seri Panglima Andrew Sheng is adjunct professor at Universiti Malaya, Kuala Lumpur, and Tsinghua University, Beijing. He has served in key positions at Bank Negara, the Hong Kong Monetary Authority and the Hong Kong Securities and Futures Commission, and is currently a member of Malaysia’s National Economic Advisory Council. He is the author of the book “From Asian to Global Financial Crisis”.
There is, however, an elephant in the room that most central bankers and financial regulators of advanced countries have missed. The elephant in the room is the biggest and most important issue that is before one’s eyes, but we ignore it because we do not know how to handle it. Hence, most people tip toe or move around the elephant rather than confront it.
The biggest item that is common to monetary policy, financial regulation and fiscal policy is land and real estate, including fixed investments.
The value of land and fixed assets is directly related to interest rates – the lower the interest rates, the higher the value of real estate. Real estate is the biggest collateral of bank loans and often the biggest asset of most households or firms. Land sales are also the biggest revenue for many local governments. Hence, asset bubbles are most difficult to handle because their deflation can kill banking systems and eventually become fiscal deficits.
Recently, it was revealed that US regulators did not see that real estate-related loans of the US banks accounted for 55% of total loans and asset-backed securities accounted for 74% of their debt securities holdings.
Since real estate is 225% of GDP, it was not surprising that a 20% fall in real estate caused the massive melt down in the financial derivative markets and eventually the solvency of banks.
A new generation of central bankers will have to learn new lessons from the current crisis.
http://biz.thestar.com.my/news/story.asp?file=/2010/4/17/business/6054682&sec=business
> Datuk Seri Panglima Andrew Sheng is adjunct professor at Universiti Malaya, Kuala Lumpur, and Tsinghua University, Beijing. He has served in key positions at Bank Negara, the Hong Kong Monetary Authority and the Hong Kong Securities and Futures Commission, and is currently a member of Malaysia’s National Economic Advisory Council. He is the author of the book “From Asian to Global Financial Crisis”.
