Home' acuity : Acuity Sept 14 Contents cap US stocks, has surged almost 20% in
the year to May 2014, whereas expected
future earnings rose less than 8%.
And it noted that issuance of high-yield
bonds soared to US$90b per quarter in
2013 from a pre-crisis quarterly average of
US$30b, and the investors bought these
bonds at lower interest rates than they
once would have.
Australia’s Reserve Bank governor,
Glenn Stevens, gave a speech in
July questioning whether ultra-low
monetary policy in the world’s biggest
economies had generated the right sort
of entrepreneurial activity.
“If some years from now we find
ourselves looking back and concluding
that such ‘real economy’ entrepreneurial
risk-taking has not really taken place, and
all that has happened is that financial risk
taking and leverage have risen, we would
be disappointed,” he said.
But ultimately Stevens was on Geithner’s
side, perhaps even having read his latest
book: “The accounts of some of the key
decision makers that have been published
give even more sense of how desperately
close to the edge they thought the system
came, and how difficult the task was of
stopping it going over.”
Geithner acknowledges the potential
problems of quantitative easing but
“ The Bureau of Industry and
Security is doing its job; of course
there are challenges but the US
economy is in a stronger position now
than before the crisis.
“In lots of ways markets’ pricing of risks
is implausibly benign at the moment but
the risks are not comparable to what we
faced before 2008.”
Until the tragic shooting down of
Malaysian Airline MH17 in early July,
prices in financial markets had been
implying levels of risk that were even
lower than those before the global
financial crisis in 2008. Still fragile
economic fundamentals – weak GDP
growth and banks – have prompted
some analysts to worry about the
prospect of another implosion.
“We imposed a stress test for banks
designed to ensure they could withstand
a great depression – it’s not clear it
makes much sense to go further than
that,” Geithner says, referring to a recent
bestselling book by Anat Admati and
Martin Hellweg that sharply criticises
the adequacy of the new capital rules
imposed in the wake of the financial crisis.
He is heartened by the greater
intensity of policy co-ordination among
large economies, pointing out how much
time he devoted to helping set up the
series of summits that lead to the G20
group of countries, which Australia is
hosting this year.
“ These summits are a big tax on time
but they are still a good investment,
forcing countries to understand each
other’s positions,” he says, pointing to the
great success of the Pittsburgh summit
in 2009 in presenting a united and
convincing policy front to the world at a
time of great economic challenge.
In a potential prelude to what might yet
occur, the Federal Reserve’s first attempt
to “taper” its quantitative easing program
prompted a bout of destabilising volatility
in stock and prices last year as investors
feared the gradual evaporation of cheap
money and artificially low interest rates.
This problem manifested itself even
more strongly, however, in emerging
markets in Asia and South America,
which had benefited from strong inward
investment flows after the GFC but
were now enduring rapid outflows at
the prospect of higher and safer returns
back in the US.
“I understand it but it’s not in their
interest for the US to run policy in a way
that gives excessive weight to conditions
outside the US,” Geithner argues.
“That’s a world-class problem to have
compared to what they faced over the
past five years”.
perfect way to
deal with it.”
is Economics Correspondent at The Australian in
Sydney. He has written for The Economist, The
Spectator and studied economics at the Universities of
New South Wales and Oxford.
aID WItHoUt agenDa
compassIon WItHoUt prejUDIce
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31/07/2014 12:19 pm
acuity | SEPTEMBER 2014
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