IMF to Asia: Put a Brake on Credit Bubbles!

Interesting developments. 

Asia has to put a brake from her asset bubble blowing policies, this has been the latest prescription by the IMF who joins the World Bank in the call to curtail asset bubbles

First the implicit advice as reported by the Bloomberg:

Asian policy makers must be ready to respond “early and decisively” to overheating risks in their economies stemming from rapid credit growth and rising asset prices, the International Monetary Fund said.

Growth is set to pick up gradually during the year and inflation is expected to stay within central banks’ comfort zones, the Washington-based lender said in a report today. Greater exchange-rate flexibility in the region would play a “useful role” in curbing overheating pressures and coping with speculative capital inflows.

Asian economic growth that the IMF estimates will be almost five times faster than advanced nations this year, and increasing investor appetite for risk have spurred capital inflows into the region. The Bank of Japan this month joined counterparts in the U.S. and Europe in unleashing monetary stimulus, which may fuel further currency gains in developing markets such as the Philippines, where policy makers have stepped up efforts to cool appreciation.

As a reminder all bubbles are homegrown or have domestic origins. The mainstream’s popular strawman or scapegoat, capital flows, which usually gets blamed for bubbles, may or may not add to the bubbles in progress. While many crises indeed involved capital flow dynamics, correlation is not causation.

Now the kicker:

Financial imbalances and rising asset prices, fueled by strong credit growth and easy financing conditions, are building in several Asian economies,” the IMF said. “Policy makers in the region face a delicate balancing act in the near term: guarding against the potential buildup of financial imbalances while delivering appropriate support for growth.

Translating the economic gibberish to the layman: Bubbles have become widespread "in several Asian economies", and could morph into a clear and present danger "face a delicate balancing act"!

Well readers here would be familiar with my constant admonitions on these. Now many, including multilateral institutions, appear to be recognizing on such developing risks. So I am no longer a “lone nut”.

But the IMF or the World Bank seem clueless on what appears as a good counsel of curbing bubbles. They ignore the economic and political implications of their “delicate balancing act” recommendations.

Since all the cumulative  “strong credit growth” have been a consequence of “easy financing conditions”, then “early and decisively” policy restraints would represent as financial losses on the manifold entities or borrowers (private, public, or hybrids e.g. PPPs) that contracted them with their corresponding creditor/s.  Remember all these  “strong credit growth” had been consummated based on expectations of a sustained or prolonged “easy financing conditions”. Now the IMF (and the World Bank) wants to reverse them.

This also means that if “strong credit growth” has metastasized into a systemic debt issue then policy tightening would translate into a sharp slowdown in economic growth (best case scenario), if not a recession or a crisis (worst case scenario).

Thus the “delicate balancing act” reveals that the IMF doesn’t seem to have a good grasp on such ramifications, or most possibly, refuses to candidly divulge of the true nature of their risks expressed via evasive opaque statements.

Moreover credit rating upgrades will whet the appetite for more debt which has been the case for the Philippines, aside from adding to the veneration of political ascendancy from current policies that undergirds today's manic phase

This means that putting a brake or policy tightening would also expose on the mirage brought about by statistical growth pillared from "strong credit growth". Doing so would effectively takes away the foundations of the “defied” status from which the political class and central bankers have been piggybacking on. 

In short, reversing the “easy financing conditions” would go against the political and personal interests of those involved, particularly the political class and their cronies, and therefore will most likely be rejected or dismissed or ignored. 

Easy money conditions will likely be pushed to the limits until the markets expose on them.