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Banks, credit and the new Asian miracle?

I’m attending the International Economic Forum of the Americasin Montreal this week (that’s a mouthful). So far, not many surprises, as policymakers and think-tank thinkers gather to discuss what the heck’s going on in the global economy and what should be done about it.
Highlights include Dominique Strauss-Kahn, managing director of the International Monetary Fund, scolding leaders of the developed countries for promising to cleanse the balance sheets of their financial institutions with some haste, and then (to his mind) dragging their heels. He went so far as to say they’d done nothingan overstatement he rather quickly retracted. But he stuck to his guns that the process of getting the toxic assets out in the open was “much too slow… There are lots of losses that have so far not been exposed.” (The IMF puts “lots” at about $500 billion.”)
Something of a debate that emerged in the forums this morning was the question of why, if “the worst of the banking crisis is behind us” (a phrase tossed about repeatedly), credit flows remain impaired. In other words, if the banks really are on a sounder footing again, why don’t they start doing their job and lend more money?
The most lucid answer came from Jan Hatzius, chief US economist for Goldman Sachs. (Hatzius was among the few economists to correctly call the widespread effects of the US housing bust.) His reply to the question of impaired credit flows? Lack of demand.
Banks are not lending money because the private sector is not borrowing it. For instance, U.S. consumer spending in the second half of ’08 fell by 4%a huge drop in a short period of time. Consumer borrowing is falling and the U.S. savings rate, which had been negative for years, is positive and rising. So it’s not that there isn’t money to borrow anymore. Lack of credit supply was a “2007/08 issue,” Hatzius said. “Demand for credit is an ’09 issue.”
Hatzius, who by the way came out on top of the Wall Street Journal’s economic forecaster rankingsfor ’08, was more upbeat (in his way) about the US dollar. He said that he thinks concern over a “deluge of debt” undermining the U.S. Treasury is “overblown.” He pointed out that the US trade deficit has shrunk sharply in a very short period of time, so effectively private sector savings are funding the debt expansion in the States.
The economist was downright upbeat about Asia, however. When it comes to China, Hatzius said he tends not to rely on statistics solely out of China as they are hard to decipher or rely upon, but he does look at other Asian economies, like Korea’s. And “there’s no question that the Asian countries are coming back.” He suggested, in fact, that a classic V-shaped recovery is occurring in Asia right now, even as the West is waiting for the recovery to start.
Look for that around the end of the year…