Ghostly gov­er­nors

Re­mem­ber­ing the glacial and great. But Mboweni didn’t get the ci­gar…

Finweek English Edition - - Nothingsacred - STEPHEN MUL­HOL­LAND stephenm@fin­

TOOK MY­SELF OFF TO PRE­TO­RIA last week to lis­ten to Pro­fes­sor Charles Good­hart, an em­i­nent Bri­tish econ­o­mist, at the SA Re­serve Bank’s large and loom­ing glass and steel tower, where it was com­fort­ing to see the mem­ory of its late, great gov­er­nor – Ger­hard de Kock – is still hon­oured.

It be­trays one’s age to re­mem­ber vis­it­ing the grand old Bank HQ in Church Square as a young re­porter and ac­tu­ally be­ing taken into the for­bid­ding pres­ence of Ger­ard Ris­sik, who was gov­er­nor un­til 1967, when he was suc­ceeded by the even more for­bid­ding The­u­nis de Jongh.

It seemed that only those jour­nal­ists for­tu­nate enough – as was your age­ing cor­re­spon­dent – to at­tend the an­nual meet­ings of the In­ter­na­tional Mon­e­tary Fund and the World Bank were able to meet with the glacial De Jongh – and then only for­mally at his rare press brief­ings in Wash­ing­ton and other world cen­tres where those gath­er­ings took place.

On the other hand, the gre­gar­i­ous De Kock charm­ingly cul­ti­vated the press in pur­suit of his mon­e­tary goals. All Bank gov­er­nors – with the ex­cep­tion of the in­cum­bent, Tito Mboweni, the eighth holder of the of­fice – have held doc­tor­ates in eco­nomics. That hasn’t been a hand­i­cap for Mboweni, as ev­i­denced by the high stand­ing of the Bank and its steady di­rec­tion of mon­e­tary af­fairs.

We’ve had our dif­fer­ences and, in a ges­ture of con­cil­i­a­tion, I armed my­self with a fine Cuban ci­gar – a Punch Churchill – to hand to the Gov­er­nor in the event he at­tended the Good­hart ad­dress. But he was nowhere to be seen, so I brought it home and smoked it.

Any­way, it was a plea­sure to be ad­dressed by Good­hart, a for­mer mem­ber of the Bank of Eng­land’s mon­e­tary pol­icy com­mit­tee and Pro­fes­sor emer­i­tus at the Lon­don School of Eco­nomics. He’s pos­sessed of that ef­fort­less ar­tic­u­la­tion one so en­vies in the well bred and well ed­u­cated Bri­tish.

In ad­di­tion he is, of course, an au­thor­ity and thus was able to pro­vide both en­light­en­ment and amuse­ment. For ex­am­ple, he in­formed us that one of the ca­su­al­ties of the world fi­nan­cial cri­sis has been the di­vorce rate. Di­vorce, like any­thing is when it’s des­per­ately wanted, isn’t cheap.

For in­stance, sell­ing the com­mu­nal house is no longer an at­trac­tive op­tion. Un­like the sit­u­a­tion be­tween 1992 and 2007, when – as Good­hart noted – the world econ­omy ex­pe­ri­enced its finest years, one can’t now quickly sell one’s house, split the pro­ceeds and buy two smaller ones all in a few weeks with the banks lin­ing up to lend you the money to fi­nance it all. It’s now cheaper to stick to­gether.

Good­hart pro­fessed he didn’t know if that trend en­hanced or re­duced the com­mon wel­fare.

How­ever, he was in no doubt about the sever­ity of the cri­sis and stressed it would take a long time for the world to re­cover. He traced the gen­e­sis of the crash, point­ing to the low in­ter­est rate poli­cies of for­mer US Fed­eral Re­serve chair­man Alan Greenspan, which took place when de­mand was grow­ing while in­fla­tion­ary pres­sures were be­ing dis­guised by the abil­ity of China and In­dia and other low-cost sup­pli­ers to flood the United States with cheap goods and ser­vices. Greenspan should have moved counter-cycli­cally to dampen down con­sumer de­mand through higher rates.

In ad­di­tion, China (in the view of the US) kept its cur­rency at an ar­ti­fi­cially low rate while build­ing up a tril­lion US dol­lars in re­serves. Thus, in a low in­ter­est en­vi­ron­ment, in­vestors em­barked on a search for yield and thus wan­dered up the risk curve.

Se­duced by a decade and a half of good times, in­vestors be­lieved house prices, share lev­els and other as­set val­ues would con­tinue to rise for­ever. That was a gen­er­a­tion that had known only good times.

As we all know, the sub-prime fi­asco arose out of the bundling to­gether of lousy mortgages and sell­ing them in mar­kets world­wide. Most of those mortgages were loans to lower in­come Amer­i­cans who had been lured into 30-year float­ing in­ter­est debt through what are known as “teaser” rates – cheap rates for two years, fol­lowed by steep in­creases, thereby ren­der­ing the home­owner un­able to meet his pay­ments.

As the mar­ket slumped, neg­a­tive eq­ui­ties ar­rived: the house wasn’t worth the amount of the mort­gage. In the US there’s no re­course in a mort­gage be­yond the prop­erty that sits as se­cu­rity. Thus Amer­i­cans just walked away from their homes, leav­ing the keys for the bank.

But be­cause of the dic­ing and slic­ing of those mortgages, it’s of­ten dif­fi­cult if not im­pos­si­ble to dis­cover which in­sti­tu­tion is now the proud owner of the aban­doned prop­erty.

Cen­tral banks and gov­ern­ments ev­ery­where are now prim­ing the pumps to lift us out of the cur­rent morass. How­ever, they’ll have to be quick off the mark in the other di­rec­tion when and if cur­rent stim­u­la­tory meth­ods work.

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