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