Irrational exuberance overtakes today’s Asia

What does Alan Greenspan have to do with rallies in Indian stocks, hopes for a resurgent Japan and the blind faith that China can grow at a rate of 7 percent forever? More than you’d think.

Call it the Greenspanization of Asia. The former chairman’s tenure at the Federal Reserve, from 1987 to 2006, established a new political compact of sorts, whereby governments abdicated responsibilities to unelected central bankers. The “Greenspan put” that flooded markets with cash whenever things got dicey has become the default position in Washington. In Asia today we’re seeing an even more dangerous escalation of the practice ― papering over cracks in economies that desperately need tougher, structural reforms.

The optimism coursing through Mumbai tells the story. Three months ago, India was in panic mode: the rupee plunging to record lows, politicians fumbling at every turn, and talk that it would become the first BRIC (Brazil, Russia, India and China) nation to have its credit rating cut to junk. Today, stocks have hit record highs, and everyone’s buzzing about India turning the corner. Even better, bulls say, the pro-business Bharatiya Janata Party looks like a shoo-in to win a national election due by May.

Yet nothing has really changed. The current-account deficit that sparked the crisis is still a clear and present danger. It’s just been temporarily disguised by a charismatic central banker named Raghuram Rajan, who arrived at the Reserve Bank of India on Sept. 4 and miraculously changed the subject. Let’s be honest: That’s all Rajan has really done with his interest-rate moves and soothing comments. India’s political system is still the corrupt, growth-stifling monster it was on Sept. 3. And odds are, the BJP is no more a force for change than it was in 2004, when voters rejected it.

India has gotten over the crisis too quickly for comfort and without addressing any underlying problems. And as Rajan refills the punchbowl over which central bankers are supposed to keep a tight watch, he has plenty of company.

Take bartender extraordinaire Haruhiko Kuroda, the Bank of Japan governor who has created a monetary cocktail potent enough to drive the Nikkei 225 Stock Average up 47 percent. That’s quite a feat, considering not one of Prime Minister Shinzo Abe’s restructuring pledges has been fulfilled. Japan is just as heavily regulated, uncompetitive and devoid of innovation as it was on Dec. 25, 2012, the day before Abe’s tenure began. All that’s new is a stronger punch recipe.

And then there’s master mixologist Zhou Xiaochuan over in Beijing. The People’s Bank of China governor’s monetary hooch is supporting the delusion that the world’s second-biggest economy can grow close to 8 percent a year, no matter what Communist Party leaders do. Or, more to the point, what they don’t. In June, Zhou did a masterful job pretending he had morphed into China’s answer to Paul Volcker. His credit clampdown made headlines everywhere, convincing the world that the bar was closed in Beijing.

The move also buttressed President Xi Jinping’s bona fides as a reformer. Although he emerged from last month’s Communist Party plenum with vague pledges to let markets play a bigger role in the economy, Xi came off looking like a Chinese Margaret Thatcher ready to bring state-owned enterprises to heel. Now, as China ends a crackdown on fraud and clears the way for 700-plus companies to sell shares, the coming boom in initial public offerings will benefit from a kind of reform halo effect.

But just as with India and Japan, the handiwork of a nimble central banker is no replacement for real reforms. If India and China, for example, are to beat the “middle-income trap” and keep gains in living standards from stalling out, their governments must act today to curb corruption, lower trade barriers, create jobs, encourage entrepreneurship, build social safety nets, promote sustainable development and, in general, reduce their own role in the economy. Japan is still competing against Asia’s rising giants with an overpriced, unproductive and shrinking workforce, not to mention an economic structure geared for success in the 1970s.

Kurodanomics can’t fix these kinds of problems. This is work for politicians and bureaucrats, not central bankers. Monetary policy can cushion the process of fixing flaws in economies, but it’s no substitute.

While the Greenspanization of America wasn’t a good thing, it unfolded in the 1990s, a time of relative stability in a very mature economy. Asia’s is happening way too early in the development cycle, and much too broadly. Evidence of governments letting central bankers do jobs they were popularly elected to do can also be found in Indonesia, Malaysia, the Philippines, South Korea, Thailand and Vietnam.

The last thing Asia needs is a slew of fresh asset bubbles. It needs government policy makers who do their jobs.

By William Pesek

William Pesek is a Bloomberg View columnist. ― Ed.

(Bloomberg)