Man With a Plan
Finance professor Raghuram Rajan saw the global credit crisis coming. Now, he sees ways to avoid a repetition of the big meltdown.
FOR AN ACADEMIC, finance professor Raghuram Rajan has serious street cred.
Much of it arises from a speech he gave in 2005 to global bankers at a conference in Jackson Hole, Wyo. In it, he warned that a worldwide credit crisis likely impended because of lax U.S. monetary management, the housing bubble and Wall Street's swelling torrent mortgage securitizations, which amplified, rather than diminished, credit risk.
The speech was poorly received, even though Rajan was then chief economist of the International Monetary Fund, a position for which he had taken a leave from the University of Chicago, where he is a finance professor in the Booth Graduate School of Business.
Larry Summers, former Clinton Treasury secretary and now director of President Obama's National Economic Council, was particularly derisive. The global economy and world financial markets, after all, were then riding high. In fact, the conference was intended as a celebration of then-retiring Federal Reserve Chairman Alan Greenspan for his staunch adherence to free-market principles, deregulation and what most people viewed as astute management of the U.S. economy during his nearly two decades in office.
RAJAN HAD THE TEMERITYto rain on the maestro's parade. And, of course, his gloomy predictions were borne out two years later, when global credit markets seized up in 2007. But rather than gloat, Rajan has since unleashed a flurry of suggested policy prescriptions to alleviate the financial and economic meltdown and avoid a repeat.
Among other things, he recommends ending the "perverse incentive system" that has long reigned in the financial world, where even ordinary performance is richly rewarded, while abject failure barely dings compensation. Among his suggestions: Bankers and other money managers should be subject to clawbacks of bonus money awarded for short-term gains that prove only transitory. To curb imprudent, high-risk behavior, they should also be forced to invest long-term in their companies, rather than getting the veritable ATMs of stock options and restricted stock awards.
Rajan, 47, was an early proponent—in the fall of 2008—of stress tests of leading U.S. financial companies, to restore market confidence in the capital levels and solvency of the financial system. The Obama administration embraced the strategy the next spring. The European Union recently decided to engage in similar tests.
Rajan finds it unconscionable that some bankers insisted "on big bonuses after their companies had been saved by the taxpayer."
Rajan gives the Bush and Obama administrations decent marks for the bailouts done in 2008 and 2009, during the darkest days of the U.S. crisis.
"Some 80% of what they did was pretty good, given the time pressures and other restraints they operated under and the fact that the U.S. was teetering on the verge of systemic collapse," he told Barron's recently over lunch at a university club overlooking the Chicago River. "Probably, though, the government should have been tougher on the creditors, preferred shareholders and financial-insurance customers of, say, AIG, to make sure they all suffered some significant losses, too, when the institutions owing them money were bailed out," he adds. "Otherwise, we will continue to have a moral-hazard problem in which risky behavior has no adverse consequences, resulting in a mispricing of security risk. I also deplore as unconscionable bankers insisting on big bonuses after their companies had been saved by the taxpayer and returned to profitability by the fat lending spreads facilitated by nearly zero percent funding, courtesy of the Fed."
RAJAN SEES A SOMEWHAT MUTEDeconomic recovery ahead for the U.S., and certainly for Europe. The major problems now are Europe's sovereign-debt woes and the euro's decline. Countries in the euro zone are being forced to embrace budget austerity programs that figure to dampen short-term growth. Rajan worries about European banks' exposure to the public and private debt of Greece, Portugal and Spain, which some on Wall Street say could be as high as $2 trillion. "The European banks have yet to 'fess up, like U.S. banks did to their subprime mortgage and other bad-loan exposure, let alone their sovereign-debt problems," he observes.
He fully expects Greece to eventually restructure its debt—a euphemism for default. The nation's ratio of debt to gross domestic product is just too elevated, and the country lacks the ability or political will to service that debt, mostly acquired after a decade of gorging on cheap money.
Yet the crisis should blow over in six months or so, says Rajan. A cheaper euro will boost European exports, he predicts, more than compensating for an austerity-induced economic slowdown. Rajan expects the debt-backstop programs that have already been announced by Eurpean authorities to be sufficient to create firebreaks, deterring the spread of any damage beyond Greece.
Nonetheless, the professor sees structural problems in the global economy that aren't being addressed by the spate of new financial reforms under way in the U.S. and Europe. As a result, he contends that more financial bubbles are likely soon, raising the specter of serious credit blowups around the globe. He describes the potentially destructive tectonic forces deep in the global economy in his recently published book, appropriately titled Fault Lines.
Rajan, who was educated in British-influenced Indian universities and in the U.S., worries about the growing inequality of incomes in America. While the top 10% of wage earners have prospered over the past 30 years, real wage growth largely has stagnated or dropped for the bottom 50%. In fact, according to one study that Rajan cites, 58 cents of each dollar of wage growth went to the wealthiest 1% of households from 1976 through 2007.
EVEN WORSE, RAJAN ASSERTS, compared with Europe, the U.S. has a weak safety net for workers who lose their jobs. According to another study, unemployment benefits in the U.S. replaced 50% of the average loss in wages from 1989 through 1995, versus 63% in Germany and 57% in France. And basic jobless benefits last up to three years in France and 18 months in Germany, compared with six months in the U.S. Many U.S. workers don't even qualify for unemployment—if they haven't been on the job long enough, or if they left a position voluntarily or because of a labor dispute. Moreover, losing a job in the U.S. means eventually losing affordable health insurance, too. That's not generally true in Europe.
A Growing Divide
Much has been made of the disparity in pay among Americans. Over the past three decades, the divide has been especially notable between the top earners—in the 90th percentile—and earners in the 50th percentile, the median-wage workers viewed as the bulwark of the U.S. economy. This disparity, Raghuram Rajan asserts, is a dangerous economic fault line threatening the nation.
Finally, the U.S. has been increasingly afflicted by agonizingly slow job recoveries from recessions. According to Rajan, from 1960 to 1990, lost jobs were recovered within eight months. But the lag was 23 months from the trough of the 1991 downturn and 38 months in the 2001 recession.
So the pressures on Washington to stimulate job growth have become ferocious. It can be done either through fiscal policy (spending programs and tax cuts) or cheap credit. In his book, Rajan mostly focuses on the Fed's easy-money, low-interest-rate policies because of the far-reaching consequences of the 2003-2007 U.S. housing bubble. In the same span, he says, Fed easing also helped induce bubbles in commercial real estate and leveraged buyouts.
Rajan wants U.S. policy makers to use easy money and low interest rates to temporarily help a broad range of Americans without alienating conservatives through obvious income redistribution. Housing has long been a favorite delivery mechanism of this stimulus. Demand fueled by easy money helps push up the price of what is many Americans' biggest asset. Suddenly, lower-income Americans can afford homes, and other homeowners can harvest their new wealth through refinancings or actual home sales. The harvested money pays for furniture, remodeling, appliances, fancy cars and the like. And that means jobs all along the housing food chain, from construction to mortgage finance on Wall Street.
That's one reason that recent administrations from Clinton to Bush fils pushed so hard for affordable housing and, to some extent, encouraged the government-sponsored entities Fannie Mae and Freddie Mac to, in the now immortal injunction of Massachusetts Rep. Barney Frank, "roll the dice" a bit in relaxing underwriting standards on new mortgages. If the U.S. couldn't deliver the reality of real income growth for the middle class, politicians would deliver a simulacrum of greater wealth by lowering everybody's monthly mortgage payment.
In Rajan's telling, the collapse of the housing bubble in 2006 and 2007 had all the inevitability of a classic Greek tragedy. Spooked by fears of deflation and the long period of jobless recovery, the Fed drove short-term interest rates from 6% down to 1% from 2001 to 2003 and has kept rates at lower than optimal levels ever since.
While housing prices were in hyperdrive, the paltry interest rates on money-market accounts and bank certificates of deposit led many investors to venture into far riskier assets. All of this set the stage for a credit-system debacle.
THE CENTRAL BANK'S SECOND BLUNDER, according to Rajan, occurred in 2002, when Greenspan in a now infamous speech to bankers at Jackson Hole insisted that puncturing asset bubbles isn't the Fed's proper province. Instead, the central bank would intervene only to "mitigate the fallout [from asset booms] and hopefully ease the transition to the next expansion."
This came to be called the "Greenspan put," whereby if markets were to go haywire, the Fed would step in to prop up prices and remediate the mess.
This emboldened the "cynical and amoral" denizens of the mortgage production line, he says, to devise and peddle esoteric mortgage products that eventually proved toxic, and the myopic credit agencies to bestow triple-A ratings on roughly 60% of all asset-backed securities during the ensuing lending boom. (Typically, less than 1% of all corporate bonds boast such a rating.)
Gross trade imbalances also have produced a huge fault line, Rajan says. Countries like Germany, Japan and, now, China rely on export growth, rather than internal demand, to fuel their economies. In fact the domestic sectors of these export dynamos are generally so protected, inefficient, high-cost and noncompetitive as to discourage much growth in domestic consumption of non-tradable goods and services. And some big exporters, particularly in Asia, have kept their currencies undervalued to foster exports and inhibit imports. The Chinese consumer thus pays more for both domestic and foreign goods and gets rock-bottom interest on savings, Rajan argues.
The exporting countries rely on nations like the U.S. to stimulate first and massively during any global economic despond. The U.S. consumer has always come through. In addition, says Rajan, "Excess global supply washes around the world looking for countries that have the weakest policies or the least discipline, tempting them to spend until they simply cannot afford it and succumb to crisis." Enter Greece and Spain…and the U.S.
LARGE TRADE DEFICITS give many of these exporters the foreign-currency reserves to recycle into U.S. financial assets and effectively finance consumption of their exports. East Asian nations learned this lesson well, says Rajan, during the Asian Flu period of 1997-1998, when a sudden exit of foreign investment capital laid low their economies and banking systems. Since then, countries like Malaysia, Thailand, Taiwan and Korea resolved to become net exporters of both goods and capital to the West, only adding to the global imbalances.
As a true citizen of the world, Rajan has seen the effects of all these trends at first-hand. His father was an Indian diplomat, whose postings exposed Rajan to countries as varied as Belgium and Indonesia (during The Year of Living Dangerously era 35 years ago, "when machine-gun fire was a nightly occurrence"). He earned degrees in electrical engineering and management in India before obtaining a Ph.D at MIT in the early 1990s. Today, he wears many hats, including that of an economic advisor to India's prime minister.
The proposed global reforms that he lists in Fault Lines run the gamut from the prosaic to grandiose. Along with revamping Wall Street's pay system, he offers innovative ideas on building capital buffers into the global credit system, obviating much of the need for bailouts of companies deemed too big or too enmeshed in the financial system to fail.
He also proposes revising U.S. child-rearing and education, with the aim of improving juvenile nutrition, inculcating values such as perseverance and self-discipline, improving inner-city schools and placing more emphasis on vocational training and apprenticeships. As for global-trade imbalances, he thinks that enlightened self-interest will force the export-led economies to reform by giving their domestic consumers a much better shake. Whether that proves to be visionary or naive remains to be seen
博文
没有评论:
发表评论