June 30, 2013
After being a steady friend to Americans’ 401(k) accounts for month after month, the U.S. stock market is getting scary again.
A long rally that sent major indicators to record highs hit a bump when Federal Reserve Chairman Ben Bernanke announced plans to taper off an economic stimulus program that has been popular with Wall Street.
On Monday morning, the hangover from Bernanke’s announcement combined with fresh concerns about China’s economy to send U.S. stocks tumbling, although equities later recovered some of their losses. Bond prices are falling too, with interest rates starting to rise after years at rock-bottom levels.
Party over? Not likely. The actions of the Fed to slowly withdraw its $85 billion-a-month bond-buying program merely injects a bit of sobriety into financial markets that sorely need it. Bernanke’s bond-buying has had the net effect of overriding market forces, artificially depressing interest rates and driving investors toward stocks. Whoopee!
But we think it’s about time that Bernanke starts to shut off the easy money. His move to do that makes sense for the long-term health of a U.S. economy that no longer requires extraordinary (and potentially inflationary) stimulus.
For the same reasons, we also welcome credit-tightening in China: After experiencing rapid growth for two decades, the Beijing government is taking needed steps to reform its so-called shadow banking system: Local power brokers control many small and unregulated banks — a recipe for loosey-goosey lending standards that result in lousy loans. The government’s main goal is to get a grip on this poorly monitored system of informal lending, and to head off the financial crisis that would result if loans were to start going bad on a large scale.
As credit becomes harder to get, China’s economy is expected to grow at a slower rate. A slew of banks and international agencies have cut their forecasts in recent weeks. Goldman Sachs on Monday predicted that China would grow 7.4 percent this year and 7.7 percent next year — down substantially from the double-digit period of the recent past.
Taking away the easy money is no more popular in China than it is in the U.S., but it is the prudent course. China badly needs to readjust after its go-go growth. The Asian giant’s ratio of credit to the size of its economy has surged to precarious levels in recent years. Credit agency Fitch Ratings has warned that the amount of credit in the economy is so excessive that China could find it difficult to keep growing — and pay back all this debt.
Now we’re seeing early signs of a change: Some small and midsize Chinese banks have become so hungry for cash that they are offering short-term interest rates as high as 25 percent. In years past, China’s central bank would have stepped in at the first sign of such trouble, bailing out iffy lenders for the sake of maintaining stability. This time, the People’s Bank of China has largely stayed on the sidelines. In so doing, it is sending a message for local lenders to rein in speculation and boost their capital levels.
It would be helpful if the People’s Bank of China sent its messages more clearly. One legacy of the Bernanke era at the Fed is a welcome trend toward open communication. The Fed has gotten much better at conveying its policies. Markets still react sharply to Fed policy changes, but without the unnecessary confusion that resulted from the cryptic utterances of Bernanke’s predecessors, such as Alan Greenspan.
When any of the world’s major economies — such as the European Union, the U.S. or China — lets easy money run rampant, the risks from too much lending threaten the global economy. Maybe the Chinese learned a valuable lesson in recent years as loose credit, and the resulting huge debt burdens, laid Western economies low.
We believe the People’s Bank of China is right to rein in excessive leverage. Better still, it should go ahead and say so.