Perspective Unlimited

Tuesday, August 07, 2007

Learning to Tie the Policy Hands

In this post, I argue, using the current red-hot property sector as an example, how too much policy discretion over the economic cycle may actually compromise long-term objectives. Some "tying of hands" or credible commitment on the part of policy-makers can sometimes be better for the economy. The full article can be found on Singapore Angle.


  • I think the govt is doing the right think to cool hot markets and boost slumping ones. PM Lee relied on the market forces to correct itself in 1996, they didn't and he was forced to use the sledgehammer.

    The govt acts less predictably in the short term against animal spirits in the property market.

    See what is happening in the US with subprime loans? can't let greed go unregulated.

    Bart, the subprime mess is reaching what people are calling a contagion that will trigger a worldwide recession. Even a decent long term investor who survived the 1997 Asian crisis like myself is spooked this time...and I think very few things can scare me.

    What is your take on the subprime crisis? Is this a crisis of confidence or something real that will undermine the integrity of the financial system?...and bring about financial armageddon.....?

    By Blogger LuckySingaporean, at 4:30 am  

  • It is not about whether the government should regulate greed. It is about whether they are "time-consistent".

    Think about it, what is the root of the subprime crisis? Many blame on Greenspan for his 1% interest rate - too discretionary, too fast and loose it now appears innit? He didn't prick the dot-com bubble when it formed. He then flooded the system with liquidity after dot-com collapse. He didn't regulate dot-com greed, but his ex-post incentive (after the collapse of the bubble) was to rescue it to avert the recession. This is the famous time-inconsistency problem. Policy makers cannot be trusted to act consistently given the kinds of ex-post incentives they face.

    The result? Housing prices boomed on cheap interest, people took out housing equity through sweetheart mortgage rate and refinancing, continued spending, all the while as Greenspan himself cheered the financial industry on how innovative they were in allowing people to monetise their housing assets.

    The scary thing about subprime is that we ain't seen the worse yet. According to what I heard from some people more informed than I am, a huge chunk of the sweetheard mortage deals would end in 2008, and would be reset to a higher interest rate.

    But back to my original point, in many cases, you cannot trust policy makers to be consistent because of the ex-post incentive to deviate.

    By Blogger Bart JP, at 8:53 am  

  • Most of those who rise to the top are those who know how to take care of themselves first before anything other people or things. When they are in positions of power to decide one way or another, wouldn't they decide upon the one that will safeguard their own interests first?

    Whether it is a rise or a fall, they will know well before hand; and they will take advantage either way. Only the grass and the ants will suffer when it is too late for them to take evasive actions.

    So, would the time-inconsistency be an inevitable honest mistake or would it be a deliberate move for reasons only known to those who have the power to make decisions on before of all?

    By Anonymous Advantage Rule, at 11:31 am  

  • This comment has been removed by the author.

    By Blogger Bart JP, at 11:59 am  

  • Bart,

    This credit squeeze looks serious. I wonder if it is the reverse of the Asian crisis now that Asian economies have been retooled and Asian countries accumulated massive reserves, we are looking at a contagion starting in USA....

    I wonder if you read Soros' book "Crisis of Capitalism" ...he had this theory that crisis will start at the periphery Mexico, Asia, Russia and then there will be a final one at the center of the world economy right in US itself.....then the entire fiat currency system will fall apart and get reset....

    I wonder is Soros is right...scary stuff...

    By Blogger LuckySingaporean, at 10:27 am  

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