IMF’s Toolkit Inadequate for Next Housing Bubble, Official Admits

Jun. 16, 2014
by Bob Adelmann

Last month, the Financial Times saw what’s coming: Housing prices rose last year at the fastest rate since 1995, setting the stage for the next global bust. Eleven countries they were watching had year-over-year rises in double digits, adding:

Even Germany, known for its stable housing market, is prompting concern, with the Bundesbank warning that valuations are as much as 25 percent too high in [some] big cities.

It admitted great concern that regulators won’t be able to do anything about it, either, just like last time:

Economists at organizations including the Bank for International Settlements question whether, on their own, macroprudential regulation can stop a boom once it is going full throttle.

Hard on the heels of that dismal outlook came an economist with the IMF who virtually admitted that they really didn’t have much in their “toolkit” to head off the impending disaster. In an ironic twist, the economist’s name is Zhu Min, which in Chinese means “the people rule” or “democracy.” But he is far from a free market proponent. Born in China and trained in economics at Fudan University in Shanghai, Min went on to obtain degrees in public administration from Princeton and a doctorate in economics at Johns Hopkins. Before moving to the IMF, Min worked for the Bank of China in charge of “internal controls” and “compliance.” In other words, he is from the school decried years ago by Ronald Reagan:

Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.

On Wednesday last week, Min announced that the IMF had just created a new website so folks could watch the impending disaster unfold for themselves: Global Housing Watch. He said:

Housing prices are inching up….

In fact, our research indicates that boom-bust patterns preceded more than two-thirds of the recent 50 systemic banking crises [experienced around the world]….

We need to guard against another unsustainable boom.

The website shows a number of charts following the bubble, including affordability ratios and comparisons of housing prices to incomes and rents, each of which shows the bubble gaining momentum. Out of the 52 countries that IMF is monitoring, 33 of them show increases in housing prices, some of them quite alarming. In fact, in Min’s own country, China has seen housing prices gain nearly 10 percent just in the last 12 months, and they’re fourth on the list behind New Zealand, Hong Kong, and the Philippines. Right behind China on that list is the US, Israel, Australia, Switzerland, and Germany, each showing gains in the high single digits.

Min explains, quite reasonably, why these charts and graphs are important:

Theory asserts that house prices, rents, and incomes should move in tandem over the long run.

If house prices and rents get way out of line, people would switch between buying and renting, eventually bringing the two in adjustment.

Similarly, in the long run, the price of houses cannot stray too far from people’s ability to afford them.

The only trouble is that that is how the free market works when it is left alone. But once regulators like Min get involved, the unintended consequences of policies implemented to improve things make them worse, not better. And when things get worse, Min thinks more regulation, not less, is just the ticket to keep things from popping. He proposed tougher loan-to-value requirements on banks and other lenders, with higher debt-to-income ratios demanded of borrowers. He recommended higher capital ratios for those lenders with more assets backing up their loans.

But then, in a startling admission, he doubts whether these will be enough, or that they’ll be implemented soon enough, to head off disaster:

The task [of regulating the global housing market] is difficult for a couple of reasons. First, assessing when house prices are out of line with economic fundamentals is as much art as science.

Second, the policy toolkit to manage housing cycles is still under construction.

This is a remarkable admission from one of IMF’s brightest and best: we don’t know or can’t tell “when house prices are out of line” – that it might take an art major rather than an economist to know – and that even if we did know, our toolkit is “still under construction.” The arsonist doesn’t know how to put out the fire he started! 

Here’s more from this expert:

The tools for containing housing booms are still being developed. The evidence on their effectiveness is only just [now] starting to accumulate. The interactions of various policy tools can be complex.

The best tool, in fact the only tool that has any chance whatsoever of correcting the imbalances and distortions in the housing market caused by interventionists, is the free market. Let the people involved directly, personally, and financially work out the details, be they borrowers or lenders, buyers or sellers.

But that won’t happen, not while Min’s in charge. Instead, he claims that what’s needed is more of what caused the bubble in the first place:

But all this should not be an excuse for inaction….

[Instead] we need to move from “benign neglect” to an “all of the above” approach when it comes to policy choices.

Call it arrogance, conceit, disdain, lordliness, insolence, or presumption, Min’s remedy for avoiding the disaster he and his institution have helped create, along with the help of every central bank in the world and their fraudulent fractional-reserve banking systems, will simply assure that this coming disaster will be vastly worse than the last one. Austrian economist Frank Shostak explained why:

Fractional reserve banking (creation of money out of “thin air”) is actually instrumental in creating the dilution of real wealth formation and boom-bust cycles.

Min’s announcement indicates his complete faith in something that doesn’t work, hasn’t worked, and can’t work. It also confirms that he should have majored in art – or better yet, history – instead of economics. Said Friedrich Hegel:

The only thing we learn from history is that we learn nothing from history.

----------------------------

Sources:

Financial Times: IMF sounds global housing alarm

Financial Times: Surging property prices test regulators’ weaponry

The IMF’s new website: Global Housing Watch

The Wall Street Journal: IMF: Home Prices Look Overvalued in Canada, Norway, Australia

The IMF: Era of Benign Neglect of House Price Booms is Over

Min Zhu’s bio

More on Min Zhu

Reagan’s quote:  If it moves…

Friedrich Hegel’s quote: The only thing…

Dr. Frank Shostak on Booms and Busts

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