Less than two weeks after a leading Chinese academic suggested that China’s central bank should signal its commitment to a stable monetary policy so as to help prevent the development of possible asset bubbles, a Chinese regulator expressed concern about increasing indications of overheated bank lending to the real estate sector.
On Sunday, CNBC reported:
China's top banking regulator on Sunday warned of the risks from surging bank lending, singling out the dangers of unhealthy growth in the property market.
"(We) must control the risk of real estate loans," said Liu Mingkang, the head of the China Banking Regulatory Commission, adding that measures must be taken to better evaluate the creditworthiness of borrowers.
The growing concern in China about the potential risk of a possible real estate bubble, probably one or more regional bubbles, is well-founded.
• Banking crises have often been preceded by credit booms. An IMF Working Paper written by Luc Laeven ad Fabian Valencia found that credit booms preceded about 30% of banking crises.
• Real estate busts in which the prices of homes, farms, and/or commercial property fell have often led to waves of bank failures.
• Research has shown that shifts in capital flows from earlier asset bubbles can contribute to the rise of asset bubbles elsewhere. Hence, with the U.S. housing bubble having burst in recent years, some capital in search of appreciation could flow to a growing economy and rapidly rising asset markets in China.
• According to research by the International Monetary Fund, housing busts typically lead to recessions that are twice as deep and twice as long as those associated with equities busts.
• Considering the still fragile shape of economies in parts of Asia, Europe, and the Americas, including financial system fragility in some of those locations, the rise and fall of a real estate bubble in China could send the kind of fresh shock rippling through the global financial system that could suffocate any economic recovery that might be underway in various Asian, European, and North and South American economies at that time. During the Great Depression, a relentless wave of economic shocks rolled across the European and American economies inhibiting any early recovery.
• Should an asset bubble burst in China, its fallout could sufficiently damage already-weak financial institutions in numerous major money centers so as to lead to a prolonged impairment of the credit creation process. Such a development would have the potential to lead to a prolonged period of regional or global economic stagnation.
• In China, a significant real estate bubble could undermine domestic economic growth and job creation. Those developments could lead to a further intensification of forces contributing to recent ethnic strife in parts of China.
All said, China has ample reason to be concerned about the possible rise of a major regional housing bubble or bubbles. Given the stakes involved, China might well choose to break new monetary policy ground in attempting to deploy monetary policy toward reducing the risk of the emergence of a real estate bubble.
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Showing posts with label asset bubble. Show all posts
Showing posts with label asset bubble. Show all posts
Monday, July 20, 2009
Wednesday, July 1, 2009
U.S. Unemployment Rate Likely To Rise Into Next Year
On June 30, 2009, The Conference Board revealed that consumer confidence had fallen in June. Worries about the job market and business conditions were largely responsible for the decline.
In part, The Conference Board’s statement explained:
Says Lynn Franco, Director of The Conference Board Consumer Research Center: "After back-to-back months of strong gains, Consumer Confidence retreated in June. The decline in the Present Situation Index, caused by a less favorable assessment of business conditions and employment, continues to imply that economic conditions, while not as weak as earlier this year, are nonetheless weak..."
Consumers' appraisal of present-day conditions was less favorable in June. Those claiming business conditions are "good" decreased to 8.0 percent from 8.8 percent, while those saying conditions are "bad" increased to 45.6 percent from 44.5 percent. Consumers’ assessment of the labor market was also less favorable. Those stating jobs are "hard to get" increased to 44.8 percent from 43.9 percent. Those saying jobs are "plentiful" decreased to 4.5 percent from 5.8 percent.
Consumer worries about the unemployment rate raise the all-important question as to when the currently climbing level of unemployment will peak and then begin to recede. The historic experience suggests that the unemployment rate probably will not peak until next year.
The average duration of unemployment is a lagging indicator. Therefore, reversals in the unemployment rate usually commence some time after a business cycle has already peaked or troughed.
An examination of the ten post-World War II recessions reveals the following concerning the timing of the peak unemployment rate:
• At the end of the recession: 2
• 1 month after the end of the recession: 1
• 2 months after the end of the recession: 1
• 3 months after the end of the recession: 2
• 5 months after the end of the recession: 1
• 9 months after the end of the recession: 1
• 12 months or more after the end of the recession: 2
In the above sample 40% of the cases saw the unemployment rate peak 2 or fewer months after the end of the recession. 60% of the cases saw the unemployment rate peak 3 or more months after the end of the recession, and half of those cases experienced a peak unemployment rate 6 or more months after the end of the recession.
Combining the historic experience with the structural dynamics behind the recession suggests that the unemployment rate will probably peak well after the current recession comes to an end. Continuing financial system fragility, the ongoing credit crunch, deleveraging by households, and the cause of the recession (an asset bubble) indicate a delayed recovery in employment.
Three cases from the post-World War II experience are particularly relevant:
December 1969-November 1970 Recession:
• Underlying cause: A credit crunch that erupted in 1966
• Timing of the peak unemployment rate: 9 months after the recession ended
July 1990-March 1991 Recession:
• Underlying causes: Regional real estate bubble, S&L crisis
• Timing of the peak unemployment rate: 15 months after the recession ended
March 2001-November 2001 Recession:
• Underlying cause: Dot Com bubble burst
• Timing of the peak unemployment rate: 19 months after the recession ended
A delayed recovery in employment suggests a higher peak unemployment rate. In general, the longer it takes for the unemployment rate to peak, the greater the rise is from the unemployment rate that prevailed at the end of a recession.
On average, for every month it takes for the unemployment rate to peak, the unemployment rate rises nearly 0.8% from the unemployment rate at the time the recession ended. For example, if the unemployment rate was 6% at the end of a recession, and the unemployment rate continued to climb for 6 additional months, the data would imply a 6.3% peak rate of unemployment.
Therefore, were the unemployment rate to range from 9.5% to 10.0% at the time the present recession ends, and were the unemployment rate to continue to climb for 6-12 additional months, the peak unemployment rate could range from 9.9% (in the case of a 9.5% rate that peaks 6 months later) to 10.9% (in the case of a 10.0% rate that peaks 12 months later). In the case of a rate that peaks 18 months later, there would be an implied range of 10.8% to 11.4%.
All said, assuming the recession ends in the Third Quarter of 2009, it appears likely that the unemployment rate will not peak until some time next year. There is a possibility that it will not peak until some time in 2011. Finally, a 10% or above peak unemployment rate looks realistic at this time.
&&
In part, The Conference Board’s statement explained:
Says Lynn Franco, Director of The Conference Board Consumer Research Center: "After back-to-back months of strong gains, Consumer Confidence retreated in June. The decline in the Present Situation Index, caused by a less favorable assessment of business conditions and employment, continues to imply that economic conditions, while not as weak as earlier this year, are nonetheless weak..."
Consumers' appraisal of present-day conditions was less favorable in June. Those claiming business conditions are "good" decreased to 8.0 percent from 8.8 percent, while those saying conditions are "bad" increased to 45.6 percent from 44.5 percent. Consumers’ assessment of the labor market was also less favorable. Those stating jobs are "hard to get" increased to 44.8 percent from 43.9 percent. Those saying jobs are "plentiful" decreased to 4.5 percent from 5.8 percent.
Consumer worries about the unemployment rate raise the all-important question as to when the currently climbing level of unemployment will peak and then begin to recede. The historic experience suggests that the unemployment rate probably will not peak until next year.
The average duration of unemployment is a lagging indicator. Therefore, reversals in the unemployment rate usually commence some time after a business cycle has already peaked or troughed.
An examination of the ten post-World War II recessions reveals the following concerning the timing of the peak unemployment rate:
• At the end of the recession: 2
• 1 month after the end of the recession: 1
• 2 months after the end of the recession: 1
• 3 months after the end of the recession: 2
• 5 months after the end of the recession: 1
• 9 months after the end of the recession: 1
• 12 months or more after the end of the recession: 2
In the above sample 40% of the cases saw the unemployment rate peak 2 or fewer months after the end of the recession. 60% of the cases saw the unemployment rate peak 3 or more months after the end of the recession, and half of those cases experienced a peak unemployment rate 6 or more months after the end of the recession.
Combining the historic experience with the structural dynamics behind the recession suggests that the unemployment rate will probably peak well after the current recession comes to an end. Continuing financial system fragility, the ongoing credit crunch, deleveraging by households, and the cause of the recession (an asset bubble) indicate a delayed recovery in employment.
Three cases from the post-World War II experience are particularly relevant:
December 1969-November 1970 Recession:
• Underlying cause: A credit crunch that erupted in 1966
• Timing of the peak unemployment rate: 9 months after the recession ended
July 1990-March 1991 Recession:
• Underlying causes: Regional real estate bubble, S&L crisis
• Timing of the peak unemployment rate: 15 months after the recession ended
March 2001-November 2001 Recession:
• Underlying cause: Dot Com bubble burst
• Timing of the peak unemployment rate: 19 months after the recession ended
A delayed recovery in employment suggests a higher peak unemployment rate. In general, the longer it takes for the unemployment rate to peak, the greater the rise is from the unemployment rate that prevailed at the end of a recession.
On average, for every month it takes for the unemployment rate to peak, the unemployment rate rises nearly 0.8% from the unemployment rate at the time the recession ended. For example, if the unemployment rate was 6% at the end of a recession, and the unemployment rate continued to climb for 6 additional months, the data would imply a 6.3% peak rate of unemployment.
Therefore, were the unemployment rate to range from 9.5% to 10.0% at the time the present recession ends, and were the unemployment rate to continue to climb for 6-12 additional months, the peak unemployment rate could range from 9.9% (in the case of a 9.5% rate that peaks 6 months later) to 10.9% (in the case of a 10.0% rate that peaks 12 months later). In the case of a rate that peaks 18 months later, there would be an implied range of 10.8% to 11.4%.
All said, assuming the recession ends in the Third Quarter of 2009, it appears likely that the unemployment rate will not peak until some time next year. There is a possibility that it will not peak until some time in 2011. Finally, a 10% or above peak unemployment rate looks realistic at this time.
&&
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