From the AFR today:
Citi global chief economist Willem Buiter believes the global economy is at a crucial turning point as emerging markets like China slow and the United States recovers from the worst downturn since the depression.
“There is a clear changing of the guard because the advanced economies are picking up their act…The emergence of the shadow banking sector, together with the banking sector, produced total social credit as a share of GDP to the private non-financial sector of close to 200 per cent of GDP which is higher than the US. So there is no doubt China has had a credit boom that turned to a bubble. Similar things happened in India…I do not think the Chinese authorities will let this drag out. The question is who will pay for it. Creditors of the banks or the taxpayers?”
So much for the problems. What of the solutions?
“Australia’s problems are luxury problems compared to the rest of the world…If the economy were to get another unpleasant hit from China or elsewhere, you have monetary ammunition and fiscal ammunition in the tank which would be of considerable envy to a finance minister in Europe.”
Buiter is one of the best GFC-era economists. In the broad brush-stroke this all makes sense. He concludes with a discussion of banking risk:
“It’s a source of potential fragility. Clearly any institution that has 80 per cent of its balance sheet in one product, is short on diversification.”
Mr Buiter said he believed Australia did not have a housing bubble.
Call it what you will, “bubble” or “over-valuation”. If you have the banking risk you have the housing risk and vice versa.
