No apology needed

Tyler Cowen has a new post on “The Chinese Credit Crunch.”  At one point he makes this off-hand comment:

This economy was addicted to cheap credit in the first place, so that’s a big deal.  (By the way, promising to print more currency won’t solve the core problem here, with apologies to Scott Sumner.)

This is a bit puzzling, as I doubt in the entire blogosphere there’s a stronger opponent of mixing monetary policy and credit policy than me.  Just a few days ago I did a post entitled “Please, keep finance out of macro.”

Not only do I oppose using monetary policy to solve the “core problem” in China, but I oppose using it to solve ANY problems, anywhere.  Monetary policy should be neutral, aimed simply at avoiding the creation of problems, such as unstable NGDP growth.

I’d guess that Tyler Cowen and I have pretty similar views on what China’s core problems are, and they aren’t anything that can be fixed with monetary policy. Fortunately the new government seems committed to accelerating economic reforms.

Now suppose I’m wrong, and Tyler wasn’t referring to the credit crunch as the core problem in China, but rather insufficient NGDP growth.  Then he would be wrong. Tyler has (correctly) argued on numerous occasions that the US isn’t stuck in a liquidity trap, and obviously that’s even more true of China. I don’t know the current Chinese NGDP growth rate (I believe it’s close to 10%) but if it was slowing faster than desirable (as Lars Christensen suggests may be occurring) it would not represent a problem that monetary policy could not solve. Obviously with “money printing” the PBoC could speed up NGDP growth to 100% or 1000% if it so desired. In any case, I think it’s pretty clear Tyler is referring to the credit crunch, not low NGDP–and on that issue I entirely agree.

I haven’t followed the Chinese situation very closely, but I’d guess that monetary policy failures (if they exist) constitute less than 2% of China’s problems, the rest are structural.

PS.  Commenters: Don’t say; “Monetary policy and credit policy in China are linked.”  I doubt it.   Don’t confuse nominal policies with real policies. But even if true it would have no bearing on my argument.  I’d simply recommend de-linking them.



9 Responses to “No apology needed”

  1. Gravatar of Theo Clifford Theo Clifford
    22. June 2013 at 09:11

    Monetary policy and credit policy in China are not necessarily linked. But the credit crunch may be a 2008-style indication that there is a monetary problem going on beneath the surface. And that is very, very worrying.

  2. Gravatar of chris mahoney chris mahoney
    22. June 2013 at 09:33

    China’s problem is that the Center does not have adequate control over the financial system and debt creation. They deregulated their financial system in the worst possible way. They haven’t been able to prevent all sorts of essentially unregulated entities from borrowing money from all sorts of people. They are now trying to shock the system and to cut off credit to all of this financial undergrowth. They did this in 1998 with the provincial ITICs. Westerners don’t understand that China (and the rest of East Asia) have not decided to hang themselves on the gibbet of market discipline. The discipline comes from the Center, which decides who defaults and who doesn’t. It is true that, if the Center decides to rein in credit growth, this would provide a headwind for economic growth, unless offset by other policies. But what happens in the Chinese economy is decided by the Center, not by the market. China is perfectly capable of rejiggering its financial system as needed. China cannot be a Black Swan.

  3. Gravatar of ssumner ssumner
    22. June 2013 at 09:47

    Theo and Chris, Those remarks sound plausible to me, but again I’m no expert on China’s financial system.

  4. Gravatar of 123 123
    22. June 2013 at 11:28

    Scott: ” But even if true it would have no bearing on my argument. I’d simply recommend de-linking them.”
    That’s the question – do they know how to delink them? I’m not sure.

  5. Gravatar of SG SG
    22. June 2013 at 11:51

    Scott, what percent of the discussion at fed press conferences actually concerns relevant issues?

  6. Gravatar of Petar Petar
    22. June 2013 at 11:57

    I wish Croatian economists (at CNB) would see this, so much talk about banks and credit and ngdp dances around 0 since 2009.


  7. Gravatar of ssumner ssumner
    22. June 2013 at 12:37

    123, I very much doubt they are linked, but even if they were I’m sure they could de-link them.

    SG, Maybe a third?

    Thanks Petar.

  8. Gravatar of 123 123
    22. June 2013 at 12:56

    Scott, in 2007 I was confident the Bernanke could delink the credit and monetary policies. I was wrong.

  9. Gravatar of ssumner ssumner
    23. June 2013 at 06:16

    123, Replace “could” with “would,” and I’d agree.

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