The Latest Import from Asia: Responsible Banking?
Posted on February 22nd, 2010
Last week, China raised its reserve requirement ratio for large banks. The move was noteworthy because it is a tactic designed to slow growth — something it’s hard to imagine U.S. policymakers doing. However, China’s action may be an example of how policymakers can lead rather than follow.
According to a New York Times story, China’s move had similarities with recent actions taken by Australian and Indian authorities to ease back on the growth throttle a little bit. In essence, by raising reserve requirements and/or raising interest rates, central bankers can restrict lending and thus check the pace of economic growth.
Why would anyone want to do that? Most prominently, central bankers are concerned with inflation. If inflation is starting to percolate, easing back on growth can cool it down a little. Also though, reining in lending activity can reduce the extent to which economic growth is based on debt and speculation — a lesson that seems to have eluded Alan Greenspan in his tenure as U.S. Fed Chairman.
Toward the end of the last century and the beginning of this one, the U.S. economy was blessed with low inflation. For this reason, Greenspan saw his way clear to foster stimulative monetary policies. Unfortunately, low bank rates and high degrees of financial leverage meant that much of the apparent growth in the economy over the past decade was based on debt and speculation. This inevitably proved unsustainable, and we are still paying the price for that illusory economic policy.
What does this have to do with your CDs, savings, and money market accounts? Simply this. You may see some disruption in the financial markets whenever current Fed Chairman Ben Bernanke hints at more restrictive monetary policies. However, acting on those hints should ultimately make your deposits more secure and bank rates higher.
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