• Fri
  • Dec 26, 2014
  • Updated: 11:40pm
Jake's View
PUBLISHED : Thursday, 28 February, 2013, 12:00am
UPDATED : Thursday, 28 February, 2013, 5:02am

Recession, high property prices not signs of market failure

A pause in growth is the market's self-correcting mechanism that points economic efforts into new directions when binge investing has failed

In fact, the government has been playing a pivotal role in the market economy, especially in times of market failure, when it takes steps to restore the market balance to ensure that the community can share the fruits of economic growth … As I see it, government participation and market operation are complementary concepts. What matters is how to make the two work together and how to strike a balance between social costs and benefits.

Financial Secretary John Tsang Chun-wah
2013 budget speech

Live and learn. When I was in school, I learned in physics that there can only be one pivot in any pivotal operation, and I learned in economics that the pivot of market operations is price.

But new advances in knowledge are made every day these days, and our financial secretary has just pioneered two new fields of scientific discovery - multi-pivot physics and non-price-pivot economics. Clear the way to Stockholm, folks. We have a double winner coming in this year's Nobel prizes.

As part of the peer review process before he gets there, however, let's examine some of the premises set out in this budget theme statement by a man whose education in public policy consisted of licking stamps for Kennedy family campaigns in the United States many years ago.

Just how does one define market failure? It won't do to say that an economic recession represents a breakdown in the workings of the market. Recession is a natural phenomenon that serves the vital role of pointing economic effort into new directions after binge investing has failed.

To trammel recessions by trying to prop up an economy that has grown tired and wants a rest, as the European Union is doing, is to invite decades-long periods of stagnation or even a depression. Recession is a sign of a market working, not of one failing.

It also won't do to say that our high property prices are an indication of market failure. The property market doesn't stand on its own. The reason that prices are unusually high at present is that interest rates are unusually low.

They are low because they are low in the United States, where they have been pushed down to get around the effects of a subprime-mortgage crisis caused largely by earlier overstimulation by the government of mortgage financing.

And low in the US means low here, because we had to link our currency to the US dollar 30 years ago when our government's monetary mismanagement caused the Hong Kong dollar to collapse.

To pretend that high property prices represent an isolated market failure without any underlying causes is to stick your head in the sand. The property market has reacted very efficiently to the pressures placed on it. There is no market failure here. There are only public-policy failures that have had unwelcome consequences on the market.

But trying to force property prices down by stopping people from buying and selling, as Tsang is attempting to do, is like trying to stop an accident by putting your hands in front of your eyes so you won't see it.

The words "market failure" are in fact rarely more than a convenient excuse for intervention by bureaucrats who don't understand how markets work and who can hardly be deemed judges of failure when they never admit any of their own.

The only fix they know of, in any case, is a public relations band-aid, which does exactly nothing for deep-rooted systemic faults of which market gyrations are only the symptoms.

And as to Tsang's talk of striking a balance between social costs and benefits, this is exactly what a market does without any input from government. A market is a mechanism by which society directs limited resources to its most pressing needs.

Give it a proper framework of contract and criminal law, properly enforced, and no one need ever endure lectures on social costs and benefits by bureaucrats who have first made very sure that all their personal wants and needs on that score have been satisfied.

I must confess that I just couldn't make it all the way through the budget speech. There came a point when my eyes just glazed over.

jake.vanderkamp@scmp.com

Share

For unlimited access to:

SCMP.com SCMP Tablet Edition SCMP Mobile Edition 10-year news archive
 
 

 

6

This article is now closed to comments

johnyuan
It is as important who is delivering the budget proposal at the legislator chamber every year as the content: what got cut, what got boozed and what priority and amount for each. To me all sound that they shouldn’t have come from John Tsang, a Financial Secretary. Granted he is responsible for numbers. But the rest should be saved for the Chief Executive. It should be the Chief and not the Financial Secretary that sets the direction where Hong Kong is heading in the next physical year and beyond – no? Or, Hong Kong is really a money town. Still, when you disagree with the budget proposal, take it up with CY Leung.
RobinDeCaro
AN ONE-EYED MAN IN A BLIND MENS' WORLD
Vanderkamp you have to make it absolutely clear that the bailouts of these US listed companies in 2008 and 2009:
1.The Bear Stearns Companies, Inc.
2.Fannie Mae and Freddie Mac
3.The Goldman Sachs Group, Inc. bailed out by the federal government and Berkshire Hathaway
4.Morgan Stanley bailed out by The Bank of Tokyo-Mitsubishi UFJ
5.American International Group, Inc. multiple times
6. Citigroup Inc.
7.General Motors Corporation and Chrysler LLC- though not technically a bailout, a bridge loan was given to the auto manufacturers by the U.S. government, this is referred to by most as a bailout
8.Bank of America to help it absorb known losses that were much greater than revealed to shareholders incurred by its buyout of Merrill Lynch
9.CIT Group $3 billion by its bondholders in a failed attempt to avoid a bankruptcy. This bailout only delayed the bankruptcy.
10.Dubai
Market failures or governmental market manipulation?Your "expertise" in the field of market is non-academic,may be an one-eyed-man in a blind mens' world.
johnyuan
The buzz around the Financial Secretary after his budget report is unwarranted. Not that he did or didn’t do the budgeting right. It is about what we expect of the report should be rightly coming from the Chief Executive. The Financial Secretary is a role that was left from the colonial era with a responsibility seems to be equal of the Chief Executive. Hong Kong needs a city comptroller like in New York City with a duty as described in Wikipedia: “The comptroller is responsible for auditing the performance and finances of city agencies, making recommendations regarding proposed contracts, issuing reports on the state of the city economy, marketing and selling municipal bonds, managing city debt, and serving as managing trustee of the public employees pensions funds. As managing trustee, the comptroller presides over the boards of the funds, along with managing assets. Overall fund governance is with boards of the individual funds.” Hong Kong doesn’t need two chiefs. John Tsang likewise shouldn’t be treated as one. Reform.
RobinDeCaro
You say reform......reform the year after year colonial administrative officers system,right?It has been changing.
aplucky1
* why doesnt vanderkamp ever expose his market holdings for the sake of transparency that he so truly craves the government to do? he has never written ONE article critical of the ridiculous prices or the adverse impact it has on society
* vanderkamp also seems to forget one other market LAW, supply and demand. if there was more supply the market would drop irrespective or rates, the market in the usa is NOT going up even with low rates, so his assumptions are WRONG
taihang
I don't understand all these half measures. If property prices are, say, 30% higher than what is the right price, just fix the price per square foot at 30% of today's levels. Take the most recent transaction in the block or vicinity as the benchmark. Manage immigration and land supply to accommodate. That will stabilise things, surely..
 
 
 
 
 

Login

SCMP.com Account

or