Is IMF still relevant, even in the time of crisis, to Asian economies? The Journal ponders the possibility of AMF.

Asia's finance ministers are getting a little cozier.

After nearly a decade of scant progress on regional support systems, governments are making plans to shore up defenses against a fast-worsening global economic crisis.

Already planned is an $80 billion pool of reserves against which central banks can borrow. China, South Korea, and Japan would contribute 80% of that, with the rest coming from the 10 members of the Association of Southeast Asian Nations.

Bilateral deals are in the works as well. South Korea's central bank is working to expand a currency swap deal with China which, according to Korean press reports, could equal one in place with the U.S. Federal Reserve.

The talks showcase Asia's collective financial strength, a gargantuan $4.4 trillion worth of foreign exchange reserves, and have some wondering if the natural extension of this cooperation isn't the creation of a regional alternative to the International Monetary Fund.

Skepticism about what's dubbed the Asian Monetary Fund is warranted. This is an old idea, floated ten years ago by the likes of Eisuke Sakakibara, then Japan's vice finance minister for international affairs. Mr. Sakakibara renewed that call this week.

But there are a few reasons this idea could get more traction than it has in the past, not the least of which is the credit crunch.

The IMF may find itself unable to swat down the idea as it did when the economic crisis was of Asia's own making. The body is adamant that its $200 billion war chest is ample, but Ukraine, Hungary and Iceland are already asking for its help and a wave of problems in the Baltic states could stretch its resources further.

Asian leaders still cringe at the thought of the IMF's one-size-fits-all austerity programs of a decade ago. Pakistan, for one, approached China before starting serious talks on aid with the IMF.

China would certainly play a key role in any pan-Asian initiative in ways it doesn't at the IMF. There, Belgium and the Netherlands together have more votes than China does.

The Journal reports:

Bob Shiller tells his personal story of why many people knew the bubble coming but still yielded to the 'consensus' view.  A delightful reading from NYT.

Challenging the Crowd in Whispers, Not Shouts

ALAN GREENSPAN, the former Federal Reserve chairman, acknowledged in a Congressional hearing last month that he had made an “error” in assuming that the markets would properly regulate themselves, and added that he had no idea a financial disaster was in the making. What’s more, he said the Fed’s own computer models and economic experts simply “did not forecast” the current financial crisis.

Mr. Greenspan’s comments may have left the impression that no one in the world could have predicted the crisis. Yet it is clear that well before home prices started falling in 2006, lots of people were worried about the housing boom and its potential for creating economic disaster. It’s just that the Fed did not take them very seriously.

For example, I clearly remember a taxi driver in Miami explaining to me years ago that the housing bubble there was getting crazy. With all the construction under way, which he pointed out as we drove along, he said that there would surely be a glut in the market and, eventually, a disaster.

But why weren’t the experts at the Fed saying such things? And why didn’t a consensus of economists at universities and other institutions warn that a crisis was on the way?

The field of social psychology provides a possible answer. In his classic 1972 book, “Groupthink,” Irving L. Janis, the Yale psychologist, explained how panels of experts could make colossal mistakes. People on these panels, he said, are forever worrying about their personal relevance and effectiveness, and feel that if they deviate too far from the consensus, they will not be given a serious role. They self-censor personal doubts about the emerging group consensus if they cannot express these doubts in a formal way that conforms with apparent assumptions held by the group.

Members of the Fed staff were issuing some warnings. But Mr. Greenspan was right: the warnings were not predictions. They tended to be technical in nature, did not offer a scenario of crashing home prices and economic confidence, and tended to come late in the housing boom.

A search of the Federal Reserve Board’s working paper series reveals a few papers that touch on the bubble. For example, a 2004 paper by Joshua Gallin, a Fed economist, concluded: “Indeed, one might be tempted to cite the currently low level of the rent-price ratio as a sign that we are in a house-price ‘bubble.'” But the paper did not endorse this view, saying that “several important caveats argue against such a strong conclusion and in favor of further research.”

One of Mr. Greenspan’s fellow board members, Edward M. Gramlich, urgently warned about the inadequate regulation of subprime mortgages. But judging at least from his 2007 book, “Subprime Mortgages,” he did not warn about a housing bubble, let alone that its bursting would have any systemic consequences.

From my own experience on expert panels, I know firsthand the pressures that people — might I say mavericks? — may feel when questioning the group consensus.

I was connected with the Federal Reserve System as a member the economic advisory panel of the Federal Reserve Bank of New York from 1990 until 2004, when the New York bank’s new president, Timothy F. Geithner, arrived. That panel advises the president of the New York bank, who, in turn, is vice chairman of the Federal Open Market Committee, which sets interest rates. In my position on the panel, I felt the need to use restraint. While I warned about the bubbles I believed were developing in the stock and housing markets, I did so very gently, and felt vulnerable expressing such quirky views. Deviating too far from consensus leaves one feeling potentially ostracized from the group, with the risk that one may be terminated.

Reading some of Mr. Geithner’s speeches from around that time shows that he was concerned about systemic risks but concluded that the financial system was getting “stronger” and more “resilient.” He was worried about the unsustainability of a low savings rate, government deficit and current account deficit, none of which caused our current crisis.

In 2005, in the second edition of my book “Irrational Exuberance,” I stated clearly that a catastrophic collapse of the housing and stock markets could be on its way. I wrote that “significant further rises in these markets could lead, eventually, to even more significant declines,” and that this might “result in a substantial increase in the rate of personal bankruptcies, which could lead to a secondary string of bankruptcies of financial institutions as well,” and said that this could result in “another, possibly worldwide, recession.”

I distinctly remember that, while writing this, I feared criticism for gratuitous alarmism. And indeed, such criticism came.

I gave talks in 2005 at both the Office of the Comptroller of the Currency and at the Federal Deposit Insurance Corporation, in which I argued that we were in the middle of a dangerous housing bubble. I urged these mortgage regulators to impose suitability requirements on mortgage lenders, to assure that the loans were appropriate for the people taking them.

The reaction to this suggestion was roughly this: yes, some staff members had expressed such concerns, and yes, officials knew about the possibility that there was a bubble, but they weren’t taking any of us seriously.

I BASED my predictions largely on the recently developed field of behavioral economics, which posits that psychology matters for economic events. Behavioral economists are still regarded as a fringe group by many mainstream economists. Support from fellow behavioral economists was important in my daring to talk about speculative bubbles.

Speculative bubbles are caused by contagious excitement about investment prospects. I find that in casual conversation, many of my mainstream economist friends tell me that they are aware of such excitement, too. But very few will talk about it professionally.

Why do professional economists always seem to find that concerns with bubbles are overblown or unsubstantiated? I have wondered about this for years, and still do not quite have an answer. It must have something to do with the tool kit given to economists (as opposed to psychologists) and perhaps even with the self-selection of those attracted to the technical, mathematical field of economics. Economists aren’t generally trained in psychology, and so want to divert the subject of discussion to things they understand well. They pride themselves on being rational. The notion that people are making huge errors in judgment is not appealing.

In addition, it seems that concerns about professional stature may blind us to the possibility that we are witnessing a market bubble. We all want to associate ourselves with dignified people and dignified ideas. Speculative bubbles, and those who study them, have been deemed undignified.

In short, Mr. Janis’s insights seem right on the mark. People compete for stature, and the ideas often just tag along. Presidential campaigns are no different. Candidates cannot try interesting and controversial new ideas during a campaign whose main purpose is to establish that the candidate has the stature to be president. Unless Mr. Greenspan was exceptionally insightful about social psychology, he may not have perceived that experts around him could have been subject to the same traps.

This article from Economist magazine offers some good counter-arguments to the misguided view that China is running out of it's surplus labor (or cheap labor in mass media) as reports spread that factories in coastal China were finding it difficult to find workers even with wage increase (this was before the current global economic slowdown):

WHAT is the single most important price in the world? Popular answers are the price of oil, American interest rates or the dollar. Yet Chinese wages are, arguably, more important. China has by far the world’s biggest labour force, of around 800m—almost twice that of America, the European Union and Japan combined. Thus recent claims that it is running short of cheap labour would, if true, have huge consequences not just for China, but also for the rest of the world.

A seemingly unlimited supply of cheap workers has been one of the main forces behind China’s rapid economic growth. But over the past couple of years, factory owners have complained of labour shortages and wages have risen more rapidly, leading some to conclude that China’s “surplus” labour has been used up. The country’s one-child policy, introduced in 1979, has caused the growth in its labour supply to slow sharply (see chart). After rising by 1.3% a year during the decade to 2005, the population of working age is expected to increase at an annual rate of 0.7% until 2015, and then shrink by 0.1% a year until 2025. At the same time, the shift of workers from agriculture to industry, which has been an important source of productivity gains, will also slow. Jonathan Anderson, an economist at UBS, reckons that these two trends will reduce China’s sustainable growth rate from 9-9.5% today to 7-7.5% by 2025.

But as well as boosting growth, the flow of workers from farms to factories has held down manufacturing wages—not only in China, but also throughout the world. The theory behind this was first expounded by Sir Arthur Lewis, an economist from St Lucia, who won the Nobel prize for economics in 1979. He argued that a developing country with “surplus” (ie, underemployed) rural labour could expand industrial employment for many years without causing wage inflation, because employers enjoy such a large supply of labour. During the first 50 years of Britain’s industrial revolution, real wages remained more or less flat while profits soared. Likewise in China, as millions of migrants have quit the countryside for urban factories and construction sites, the real wages of low-skilled workers barely rose during the 1980s and 1990s, despite big productivity gains; only recently have they increased rapidly.

This acceleration of wages has prompted some to conclude that China’s surplus labour in the countryside has been used up. Last year Cai Fang, the director of the Institute of Population and Labour Economics at the Chinese Academy of Social Sciences, argued that China has reached the “Lewis turning point”. By 2009, he predicted, there would be a widespread shortage of workers, pushing up industrial wages. Does this mean the death of China’s growth model?

As so often in China, this debate is clouded by the poor data. Until recently, most estimates of surplus labour varied between 150m and 200m people. But the true figure is probably much smaller, because government figures for the rural labour force include millions of migrants who have already moved to cities and others who work in rural industry, not farming.

In addition the population is ageing: the number of workers aged between 20 and 29 fell from 233m in 1990 to 165m in 2005. Many textile and electronics firms hire only young women in their 20s, as they are thought to be less troublesome and more willing to work long hours. Construction firms favour young single men. Older people are not only less employable, but they are also typically less willing to migrate if they have children. After taking account of this, Mr Cai estimates that China’s surplus labour has been virtually exhausted.

But Stephen Green, an economist at Standard Chartered, thinks that talk of China’s vanishing labour surplus is premature. In a report this year he argued that the surplus would not run out for another decade. Although the number aged between 20 and 29 fell over the past decade, their ranks are now rising again. Using the 2005 census, Mr Green estimates that the 20-something group will increase by a third in the ten years to 2015, as baby-boomers’ children join the workforce (see right-hand chart); only then will it start shrinking sharply.

What is more, the recent spurt in urban wages is not necessarily proof that the surplus has gone. Mr Green argues that to attract migrant workers, urban employers have to pay more than rural income, which has increased in recent years, thanks to government policies and higher food prices. The temporary increase in the age group between 20 and 29 over the next few years will also ease the upward pressure on urban pay.

The World Bank agrees that China’s labour surplus has not yet run out. Even when the number of young people drops, the labour supply is determined by more than demographics. Migrant workers are usually excluded from urban social-security schemes and have to pay more for education and health care. The bank suggests that phasing out the household-registration system would encourage more people to move to the city. Vocational training for rural residents aged over 30 would equip them better for jobs in industry. And financial incentives to encourage workers to retire later could also boost the labour supply: only 60% of men and 30% of women aged over 50 have jobs.

Moreover, Mr Cai’s estimate of China’s labour surplus assumes that 180m workers, or 24% of total employment, are needed for farming. But that is based on today’s agriculture. Mechanisation and the consolidation of land plots will boost productivity, meaning that fewer farmers will be needed. That will in turn release more workers for industry. In developed countries only 3% of workers till the land.

China’s surplus labour will eventually dry up, but it still seems some years away. In any case, that moment should be cause for cheer not fear in China and elsewhere, because it will lead to bigger gains in income and consumption. That, after all, is the whole point of development.

Guardian reports on how China's low-end manufacturing sector is hit by global economic slowdown.

Bernanke speaks to a symposium at UC Berkeley.

A sensible analysis, and good lessons for the US policy makers to learn.

Dick Berner, Chief US economist at Morgan Stanley, argues deflation is unlikely.