Daily Times

Janet Yellen giving big banks a passing grade in the Federal Reserve’s latest stress tests is cold comfort for Asia.

It’s grand that the Fed chair thinks bankers are on top of risks to the largest economy, and that she doesn’t expect another financial meltdown “in our lifetimes.”

Coming days before Asia commemorated the 20th anniversary of the 1997 financial crisis, Yellen’s words were a tonic for governments from New Delhi to Tokyo.

There’s just one problem with Yellen counseling calm: other major central banks are also coalescing around a message that tighter money conditions are coming.

The Fed’s four rate hikes since December 2015 haven’t knocked the global economy off course. It may soon have company, though, in ways that remove a key stabilizing force on which Asia has relied over the last decade.

On June 28, for example, Bank of England Governor Mark Carney hinted that a rate increase may be coming. Canada’s Stephen Poloz said as much recently. Even European Central Bank President Mario Draghi’s tone has turned more hawkish, much to the dismay of debt markets.

That makes this a dangerous moment for Asia. As credit markets stiffen, China will regret not doing more to rebalance growth engines from investment to services and curtail bubbles in debt and credit.

India will regret not acting faster to reduce bad loans in the banking system. Hong Kong will regret not working harder since the 1997 handover to diversity the economy away from overpriced land and finance.

The Philippines will regret letting Rodrigo Duterte’s war on drugs sidetrack efforts to fight inefficiency and graft. Malaysia will regret not using the Fed-driven growth years to scrap productivity-killing affirmative-action schemes.

Thailand will regret delaying giant infrastructure projects needed to boost competitiveness. Indonesia will regret not going further to eradicate corruption.

South Korea will regret not taking the family-run conglomerates, or chaebol, towering over the economy down a peg. Singapore will regret thinking casinos were the remedy for stagnant wages.

Taiwan will regret not being more creative about harnessing Chinese growth. Japan’s will regret spending 4 ½ years under Shinzo Abe focused backward — on tweaking the postwar constitution, not rising to fast-growing challenges from China. To be sure, it’s high time the Fed and other quantitative-easers reassess the need for emergency credit accommodation.

The Fed following the Bank of Japan down the zero-interest-rate rabbit hole in 2008 was about short-term desperation, not long-term strategy — the monetary equivalent of injecting adrenaline into the heart of a dying patient.

By now, it’s clear that, just like human patients, medicines only work for a while.

Sticking with them too long breeds addiction and neglect. The addiction was seen in how quickly Wall Street, London and Hong Kong went from near-Depression to happy-days-are-here-again rallies.

The neglect is seen in how little the U.S., Europe and Asia did to restructure economies to create growth and jobs organically. Steroids are always easier than building economic muscles.

That normalization will hurt, though, particularly here in Asia.

Yes, this region has come a long, long way since 1997: banking systems are healthier; governments more transparent; currency reserves rebuilt; and economies more open.

But the rapid return of growth had governments shelving bigger, touchier reforms: reducing the role of exports and smokestack industries and reining in vested interests.

The lack of progress should have investors thinking more about 1994 than 1997. The Fed’s aggressive hikes 23 years ago shoulder-checked the global economy.

And over the subsequent 12 months, the Fed chopped more than $600 billion off US Treasury prices, drove cities like Orange County, California into bankruptcy, thrust Mexico into chaos and sent the dollar soaring.

That strained Asia’s currency pegs until governments couldn’t defend them anymore three years later. Another 1994, or 1997, is still unlikely. And major central banks cutting off complacent politicians isn’t without silver linings. But as Yellen and other major authorities mop up credit, Asia is directly in harm’s way. It’s time for governments and investors alike to batten down the hatches.

Published in Daily Times, July 10^th , 2017.