Blowing bubbles

Corporate Watch
Amelia H. C. Ylagan

Posted on July 08, 2013

JEAN SIMÈON Chardin, a French artist in the Dutch genre tradition, painted Soap Bubbles at about 1733, showing his naturalist delectation with children’s idle play -- as blowing bubbles was the fad at playtime in the 18th century. Quite inconsistently though, he depicted not a child, but a young man leaning out a window and blowing a bubble with a pipe in that famous painting, which now hangs in the National Gallery of Art in Washington, D.C.

With his impassioned thick, granular impasto, Chardin might have wanted to pass on a strong statement albeit softened by the warm light on earth colors, as did Rembrandt in his realism: A young adult blowing bubbles might have depicted, in Chardin’s possible metaphor, the pathos of creating dreams that will burst in a short while.

What Chardin dared to say in his painting might have alluded to the woeful financial crisis (1720) in Europe that resulted from the crash of stock prices of the British South Sea Bubble (notice the name). The Bubble was a joint-stock company founded in 1711 as a public-private partnership (PPP) granted a monopoly by the Crown to trade with South America. But the War of Spanish Succession (1713) intervened, and the Bubble was never able to exercise its monopoly fully. Instead, it expanded its operations by selling down government debt (acquired from debt for equity swaps), then a novel financial scheme for which the Bubble’s stock rose in unexpected value, driven by speculators and investors pushed to the alternate new opportunity. From the hyped demand, the overvalued stocks peaked in 1720, and then drastically plunged to a little above its original flotation price.

From the experience with the British South Sea Bubble, the other overvalued stocks and assets rising dramatically from inordinate investor demand, and then collapsing to lower than fundamental value from the panic selling, were since then nicknamed “Bubbles.” The nickname stuck, not anymore for such companies, but for an economic phenomenon for a trade in high volumes at prices that are considerably at variance with intrinsic values.

An asset bubble, or a credit bubble can hardly be seen while it is forming, much like the ethereal soap bubble that fascinates a child peering through its flimsiness. Mainstream economists think bubbles cannot be identified in advance, and cannot be prevented. They say that the most probable cause is excess monetary expansion, like when the US shed the gold standard in August 1971, and created massive commodity bubbles from frenetic investments by people thinking themselves rich by owning over-valued assets (wealth effect theory). Easy credit likewise encourages the even more unfounded wealth effect on people who spend money that they do not have, thus happened the fatal US sub-prime credit bubble burst of 2007 that caused pandemic world recession.

The world still feels the recession in developed economies balancing on slippery footing from the residual condensation of the bubble, as they frantically pump prime growth through subsidies and bailouts. Through six years of more easy money following the tragedy of easy money in the first place, the US and Europe are forming more bubbles for themselves. Lately, talk is rife of a coming bubble burst in the US automotive industry, where the demand exceeds the supply, and prices have soared yet consumers can, and will buy, because of easy credit. In the European Union, the perceived cold-heartedness of the stable economies has had to melt to the spendthrift flailing member economies that riot against austerity and economic contraction.

The developing economies, mostly Asia, have enjoyed undreamed-of wealth as hot money seeking opportunistic levels parked while waiting for the more stable economies to recover -- as they surely will, by their sheer size and experience. Excessive monetary liquidity, cheap interest (credit), and asset price inflation (thought to be good) is hedonistically enjoyed. But heated economies encourage bubbles, as soap bubbles are easier to blow in hot weather than in cold -- ask any child.

The most fearsome bubble that may occur in the Philippines is the real estate bubble, which is much argued about as here or not here -- and if already here, is it to burst soon?

Licenses to sell residential units (lots and condos) awarded by the Housing and Land Use Regulatory Board (HLURB) have increased about 1, 650 times from 2003 to a cumulative 1.880 million units for the 10-year period up to 2012. Of this residential unit build-up, 20.57% are condominium units, about 90% of which are in the National Capital Region (NCR). Condominium units in the NCR have increased an estimated average of 35% per year, mushrooming most in 2008 (150% from 2007), which interestingly coincided with the real estate crash in the US. Perhaps allowing for the standard three-to four-year construction period for a condo building, a similar feat of 141.56% increase in licenses to sell for condominium units was seen between 2011 and 2012.

A medium-range condo unit in the Makati center started at 50, 000/square meter (m2) in 2003, and is now going for 180, 000-200, 000/m2. Yet many condominium projects in the NCR (862 projects in 10 years), though all sold-out, are lucky to be half-lit in the evenings, meaning these are not occupied or rented out. Perhaps the housing boom is unequal to the housing need of a population growing 2.04% a year, with 36.4% in the 0-14 years of age. Demand, then, could not have been anything but speculative, abetted by the liquidity from the OFW remittances, the BPO boom, and the foreign money coming in. Price increases were pushed by insistent demand compounded from the wealth effect of ready cash and/or readily available credit at temptingly low borrowing rates. If that is not a bubble blowing, soap must have gotten into the eyes of regulators, who keep insisting that there is no bubble, and no bubble burst.

According to the Bangko Sentral ng Pilipinas (BSP), there is no need to revise guidelines that limit the exposure of banks to real estate-related loans and investments to only 20% of total loan portfolio. Though the limit was breached by 0.9% last year (821.7 billion real estate exposure), the banks’ capital adequacy ratio of 15.77% (well above the BSP’s 10% norm) would ensure that “banks can withstand a default of 50% of their real estate loans.”

But think about it: banks suffering (and surely surviving) a default of 50% of their real estate portfolio would mean about 410.8 billion of the investors/end users money gambled on real estate would have been lost by them. Their bubbles would have burst, as the BSP, the HLURB and other government agencies would continue blowing bubbles for higher expectations.

From the exemplary experience of the US subprime credit and housing bubble burst, the monetary authorities would have a template for what to prudently watch for in a possible bubble burst: “too much money chasing too few assets causing both good and bad assets to appreciate beyond their fundamentals to an unsustainable level,” as economists all similarly define. Bailouts and subsidies can only increase money supply more, and did not work as in the US expansionary track, now being re-studied by the Fed. Should the advantage of hindsight be pointing to some traditional measures in preempting bubble situations, like controlling liquidity and inflation, maybe raising interest rates, increasing capital reserve requirements, and surely, strengthening financial institutions -- while the economy is still strong?

But everyone’s so engrossed in blowing bubbles.