1. Human Error or Animal Spirit? Hayek vs. Keynes October 2011

2. Financial Crises Become more Frequent –US: Deviation from the Taylor Rule in 2001-2007 –South East Asia: High growth of bank credit and asset market –Japan: 10-year low interest rate Competing Theories –Hayek: Central bank’s manipulation of interest rate distorted intertemporal allocation of resources the natural rate of interest parallel to Friedman’s natural rate of unemployment Monetary authority may not push rate below the natural rate in the long run –Keynes: Private sector, irrational animal spirit Monetary Policy is the Single most Important factor

3. Deviation from the Taylor Rule Sources: The Federal Reserve, Deutche Bank Percentage Point

4. Housing Bubble Created by …? Sources: CEIC Jun-1991Jun-1995Jun-1999Jun-2003Jun-2007Jun-2011 4.6 4.4 4.2 4.0 3.8 3.6 3.4 3.2 3.0 2.8 2.6 2.4 2.2 US Housing Price/Per Capita Disposable Income

5. Japan: Whose Animal Spirit? Source: CEIC

6. Rational Response to Low Interest Rate –High leverage of US households and financial institutions –Financial innovations sped up since 2001 The Keynesian Theory Unsatisfactory –Where animal spirit comes from? Stock market crash in 1929. Why stock market crashed? Animal spirit –An inconsistency, why the government does not have animal spirit? China: the Other Side of the Equation –Saved and invested too much before the crisis –Excess capacity absorbed by strong US demand fueled with easy credit –Subsidized exports and the “China Price” helped contain US inflation, which allowed the Fed to keep monetary policy loose

7. Highly Leveraged Rationally Sources ： CEIC Jun-1987Jun-1991Jun-1995Jun-1999Jun-2003Jun-2007Jun-2011 8 7 6 5 4 3 2 1 US Household Saving Rate ， %

8. Policy Failure –US QEs had little effect on bank lending & repair of balance sheet, Policies to support to housing prices prolonged market correction –China: Fiscal stimulus to add more excess capacity China not to be the Savior this Time –Inflation worse than official numbers indicate –Debt crisis of Chinese version, more than 10,000 local government financing vehicles, total debt outstanding 25% of GDP, defaults reported –Inefficient government investment projects such as high speed train and solar power. Suspension and delay of investment due to difficulties in fund raising

9. US Plenty of Money but No Credit Sources ： CEIC Jun-1996Jun-1999Jun-2002Jun-2005Jun-2008Jun-2011 14 12 10 8 6 4 2 0 -2 -4 -6 -8 -10 YoY, %

10. Japan: Plenty of Money but No Credit Source: CEIC Sep-1977Sep-1982Sep-1987Sep-1992Sep-1997Sep-2002Sep-2007 12 10 8 6 4 2 0 -2 -4 -6 % Loans Discount Rate

11. Drink Poison to Quench Thirst Sources ： CEIC Nov-2006Nov-2007Nov-2008Nov-2009Nov-2010 70 60 50 40 30 20 10 0 YtD, % ManufacturingInfrastructureReal Estate

12. The Way out: Bite the Bullets –US: Balance budget, increase savings, recapitalization of banks –China: Reform not reflate, deregulation, tax reduction

13. Thank You! 译：游 校：赵